Wednesday Options Update: MER, BAC, FNM, AMGN, AMLN, LLY, MEA, GE
Rebecca Engmann Darst contributed to this report.
Merrill Lynch (MER) – Financial shares started the day on shaky footing following Goldman Sachs’ downgrade of profit estimates and share price targets for a slew of banks and brokerages, leaving traders understandably wary of what’s waiting behind the proverbial Door #3. Many sector names are trading still higher – even following news that Lehman Brothers’ (LEH) plan to raise $5 billion in capital from South Korean investors fell through. Given what looks like unsynchronous price action in the sector, option traders aren’t letting go of defensive strategies in large-sized put spreads in the sector. One notable example is Merrill Lynch - one of the names on Goldman Sachs’ hitlist – whose shares are up .67% to $23.98. Early in the session we saw a 10,000-lot put spread in the front month deployed between strikes 20 and 27.50 at a $3.65 debit that first breaks even at the $23.85 line.
Bank of America (BAC) – A similar put-spread strategy involving 10,000 lots went through about half an hour later in Bank of America, where shares bounced 2.7% to $28.85. Today’s spread involved the October 17.50 and 27.50 put lines, and because both ends of the spread traded to the middle of the market (making a directional call unclear), our analysis of the order flow is based on the premiums involved. Again, it looks like this spread was bought, with the trader paying $2.60 for a trade that functions best if Bank of America shares trade between $17.50 and $24.90.
Fannie Mae (FNM) – No succor has been forthcoming for Fannie Mae, however, even as the company’s CEO took to the National Public Radio airwaves today with assurances that no government bailout is in the offing. Shares deteriorated another 18% to under $5.00 as option traders have put more than 107,000 options in play, nearly twice as many of these trading on the put side of the sentiment divide. Buyers of puts are targeting the 2.50, 5.00 and 6.00 strikes in the front month, with interest at the 2.50 strike extending into the December and January contracts as well. Traders on the whole appear hellbent on securing “disaster protection” on Fannie Mae shares for the remainder of the year, without wagering a bet on when shares might crumple completely. Implied volatility at 248% represents about a 20% increase from yesterday.
Amgen (AMGN) – Front-month option activity in biotech Amgen qualified the ticker for our scan of most active option families. This occurred against flat action in the share price, which is down .17% at $63.83. It looks like a trader took advantage of the lull in share price and implied volatility (at 38.2% versus a historic reading of 50.5% for the demonstrably volatile Amgen stock) to position in anticipation of a new break of its 52-week high of $65.60. Amgen shares have pulled back only slightly since setting that high watermark last week. The trader positioned long of just under 5,000 lots in the September 65/70 call spread, a strategy that would carry a debit of $1.73. It appears that our trader skimmed some of the top from that amount by selling an equal number of September 57.50 puts at 73 cents.
Amylin Pharmaceuticals (AMLN) – Amylin Pharmaceuticals options continue to show an unusual level of volume, trading at 1.8 times the normal level today as shares shave another 2% off to $27.91 – bringing the loss to nearly $7 in the past week since its diabetes drug Byetta was linked with deaths due to pancreatic inflammation. Implied volatility at 73.6% remains substantially elevated above the 68.2% historic reading, suggesting that traders see more risk of more continued share price turbulence – the demand for put positions at out-of-the-money strikes implies further downside. Specifically we’re seeing heavy buying at the September 20 line, as well as long put spread activity between strikes 22.50 and 30, carrying with it a $2.60 debit. In the October contract, early activity included a strangle at the 25/30 lines involving a premium of about $4.20, though we have no confirmation of the trade direction, and a short call spread between strikes 30 and 40 in which the trader took a $2.46 premium expecting shares to remain below $30 by October expiration.
LLY – Shares in Lilly, Amylin’s partner on Byetta, are trading .10% higher at $47.85, as an increase in options trading volume to nearly 3 times the normal level showed traders selling September volatility and buying October. This seems to have been done at the 45 put line with calendar spread activity at that strike, and again at the 50 call line, where traders either rolled out existing long positions or wrote September to pay for October.
Metalico Inc. (MEA) – For a second straight session, we’re seeing an unusual level of interest in the options of scrap metal recycler Metalico Inc. Shares are down .46% at $10.86 at present, but don’t let the inactivity fool you – this is a stock that has come off some 42% from its 52-week high set back on June 24. While implied and historic volatility are currently at near-parity at around 72, suggesting that the options market doesn’t see much reason to suspect outsized moves above and beyond what the stock has already demonstrated. One trader, however, seemed to position on a nearer-term spike in call volatility and share price via a calendar call spread in which the October 12.50 calls were bought at 80 cents, against the sale of April 12.50 calls at $1.70. This strategy also allows the trader to take a 90-cent credit on the transaction. Today’s volume represents more than 16 times the normal level of activity, and more than a quarter of its total open interest – interest which shows traders in possession of 5 times as many calls as puts.
General Electric (GE) – Finally, shares in General Electric are flat-to-higher at $28.76 at present, and while implied volatility at 27.6% rates below the 32.6% historic reading, we saw early indications of traders positioning volatility-bullish and even long on puts, in anticipation of near-term turbulence in the share price. In one example, a trader bought a 1,000-lot position at the September 27.50 straddle, a position which costs $2.19 for the long buyer and would generate profit with an upside break past $29.69 or below $25.31. Calls and puts traded to buyers and sellers at the 29 and 30 lines, while activity in October and January showed buying interest at the 27 line.
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This article has 2 comments:
- crimfunk
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Aug 20 08:23 PMthanks
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Aug 21 08:01 AMMore by Andrew Wilkinson