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Oct

1

Options Sector Takes Sympathy Sniffle…

Filed Under Market Snapshots 

Today’s tickers: HLF, CVS, AKS, GRMN, WAG, C, RIO, NVT & EWH

WAG – Walgreens share price took a smack on the chin despite a bullish start to the week. The near-15% slump in its shares created a fertile battleground for options traders thanks to the presence of liquidity and volatility. The company announced a 4% decline in quarterly profits thanks to a nasty combination of rising wage costs, store expenses and lower reimbursements for generic drugs. That potent potion is precisely why the stock is being punished today. None of the inputs are necessarily one off problems for the quarter and looking forward investors will need to see precisely what strategic shifts management makes to address the concerns.

Around 135,600 options contracts were in circulation Monday or put in an alternative context that’s about 67% of the overall open interest in the options series. Implied volatility surged by around one-third as uncertainty returned to the direction for the stock. Volatility jumped to 27.5%. Shares in Walgreens, which haven’t traded below $43 this year, fell to $40.31 - a 52-week low. October call options prices slumped with calls at the 40 strike losing 83% of its value to 1.25. On the other side of the coin put values surged. The October 42.5 calls for example, having settled at just a nickel on Friday, were actively traded at prices as high as $2.80 today.

It does appear that some investors are betting on steeper declines looking forward or simply betting that this might need a stronger prescription from management. There seems to have been a heavy amount of call option selling in the January 40 calls, where several blocks of 500 contracts were sold to the bid. Premiums slipped from 3.5 to 2.5 during the morning on volume of 11,650 lots.

CVS – Arch-rival CVS/Caremark came out shortly after the Walgreens release to reiterate its profit guidance for the year, but that didn’t stop a 6% pummeling-by-proxy for its shares on the market. With 95,000-plus option contracts trading this afternoon, we observed what may have been call holders looking to unload positions at the November 40 strike as premiums eroded, with volume at the 37.50 strike trading to buyers and sellers. Given the comparably heavy volume, and distribution of buyers and sellers, on the other side of that strike on the puts, it seems conceivable that today’s play is the at-the-money November straddle. A buyer of this strike pays the $2.75 premium in the belief that – whether CVS/Caremark’s profit guidance stocks – its shares are set for tumult in the coming weeks. A seller would take comfort in last week’s bank upgrade, and the fact that shares are still within 5% of a 52-week high, and play against short-term sniffles for the stock, pocketing the premium for good measure.

HLF –Options activity in nutritional supplement maker Herbalife ticked our volume scanners today as shares settled on a new 52-week high of $45.74. But despite short term bull momentum for the stock, it appears that skittish option traders holding Herbalife stock may have sought to hedge their bets on the mid-term outlook by playing the November collar. This would have involved buying the 40 puts at today’s premium of $1.05 against the sale of calls at the November 50 strike at $0.90 apiece in hopes of protecting against a sudden drop in share price below the $39.85 mark by November’s expiry. Overall open interest in Herbalife shows a surprising balance of outstanding puts and calls, with puts narrowly outnumbering calls by a factor of 1.1. Significantly, much of this build in puts accumulated during the month of September.

C – Citigroup Inc. shares reacted positively to its forewarning of a 60% dip in quarterly profits earlier today and losses incurred to its exposure to subprime debt. Investors seem to have taken the confession with a huge sigh of relief and bought stock, perhaps in the hope that this is the bloodletting that people have demanded to see. Shares have recently held at the $45 support line. Implied volatility came off while put premiums at the 45 line sank by around one half. Shares in the bank gained 2.2% to stand at $47.70. The December calls at the 50 strike reflected optimism by investors as premium rose by one-third to 1.0. Shares slipped below $50 in late July and haven’t recovered since. The 50 line was the most active call line in today’s trade. In the March contract it looks as though a couple of thousand puts at the 42.5 line may have been sold against call purchases at the 50 and 55 lines.

RIO – Cia Vale do Rio Doce – Commodity companies shares remained an investor favorite given the solid case afforded to them by the combination of a weakening dollar and strong commodity demand. Shares in Brazilian copper miner Vale rallied 6.5% Monday to stand at $36.15. Premiums at the October 35 and 37.5 calls jumped by around one half on heavy volume. Strongest volume occurred at the January 32.5 strike in the put side where some 13,500 contracts traded. As the stock rallied premiums came off, but this looks more like put selling rather than buying indicating continued conviction in a rally in shares.

AKS – AK Steel Holdings piqued our volume scanners today with nearly 127,000 active contracts against open interest of just about 335,000. Interested by the modest, half-percent gain in shares to $44.88, it appears that a trader closed out a position involving 24,000 lots in the October 35 puts in favor of new positioning in the November 40 puts, which traded on inflated premiums of around $1.90. AK Steel is due to report Q3 earnings on October 23.

NVT – Navteq Corp. Options activity at nearly 60,000 comprised exceeded the previous overall options open interest. Despite news that handset maker Nokia would buy the navigation software maker, shares took a 2% shave in early trading and sustained the loss this afternoon. The deal agreement sent implied volatility sharper lower and undermined any bullish positioning in the call options. For example, October calls at the 80 strike trading at 0.40 lost 85% of their value today.

GRMN – While news of Nokia’s acquisition was – somewhat counter-intuitively – bad news for Navtech’s share price, it was even worse for Navtech crosstown rival Garmin Ltd., whose shares swan-dived 10% to $107.25. Implied volatility shot up to 60%, having remained stable at 50% for much of September – a phenomenon that has borne out in put-side premiums today. Today’s 116,000 active option contracts show volume actively dispersed throughout the October contract, particularly concentrated between strikes 110 and 115 in both calls and puts. This is a strong hint of traders looking to position for continued volatility in Garmin share prices in the coming weeks. An interesting note about those October 100 calls, which traded 10,000 times today at prices around $9.80 – the going price for this contract last Thursday was $21.80. Ouch!

EWH - iShares MSCI Hong Kong - Shares jumped 1.8% today to rise to $21.42. Options activity was a robust 44,600 contracts - equivalent to around one-half of current open interest on the shares. The December 18 and 20 calls have traded on volume of 20,000 contracts each on prices of 0.30 and 0.75. It could be that as shares have ratcheted higher, an investor has rolled up the strike to remain closer to the current share price. Shares have been on a tear over the last six weeks adding around one third as the Pacific rim continues toshow economic strength.

Andrew Wilkinson
Senior Market Analyst

Rebecca Engmann Darst
Equity Options Analyst

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