Today’s tickers: AN, GD, HSY, MSFT & NOK
AN – AutoNation Inc. – Shares of the automotive retailer have lifted 6% today to $10.33, a price that represents a more than 160% increase over the 52-week low of $3.97 established just as the broad market reached its weakest point for 2008 in November. AutoNation continues to thrive in this depressed economic environment, whereas the big four automakers are left struggling in vain to avoid the descent to bankruptcy. AN has captured a sweet spot in the auto industry given that consumers continue to require automobiles for transportation purposes, but are currently without the means to purchase new vehicles. And so AutoNation welcomes cash-strapped consumers to its franchises, while big-auto laments the loss of customers, which it so desperately needs. Interestingly, CEO Mike Jackson, reported that demand for highly fuel-efficient autos and hybrid vehicles has fallen off a cliff given the decline in the price of gasoline, and now AN’s lots are chock-full of the cars. Perhaps if gasoline prices rally and consumers once again remember the long-run cost savings hybrids accrue, the hybrid vehicles will once again fly off the shelves. AN popped onto our ‘hot by options volume’ market scanner today after some interesting trades were established in the March and April contracts. At the March 10 strike price, 10,000 puts were sold for 40 cents each while at that same strike, 5,000 calls appear to have been purchased for 90 cents apiece. It also looks like these two trades were connected to the purchase of 2,500 calls at the April 10 strike price for 1.45 per contract, as well as the purchase of 2,500 calls at the April 12.5 strike for 45 cents each. We believe that the puts were sold as a vehicle to finance the purchase of calls as this investor seeks further upside on AN. The March 10 calls are already in-the-money as of today, but shares would need to rally by an additional 21% in order for the April 12.5 calls to land in-the-money by expiration. The investor appears to feel confident that the shares will remain above $10.00 at expiration.
GD – General Dynamics Corp. – Over the course of the last six months, shares at defense contractor, General Dynamics have fared badly falling from around $95 to $35 per share. You can blame the broad macro environment or you can focus on expectations of lower earmark for defense spending within President Obama’s future budgets. While shares today are largely unchanged at $36.50 it’s option investors putting capital to work on hopes that the predictions are wrong. One analyst believes that evidence of a 4% defense spending increase in the budget coupled with significant lobbying pressure by certain lobbyists in Congress makes for a better environment than investors currently expect. In the May contract today, investors played the potentially bullish prospects by creating a call spread using the 40 and 45 strike prices to get long of General Dynamics. Some 10,000 calls at the lower strike were bought in exchange for sold calls at the 45 strike price for a net price of 1.30. That means that investors seeking upside from the stock want shares to trade to above $41.30 before their May options come due. From today, that’s a 13.2% increase and it seems there must be a reasonable chance of that happening if defense as a sector regains its poise.
HSY – Hershey Company – A sweeter prospect is in store for investors in the chocolate and confectionery maker if you believe the activities of option investors who have a sweet tooth for calls at the 35 strike line today. With Hershey’s share price down 0.3% at $31.91 and quite clearly at the bottom of its 52-week range, these call buyers are looking for an immediate rebound. Most calls bought expire in March where some 11,500 were bought for 60 cents a piece, inferring a rebound to the $35.60 breakeven of 11.5% within two weeks. Those buyers also focused on the April contract where investors paid 95 cents in hopes of a rally. In the May contract around 1,400 calls were bought for 1.40.
MSFT – Microsoft Corporation – Shares have rallied slightly by less than 1% to $15.40 today despite the trim in its EPS estimate and price target for the period ending in June 2009by one equity analyst. The price target was revised from $22 to $19 and the EPS estimate was reduced to $1.66 from $1.72. Option traders saw through these revisions choosing instead to lengthen their time horizons as they initiated bullish positions in the January 2010 contract. There it looks like one investor established a short straddle at the 20 strike price by selling 5,000 puts for 5.73 each, and selling 5,000 calls for 1.12 apiece. The gross premium enjoyed on this trade amounts to 6.85 and yields breakeven locations at $26.85 on the upside and at $13.15 on the downside. This investor will retain the full premium if shares settle at $20 by expiration but would see the 6.85 begin to erode if shares deviate. Losses would accrue in either direction beyond the breakeven points described. Bullishness was also seen at the January 2010 22.5 strike price where 24,000 calls were scooped up for approximately 66 cents per contract. Profits will begin to amass next year if shares can surpass a breakeven share price of $23.16 by expiration. Option implied volatility stepped up a notch rising gently to 53%.
NOK – Nokia Corporation ADS – The Finnish maker of mobile devices has experienced a 1.5% rise in shares to $8.87. NOK edged onto our ‘hot by options volume’ market scanner today after a call spread was established in the April contract. One investor purchased 14,000 calls at the April 9 strike price for 80 cents each, while at the April 11 strike 14,000 calls were sold for a premium of 15 cents apiece. Thus, the net cost of the trade is 65 cents and yields a maximum potential profit of 1.35 if shares can rally to $11 by expiration next month. This bullish investor will breakeven at a share price of $9.65 and begin to amass profits if NOK can continue to rebound.