Today's tickers: DOW, VIA, UPS, SNDK, WFC, AN & DHI
DOW – Dow Chemicals – Trading in options on Dow Chemical has been quite a show today. Earnings ahead of the market were pretty desperate, although investors were possibly braced for affirmation. It appears that a large seller of put premium in the February contract at the 10.0 strike was on the rampage early on taking in 64 cents in premium while the stock was trading at $10.84. At present shares are 4% higher on the session at $11.50 by which time large orders have doubled the overall trading in the series to more than 56,000 contracts where buyers are now in command. Premiums meanwhile have eroded to around 40 cents on the higher share price and an 11% decline in options implied volatility. Today's volume is running at twice the volume of open interest and is certainly curious. Put option buyers have also appeared at the March 15 strike and the June 10 strike where yet again today's contracts bought to secure selling rights over Dow Chemical's shares is twice that of open positions. With the company lodging its official response to Rohm & Haas's lawsuit in court documents today, stating that deal completion would have created an uneconomic unit at the original price, we're floundering as to get to grips with today's rash of volume in this issue. One argument has it that a dividend cut is in the pipeline, which would be the first time since 1912 that Dow has either not maintained or increased its dividend.
VIA – B – Viacom Inc. Class B – Media magnate and entertainment giant Viacom appeared on our 'hot by options volume' market scanner today after one investor purchased 20,000 calls at the September 20 strike price for 1.40 per contract. The massive chunk of calls represents a little under half of the 43,290 of open interest on the stock, and thus stuck out like Kate Moss at an all-you-can-eat buffet. The trade went through at around 10:08 a.m. this morning when shares stood at $15.25. Since the calls were snapped up, shares have increased by 9% on the day to $16.01, and call premiums have jumped to 1.70 per contract. It is unclear as to the motivation for the seemingly impromptu call binge, however, this investor appears to expect that shares will rally to a breakeven point of $21.70 or beyond by expiration in September.
UPS – United Parcel Service – Implied volatility cratered by 22% following fourth quarter earnings at parcel carrier, UPS, whose shares responded positively to measures aimed at countering a slump in demand. Shares rallied 6.4% off Monday's 52-week low to stand at $45.12 as the company reported a 3.9% decline in demand for the quarter ending in December. The company's fortunes are strongly correlated to GDP and are seen as a barometer of economic health. While UPS disappointed analysts with its prediction of first quarter volume declines of between 3-5%, it also missed EPS projections of 69 cents per share with a forecast range of 52-68 cents. The silver lining, if it can be described in such light, was the salary freeze of 30,000 managers or 7% of its global workforce. Option traders slashed uncertainty on the stock as implied volatility fell 22% to stand at 39% thanks to the greater transparency from management. Several volatility strategies were enacted with sales of the February 40/45 strangle some 800 times netting the investor 1.45 premium indicating that the shares must remain hemmed between $46.45 and $38.55 by expiration in three weeks time. In the March contract investors sold the 45 strike straddle at a gross 5.05 premium indicating a likely share price range of $50.05 and $39.95. Finally, a large amount of July expiration puts were purchased at 3.20 at the 40 strike in exchange for 7,500 January 2010 call options at the 45 strike at 6.10.
SNDK – SanDisk Corp. – After earnings were released yesterday, things are certainly looking less than picture perfect for flash memory card maker SanDisk. The Milpitas, CA based company reported larger-than-expected fourth quarter losses in the amount of $1.86 billion or $8.25 per share. SNDK also sent up a red flag yesterday by announcing that they may need to issue more equity to the tune of $300 to $500 million which would dilute currently held shares by 12% to 20%. The disappointing results have shares down by 24% today to $8.58, and option traders wasted no time reacting to the falling share price. Most of the action was seen in the February and April contracts. In February, traders sought downside protection and purchased about 1,500 puts at the 8.0 strike for an average price of 59 cents. On the call side, approximately 2,500 calls were purchased at the February 9.0 strike for about 75 cents apiece. This indicates some bullish sentiment on SNDK as shares would need to rally by $1.17 in order for those call buyers to breakeven at $9.75. In April, one investor appears to have initiated a call spread by purchasing 6,000 calls at the 8.0 strike for 2.10, and selling 6,000 calls for a premium of 1.06 at the April 10.0 strike price. The call spread cost the investor 1.04 and will result in profits if shares rally above the breakeven point at $9.06 by expiration.
WFC – Wells Fargo & Company – Heavy put activity launched WFC to the forefront of our 'most active by option volume' market scanner today. With a put/call ratio indicating three-times as many bearish puts in action, there was clearly little let up in negative sentiment on the stock. Traders bought February puts while shares declined 2% to $18.70. The caveat here is that investors used the 10.0 strike as a line in the sand indicating shorter odds that WFC's shares would break beneath there. Some 3,700 puts were sold for 15 cents often in exchange for higher-impact protection. At the February 14.0 strike some 4,000 puts were purchased for 61 cents while at the February 15.0 strike investors steamed into more than 10,000 puts at an average price of 85 cents. The February 16.0 strike cost traders 96 cents where volume edged over 4,000 contracts while the 17.5 strike saw more than 7,000 puts trade for about 1.45 each. Implied volatility rose by 11% to 129% as investors sought protective put options.
AN – AutoNation Inc. – The largest chain of auto dealers in the United States leapt to the top of our 'hot by option volume' market scanner this morning after an interesting play by a single investor. It appears that an investor is taking a 50 cent per contract bath on protection as he rolls into the March contract. Some 10,000 puts were rolled from the February 10.0 strike to the March 10.0 strike at a net 65 cent premium. Ignoring banked losses here the trader will see protection kick-in at a share price at expiration of $9.45. On the call side the investor placed a credit spread at the same time in which calls at the March 12.5 strike were bought 5,000 times on order to sell the same amount of 10.0 strike calls for a net premium of 55 cents. Given that the investor expects to see his put protection play out in the event that Autonation's shares remain below the $10.00 share price, this spread is designed to take in a partial credit to offset the cost of running that protection. The losses that could arise from the call spread amount to 1.70 per contract and would occur should AN stretch through the 12.50 strike at expiration.
DHI – DR Horton Inc. – Earnings at homebuilder, DR Horton were ugly no matter which way you splice and dice them. Writing down the value of land or walking away from deals it cares no longer to pursue took a chunk out of earnings, while there was no good news from orders, completions or backlogs. Still, shares have responded with an 18% jump to $7.19. Option volume was heavy with 3,500 calls bought at the start of trading at the February 7.5 strike for a 30 cent premium indicating optimism over a further 8% or so gain over the coming weeks. But the larger volume was on the put side where an investor initiated what has been marked down on the ticket as a spread trade. 14,000 7.5 strike puts traded close to the bid at a 72 cent premium. Without seeing the other side of the trade in terms of the position in the underlying it's hard to identify this investor's motivation. Implied volatility has declined by 15% to 97% today.