Optin Box close
Welcome to the Options University Blog

This is no ordinary ebook. Options 101 just hit the bookstore shelves all over the country. It's available at Amazon.com and BarnesandNoble.com and we've been told it's the 'best options book on the market today'.

Because we feel that a proper foundation in options is critical to your success,
We'd Like To Offer You
3 FREE Chapters
of Our NEW Book
Options 101:
From Theory to Application
by Options Expert Bill Johnson
To get your 3 FREE chapters, simply enter your name and email address below, and we'll send these to you right away
(You'll have them in your email inbox instantly!).
"It's fun for me to spend time with people that are really bright and passionate about something that I love as well. Options University has done a wonderful job of getting their message across in an easy to understand way. I hope this is the first of many..."

Tom Sosnoff
thinkorswim, inc.
Name:
E-mail Address:

Oct

2

Sallie Mae gets an intriguing proposal…

Filed Under Market Snapshots 

Today’s tickers: SLM, WAG, GRMN, RIO, FCX, NEM, AA, MFE, PDLI, CREE & CBH

SLM - News today that an investment consortium led by J.C. Flowers and including Bank of America and JP Morgan Chase would offer $50 per share for Sallie Mae (SLM) in combination with warrants for outstanding shares, sent the company’s fortunes up .34% this afternoon to $50.07. A post-deal analysis in the Wall Street Journal noted that these warrants – pending Sallie Mae’s business performance going forward – could be worth up to $10 per share, creating the impression that J.C. Flowers’ original $60-per-share offer (a price from which the buyers balked last week) is still nominally intact. Option traders put more than 132,000 Sallie Mae options in play, with calls and puts trading at near parity – but virtually no one staking bets on that elusive $60 mark. The October 50 strike appeared to be the watermark for today’s activity. The 30,000 lot-volume in the October 50 calls looks to have been generated by sellers, unloading for $2.40 positions that were bought at prices of $1.20-1.85 last week. Puts at the same strike in the October contract traded to buyers and sellers. We also noted heavy liquidity in the November 50 calls, which traded 13,600 times – open interest having tripled at this strike over the past week. Implied volatility has continued its decline, since topping out at 67% last Thursday, and now rests at 33%.

HSY – Shares in Hershey, the country’s biggest candy maker, were unsettled by this morning’s news of the departure at year’s end of CEO Richard Lenny, due to reported wrangling with the majority shareholding Hershey Trust over the company’s strategic direction. Implied volatility ticked up to 26% as a trader took the opportunity to enter a 9,000 position in the January 40/50 strangle. The position, which costs $1.20 to enter, supposes a break outside the range of the strike prices above $51.20 or below $38.80 in the wake of Lenny’s departure. Hershey’s share price has shown a mostly steady decline for the past 6 months since peaking at $56.75 in early April – the reigning 52-week high. The current share price is hovering just about $2 above the 52-week low set in August. Hershey’s shares were trading as high as the $60 mark in October 2005, but hasn’t touched those levels since.

GRMN - GPS-technology maker (GRMN) continues to captivate option traders’ attention in the wake of Nokia’s contentious bid for Navteq yesterday. Shares are extending the downtrend from yesterday, down 7% to $99.80, with 116,770 options – the rough equivalent of 42% of its open interest – in play. It appears that the October 100 calls are the pivot point for extensive volatility positioning in the October contract, some of this possibly tied up in the 100 straddle, a position which costs more than 10% of today’s share price to buy – or with strangles involving the 95 puts. Activity in the November contracts seems to show traders favoring a sale of calls at strikes 105 and 100.

WAG - Shares in Walgreen’s (WAG) tacked on another .40% loss today to stand at $40.00 – slightly off a new 52-week low set earlier today - while options remain a favorite target for option traders. The 87,760 options in play this afternoon reflect traders waging bets on the at-the-money front-month straddle, which has traded on comparable volume to buyers and sellers today.

There was a strong overnight performance for Asian equities with more stories surfacing that the $200 billion Chinese investment fund would buy Chinese stocks listed in Hong Kong. Local stocks rose by more than 3%. Elsewhere around the globe new record highs are being set by the day as investors buy the story that growth outside of the U.S. continues to steal the limelight from the overused terms of “subprime and credit concerns.” In Monday the price of gold (the anti-dollar) rose close to a 28-year high as the value of the dollar slumped to a secular low. The dollar boost was exacerbated following comments from European central bank members who noted the potential damage to the fragile domestic economy from a swift rise in the value of the euro.

But Tuesday is a different day. Investors in the local market are watching to see what reaction Monday’s convincing penetration of index highs will bring. So far some light profit taking is the order of the day. Meanwhile the dollar has bounced hard against the euro currency and its trade weighted value as measured by the NYBOT’s dollar index contract has risen by 0.5%. Broadly speaking that move is bad for commodities – we note that gold has shed 2.5% today to $728.50 per ounce in the October contract. Meanwhile, shares at several mining companies are facing selling pressures.

RIO – Cia Vale do Rio Doce saw its share price slide 2% to $35.35. It’s on days like this that options traders put a brave foot forward and take the opportunity to place bullish trades. The call/put ratio at 1.6 indicates one third more call activity than across the put complex. The bulk of Tuesday’s activity stood at the October 35 line where nearly 14,000 contracts changed hands reserving the right to buy shares at that price ahead of expiration in two weeks time. At a premium of 1.95 shares would need to break above $36.95 for option buyers to be profitable. The likelihood of these calls landing in the money according to the delta on the calls is three-in-four.

