JBHT – Conjecture about consolidation in the transport industry and comments from the analyst community on the “undervalued” nature of the sector as a whole spun options in JB Hunt Transport (JBHT) into a momentum web earlier this week. While the immediate rumors failed to pan out, options are still trading at 10 times their average volume today – and the 15,000-plus active contracts amounted to just shy of half the number of contracts outstanding – against a .65% gain in share prices to $26.27. Much of this volume appeared to be tied up in collar plays in the February ’08 and May ’08 contracts, involving the 25.0 puts and the 30.0 calls, against stock held. Given current premiums, the position in the February risk reversal play costs $0.95 to enter while the May position costs $0.80. A trader in this case is limiting upside by selling the call at the upper strike, but is still hoping for a break above $30 next spring.

WYNN – Casino operator Wynn Resorts, that mainstay of the Vegas strip, saw the price of its October 170 calls shoot up in price to $6.80 yesterday – having traded as low as $0.70 a pop a week ago, on price speculation regarding a secondary share offering. When news of the share price – $158 – gapped below the moxiest market forecasts, Wynn shares fell back 4.78% to $158.96, and the price of the 170 call retreated 45%, attracting volume from buyers and sellers today. Elsewhere in the October contract we observed heavy buying and selling in the 160 straddle, which is going for $15 today. A buyer of this position is looking for a break above $175 or below $145 – an ambitious bet given that options traders are pricing in 50% degree of fluctuation in share prices as expressed in implied volatility. A seller of this position is taking advantage of still-elevated premiums in the series against the belief that shares will remain at or around current levels for the month to come.

VIX – The CBOE volatility index rose 6.2% Friday to 18.06 despite only a moderate easing for equity prices. November and December call options were bought. The November 30 strike and December 22.5 were in strong demand. But the headline trade for the day went to what appears to be a 20,250 lot strangle in the February contract. The trade involved puts at the 17 strike and calls at the 27.5 strike at a net premium of 2.4. If the strangle was sold as we believe it may have been, this investor expects implied volatility to remain within the boundary of these strike prices by expiration. If that’s the case the investor gets to keep the 2.4 premium. A seller of the strangle would profit if implied volatility burst outside of the trade strike prices beyond the value of the total premium. In other words a breach of 14.6 or 29.9 for the VIX by expiration would see the trade in the black for a buyer. During the course of the past 28 trading days the VIX has traded within a range of 28.82 and 16.91 and on only three days during August did the index close above 29.

AL – Shareholders in U.K. listed Rio Tinto voted 97% in favor of the takeover of Canadian aluminium producer, Alcan Inc. today. The company hopes to conclude the $101 per share deal in the final quarter of this year in a $38.1 billion takeover deal. Alcan’s share price was steady at $100.08 but options traders used the confirmation of the event to take in premium on nearby put options. Given the almost certain outcome that Alcan’s share price will remain above $101 to close the year has given confidence to put sellers to take in the nickel per contract premium available on the October, November and December contracts. The most active contract was the December 95 put strike where a block of 17,875 contracts traded. It’s understandable that, given the friendly nature of the deal now backed by shareholder approval, options traders see little to cause Alcan’s shares to decline. Implied option volatility at just 3.6% supports that notion.

WHR – Whirlpool shares rallied .94% to stand at $89.10 with one news service attributing elevated options buzz to an unsubstantiated market rumor that General Electric might bid for the maker of domestic appliances. Certainly there was above average interest in Whirlpool options, where current open interest stands at 44,710 lots. Today’s 14,840 contracts in action favored the bulls with 2 times as many calls traded when compared to puts. However, of interest to us is that in the bigger picture there are 1.4 puts in play according to open interest data compared to calls. And looking at the chart pattern confirms why investors have traditionally south protection. The share price has been in freefall since closing below $110 in July. Both first and second quarter sales were impressive, but recent weakness in the domestic housing market seems to have undermined investor confidence in the stock.

Since then shares have pulled back firmly towards $85. Implied volatility is higher today at 39.4% but that’s more likely thanks to call-inspired demand than any substance to the rumor. The historic volatility on the stock runs at around 34%. Today’s volume was focused on the October calls between the 90-100 strikes. The upper strike commanded a premium of 0.55, which is 120% higher than Thursday’s closing price. Traders currently see a one-in-eight chance of shares closing at or above $100 by October. However, the chances of that happening by the time the November contract expires is one-in-four. The premium in that contract today stands at around 2.0 per 100 shares.

