Today's tickers: MSFT, WFC, TIF, AMZN, & COF
MSFT - Microsoft Corp. - Yesterday's nervousness as played out by Microsoft skeptics in the options pit proved to be quite prescient. Following a lousy earnings report with little optimism for near-term recovery in demand, Microsoft's shares slipped 9% to $23.26 today. Mid-morning it appeared that an investor used the January contract to place a bearish option trade by selling 15,000 calls with a 25 strike to pick up 15,000 puts at a net 6 cent credit. The combination in its raw form pervades pessimism and provides a breakeven just below the put strike at $20.00 thanks to the offset of the 1.03 received from the call sale. The position could alternatively have been protection against an opportunist long position on the stock, which fell to as low as $22.81 earlier. For example buying stock at $23.00 coupled with this protective option strategy would provide an 8.7% return if the shares reach the short call strike by expiration.
WFC - Wells Fargo & Co. - Massive chunks of puts were traded on WFC today as shares continued lower by 3% to stand to $23.53. The stock began this week just 2 pennies shy of $26.00 and surrendered nearly 11% of its value over the past five trading days when it reached its lowest intra-day price of $23.17 today. Some investors were able to bank gains today despite the dismal week Wells Fargo experienced. One trader purchased to close a 50,000-lot put position that he originally sold short for 50 cents per contract at the August 17.5 strike price back on August 7, 2009. Today he bought back all 50,000 puts for just 20 cents each, padding his wallet with profits of 30 cents apiece, for a total of $1,500,000. Another massive trade observed on WFC was the purchase of 65,000 puts at the now in-the-money October 24 strike price for 3.10 each. These options, likely purchased by an investor who is long shares of the underlying, provide downside protection if shares slip beneath the breakeven point at $20.90 by expiration. Increasing investor uncertainty was apparent from the spike in option implied volatility on the stock to a high of 55% today, up from yesterday's closing reading of 45%.
TIF - Tiffany & Co. - Bearish option traders feasted on a breakfast of hearty puts at Tiffany's this morning amid a slight 1% decline in shares to $29.14. Perhaps investors' appetite for downside protection on the specialty retailer stems from fears that consumer spending on luxury-goods has yet to recover. The most pessimistic individuals purchased 3,400 puts at the September 24 strike price for an average premium of 60 cents apiece. Shares of TIF would need to tumble 19% before profits begin to amass beneath the breakeven point at $23.40. The higher September 26 strike price had 1,200 put options picked up for 1.01 per contract. Finally, the just out-of-the-money September strike attracted the heaviest volume with some 25,300 puts coveted by investors for 2.05 each. A 7.5% decline in the price of the underlying must occur before downside protection kicks in beneath the breakeven point at $26.95.
AMZN - Amazon.com, Inc. - Despite an 8.5% slide in its share price following earnings at the world's largest online retailer, today's put option activity tells a rather different story. Shares have declined to $85.90 while put writers are banking on a rebound after the next set of earnings by October. Noteworthy was a credit put spread involving the October 90/75 strike puts where an investor took the credit from the sale of 6,900 puts at the higher 90 strike in exchange for paying out a lesser amount at the lower strike. Should shares at Amazon clear the 90 strike through expiration with a mere 4.8% rally, the full net 6.18 premium from today's activity. Currently 4.10 of that premium is purely intrinsic. A share price rally and the approach of expiration would be two factors benefiting this investor's view. At the 95 strike investors dumped 1,700 well in-the-money puts likely in the same expectation. Option implied volatility - another factor that would reduce put premiums has cratered in the earnings aftermath by 17% to 39%.
COF - Capital One Financial Corp. - Investors in the financial services firm should feel good about having COF in their wallets today as the stock gained nearly 7% to $29.76 by lunchtime. Capital One's reported second-quarter losses, which were less dismal than analysts had anticipated, helped boost shares upward. The firm posted a loss of 65 cents per share versus the average Street consensus of 73 cents. Option traders responded by locking in gains experienced in the rally. The now out-of-the-money September 29 strike price had 15,000 puts purchased for an average premium of 3.53 per contract. Investors looking for much cheaper downside protection bought 2,200 puts at the lower September 25 strike for 1.66 each. Finally, investors hoping for a continued rally purchased calls in the near-term August contract. The now in-the-money August 29 strike had about 1,100 calls scooped up for 2.00 each while the higher August 30 strike price had 4,000 calls coveted for an average premium of 1.52 apiece. Shares must gain another 6% for call-buyers at the higher strike to begin to accumulate profits by expiration.