FCX – Freeport McMoRan shares fell in line with the rally in the dollar losing 2% to stand at $109.15. Again call buyers were out in force on the price decline and buyers of the November calls at the 105 strike took advantage of lower premium prices as they bought 2,900 lots. The October straddle at the 110 strike gives a good reading of implied volatility on the options. Today that straddle – the combined cost of a call and a put is 9.25 generating a share price range of between $101.25 and $119.25 over the coming couple of weeks. Actual implied volatility stands at 48%, which is in line with the historic reading of volatility on the underlying shares.

NEM – Newmont Mining Corp. saw its share price lose 2% to stand at $45.14 today, but unlike above, put buyers seemed to arrive on the scene. Implied volatility on the options at 33% shows that options players aren’t overly concerned by today’s push lower. In Monday’s session it appears that fresh positioning of 3,000 puts at the March 45 strike took place. Today it was the turn of the January series where 11,000 puts at the same 45 strike traded at 2.95. Such puts would protect a long investor in Newmont against share price declines below $42.05. Still the bulls wouldn’t be deterred and added call spreads in the October contract as they bought the 47 strike for 0.40 and sold the 50 calls for 0.10. At a net premium of 0.30 it’s a cheap play on a big rebound on the gold price, which investors would hope filters through dramatically to boost the fortunes at Newmont.

AA – Alcoa Inc. We noted some bull call positioning in Alcoa shares today even though its share price declined .77% to $38.85. In the January 47.5 contract some 2,200 calls were bought at 0.85 indicating that investors see a bounce ahead for the stock. In the April 40 puts a seller sold around 6,700 lots at around 4.4. That would indicate that they see shares moving higher. Don’t forget that Alcoa was left jilted at the altar when Rio Tinto stole the Canadian bride-to-be away from Alcan. Additional positioning in April calls at the same strike confirm the bullish profile. The logic seems to be that if commodity prices and demand both remain firm, there is no reason that the fortunes for Alcoa are as bad as was suggested by the share price decline following the failure to acquire its Canadian rival. Shares fell from close to $50 to almost $30 in the aftermath and the past few days performance suggests a revival is imminent.

MFE - The revival and swift propagation of M&A rumors suggesting a possible tie-up with Dell (DELL), coming one day after a major product announcement, has led to a rabid level of interest in options in tech security giant McAfee (MFE - $36.84). Implied volatility rose more than 18% on the session to stand at 43.11%, as options traded at 28 times the average rate. Of note was heavy buying in the October 40 calls, which were snatched up at $0.40 apiece. We also observed heavy liquidity in the November 40 calls. Traffic in each of these strikes appeared to be fresh positioning – i.e., not the closing out of previously open positions. McAfee shares have shown a gradual but consistent incline over the past year, up 48.5% during the past year, handily outperforming the S&P Midcap Index, of which the company is a component. Yesterday McAfee formally announced that it was first-to-market in unveiling an industry standard “triple play” security offering on the IT market, providing protection for consumer PC, web and mobile phones.

PDLI - Following yesterday’s executive announcement that PDL Pharmaceuticals (PDLI) – maker of drugs for hypertension, acute myocardial infection and leukemia - will seek to sell the entire company, option traders rejoindered in the affirmative… and in trend with a near-9% gain for shares to $23.28. Traders today put more than 56,000 contracts in action – matching about 20% of its total open interest, and 5 times the normal level. Today’s volume was skewed to the calls, where three-figure percentage increases in call premiums were indicative of much of the action. Volume appeared heaviest at strikes 22.50 in the October and November contracts, while volume of 1,000 lots has gone through in the October 25 calls and the November calls. Traders here appear to be positioning for a test of the previous 52-week high of $27.98. Meanwhile, implied volatility in PDL shares surged about 18% to 49% - still below the 69% volatility that its shares have shown historically.

CREE - Options activity in North Carolina-based semiconductor maker Cree Corp (CREE) piqued our volume scanners today, with nearly 26,000 contracts in play against a 2% gain for shares to $32.72. The stock has been the subject of previous takeover scuttle, but as yet all the talk has failed to give form to the fog. Earlier today we observed heavy liquidity on either side of the October 30 and 35 strikes, with premiums favoring the call side. The calls, it seems, sold to the bid, while the puts traded to the middle of the market. Note here that the price of the October 35 straddle is $4.25 – 12% of the share price, and indicative of a traditionally volatile stock. While option traders are factoring in 60% volatility, Cree is a stock that has shown more than a 57% degree of fluctuation historically. And as for the October 35 call strike – delta on this call shows option traders pricing in about a 40% chance that this strike will land in the money, placing Cree on the perch of a new 52-week high, by October expiry.

CBH - Following this morning’s news of a buyout by Canada’s TD Bank Financial Group - options in Jersey-based Commerce Bancorp (CBH) picked up to twice the average clip, as shares traded flat-to-lower at $39.47. The 20,000 contracts in play matched more than 10% of Commerce Bank’s prior open interest. Today’s volume appeared hemmed in the front month, where traders may have sought to avail themselves of a 50% overnight drop in implied volatility by selling the October 37.50/40 strangle. This same sharp retreat in implied volatility made short order of yesterday’s build in open interest in the October 42.50 calls. Possibly acting on a rumor on the eve of TD’s bid, traders sent open interest on the October 42.50 from a meager 735 contracts to nearly 4,370 at closing bell, with contracts commanding $0.55 apiece. After TD’s $42-per-share bid, those $42.50 calls plummeted in value to only about a dime apiece, and traders may have closed those positions out this morning. This is also a hint that the market believes Commerce Bank’s shares are fairly valued by TD, owing to the anticipated dilution in earnings following the deal.

Andrew Wilkinson
Senior Market Analyst

Rebecca Engmann Darst
Equity Options Analyst

Share This

Comments

Leave a Reply

You must be logged in to post a comment.

Close
E-mail It