Today’s tickers: ROH, WMT, CX, PG & XLF
ROH – Rohm and Haas Company – Shares have jumped over 17% to $63.60 amid news that discussions over merger resolution have resumed between ROH and Dow Chemical Co. We can only speculate as to how the discussion will turn out and scant information is available at the present time. The uncertainty has created a veritable hot bed of frenzied trading among option traders whose speculation now surrounds what price any deal might be struck at. They have jumped headlong into various plays and created a feeding frenzy concentrated on the call side – by mid-afternoon nearly 150,000 lots have been traded. Calls were purchased in the March contract as high up as the 75 strike price where volume continues to increase. It appears that some 16,000 calls at the March 75 strike were purchased for an average of 45 cents each, while many earlier changed hands at 31 cents. We doubt we’ll see open interest increase by the full volume of today’s trading, which is likely handing some traders fast option profits.
WMT – WalMart – Even WalMart bulls can’t build on yesterday’s sales improvement and its shares are 2% at $48.80. Having touched $51.00 yesterday – a six week high – the turnaround is troubling. Costco also announced that its customers were buying more of its cheaper own brand goods, while WalMart notes the same migration from its customers. The reality to WalMart’s store traffic increase boils down to more customers looking for cheaper groceries in today’s environment. We note a smattering of April expiration put purchases indicating that investors sense that WalMart’s seemingly good fortune is not all that it’s cracked up to be. Investors bought 1,300 puts at the 47.5 line and 3,900 at the 45 line where the premium infers a breakeven share price in 42 days time of $43.86. We also note a decent amount of call selling at the April 50 line today where an average premium of 1.84. A call writer taking in that amount would need to see more than a breach of that high-water mark before resigning themselves to losses.
CX – Cemex – We noted heavy put volume in Thursday’s session on Mexico’s cement producer and today the pattern appears to be repeated, with the option market message pretty clear. With shares down 4% at $4.37 and bouncing off support around $4.00 yesterday, today and in November, the recent revisit is accompanied by an elevated reading of implied volatility at 157% and up from 100% at the start of the year. Put buyers are evident from April to January 2011 across all strikes at the 2.5 line, which is especially curious. Investors paid 21 cents to secure selling rights on Cemex ADRs expiring next month and 56 cents for rights expiring in July. The option activity isn’t all new judging by pockets of established open interest at the strikes. Indeed at the coming January 2.5 line where investors today bought 8,529 put options, open interest reads over 29,000 lots. But what is new is the fact that in the puts expiring one year on in January 2011, investors bought altogether fresh positions suggesting that Cemex shares will have crumbled to dust as the options expire. Put volume of 2,000 contracts were bought for a 1.09 premium earlier inferring a buyers only break even at a share price of $1.41.
PG – Procter & Gamble Company – Shares of the commercial products group have remained flat for the most part at $45.40 today. PG popped up on our ‘most active by options volume’ early on in the trading day, with notable activity present in the April contract. The staple company saw selling pressure accelerate at the start of February when shares had sat comfortably between $55 and $70. At the April 45 strike price a straddle was established with the purchase of 2,000 calls for 2.65 apiece, and with the purchase of 2,000 puts at a cost of 1.95 each. The position suggests this investor is looking for a surge lower or a rebound in the fortunes of the company, but would benefit most from an acceleration of implied options volatility. The premium paid for the trade amounts to 4.60 and yields breakeven points at $49.60 on the upside, and at $40.40 on the downside. Based on this strategy we believe this investor expects implied volatility to rise, and for the stock to either accelerate on the downside or experience a significant rebound by expiration. Implied volatility has stepped up gradually since the beginning of February and has remained about 3% above historical volatility readings for the stock. This trend is apparent today with the current volatility at 36%, approximately 3% higher than historical volatility of 33%.
XLF – Financial Select Sector SPDR – With shares down 3.5%, the banking index has reached a new 52-week low again today to stand at $6.02. In spite of the current trough, activity today indicates that investors are looking for a significant rebound in three months time. At the June 10 strike price one trader purchased 20,000 calls for 20 cents each. Shares would need to rally by 69% by expiration in order to surpass the breakeven share price of $10.20. The current price on the XLF reflects a sober view of the sketchy plans to help the financial system – the pessimism implies that as of now it is almost as if there is no plan. The large chunk of calls purchased so far out-of-the-money indicates that when the rebound is upon us it will likely be fast and furious.