SYNA – Synaptics Inc. After reaching a new 52-week high early on Friday, shares in this touch-pad maker turned tail as protective put-buyers perhaps eager to lock in gains came out of the woodwork. Shares have doubled in less than six months in the company, which provides interface software solutions for mobile devices that communicate with one another. With shares lower by 4.5% this afternoon at $47.76 it looks as though some put spreading may have occurred with October 40 strike puts sold in order to finance buying in the 45 strike. The November 50 puts were eagerly bid and traded 5,249 times at prices between 3.2 and 4.5. Overall volume today at 15,347 lots was equivalent to more than half of total open interest on the stock options. Implied volatility at 43% stands just a shade higher than historic volatility on the shares. The company did file earlier today with the SEC to report the forthcoming departure of its founder who has served with the company for 20 years. Still, a single buyer of 1,400 November calls at the 50 strike took advantage of today’s share price decline, scooping up calls 19% cheaper than at yesterday’s closing price.

AEO – Shares in teen clothing retailer American Eagle Outfitters (AEO) have benefited in recent days from a major bank upgrade and reports that the chain is one of a handful of mass-market fashion names benefiting from the emergent trend of “second wave” back-to-school shopping. The 18,000 active contracts in play today equalled more than 10% of its open interest, making it a volume story of note to us, as shares gave back early gains to close flat at $26.31. Buying in the October 30 calls was fresh, where 9,875 lots traded on premiums of $0.30 each. A modest groundswell of fresh call buying was also observed at this same strike in the November and January calls. Although we’d seen online reports attributing the early-session resurgent call interest to “unsubstantiated chatter,” the volume build, strike price positioning, and implied volatility as yet lack the momentum that might lend credence to scuttle of that sort. American Eagle shares traded above $30 for much of the first half year, but dipped below that level in May in a general down trend. Since bottoming out in August, its share price has shown signs of slow recovery, and today’s call-buying may be an indication that “second wave” back-to-school buying will help it patch back to early ’07 highs.

CVS – Two days after hitting a new high for the year at $39.80, shares in retail drugstore chain CVS/Caremark are closed flat just below the highs at $39.63. It appears that option traders may have been looking to unload open strangle positions in anticipation of a low-volatility environment for CVS share prices heading toward year’s end. The November 35/37.50 strangle traded to the middle of the market, on volume of 14,000 lots, a level within existing open interest. Action was also seen in the February contract, where 5,000 lots of the 37.50 puts sold to the bid at $1.30, and the 42.50 calls traded to the middle of the market at $1.30.

RAD – Today’s option volume has been strictly five-and-dime at CVS competitor, RiteAid (RAD), whose shares lost nearly 6%, closing at $4.55 after second quarter earnings fell short of street estimates, due in part to the absorption of costs from its acquisition of Eckerd pharmacies. The development lent to a nearly 30% climb for implied volatility, which peaked earlier today at 49% – significantly above the 34% level of volatility that Rite Aid shares have documented in the past. By comparison, CVS options implied volatility at 21% is below the historic reading. The development is reflected in today’s higher put-side premiums in Rite Aid options. Overall open interest shows puts moderately outnumbering calls by a factor of 1.3. JNPR – Options in Juniper Networks, the Silicon Valley telecom company that makes routers, firewalls and IP phone equipment for partners including Ericcson and Alcatel-Lucent, traded on a volume of 42,000 lots today, calls and puts trading with equal frequency. With shares closing .80% higher at $36.61, it appears that traders may have been looking to unload the October 37.50 straddle for a combined premium of $2.90, while calls were bought at the same month’s 40.0 strike. The market is currently pricing in a one-in-five probability that Juniper shares will break above $40 next month.

TZOO – Momentum swarmed throughout the session around online travel site Travelzoo, and the buzz bore out in option activity. This ticker caught our attention early this morning as our market scanners showed options were moving at 64 times the average volume, coinciding with a 45% climb in implied volatility to 72% – all this as its shares gained 13.4% on the session to close at $22.95. Today’s volume was cloistered in at-the-money 22.50 calls in the October and November contracts, while 3,275 lots have traded one strike higher at 25.00 for a buck-fifty apiece.

Andrew Wilkinson
Senior Market Analyst

Rebecca Engmann Darst
Equity Options Analyst

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