Friday Options Update: GM, YHOO, FLR, KBR, DIS, GS

Rebecca Engmann Darst co-authored this report.

General Motors Inc. (GM) – Cash burn or crash n’ burn? Today’s dire earnings report from the company is nicely timed evidence to present to Congress to remind them to hurry up and bailout the automakers. Investors are fast coming around to see the silver lining here whereby the government is held at gun point to save the industry or face the drastic consequences of unemployment not seen since the Nixon era. Option volume in GM has almost doubled since the delayed earnings announcement this morning and investors are pouring their capital into the November 3.0, 4.0 and 5.0 strikes (shares have reversed an earlier rebound and stand 12.5% lower at $4.22). It now costs 80 cents to buy rights to sell GM shares at $4.00 within two weeks. Meanwhile some 6,000 puts have traded at the December 2.5 strike where breakeven occurs, wait for it, at a share price of $1.87.

Yahoo Inc. (YHOO) – One might call the way in which Yahoo! is publicly throwing itself at Microsoft embarrassing after it “successfully” fought off a bid at almost three-times the price at which its shares are now trading at $12.14. Today, investors have more than reversed yesterday’s gains in its shares with MSFT officials coming out and noting that they really aren’t interested in reopening discussions with Jerry Yang’s team. Options on the search-engine stock were actively traded with some 85,000 lots traded by 10:30am. Investors took out 10,300 put options securing the right to sell Yahoo! shares at 12.0 by November’s expiration in two weeks time, which is almost as large as the existing amount of investor positions as measured by open interest of 12,416 contracts. In the December contract some 2,000 puts traded at the 9.0 strike where only several hundred bearish bets reside. At the December 12.0 strike investors took out 3,600 lots, which once again exceeds current bearish positions. Most notable was the high call volume in the November 14.0 strike where 14,800 lots traded.

Fluor Corp. (FLR) – A 95% jump in quarterly earnings sent shares in Dallas-based engineering and procurement company, Fluor Corp., higher by 23.2% to $41.94. The rise in profits, the company’s raised floor for 2008 profits and the 2009 guidance brought call option buyers out in both November and December contracts. The most commonly traded contracts were at the 40 and 45 strikes in the nearby month but we also note the purchase of around 700 contracts offering buying rights at the 55 strike in December for a premium of 1.20. Shares would need to rally by one third just to reach the strike price alone, which seems pretty bullish. But then again with the S&P 500 index down 38% year-to-date and markets becoming increasingly optimistic over further plans to bailout areas of the economy other than financials, there are still companies who are hands down still doing good business. The company also noted an increase of 31% in its order backlog adding fuel to today’s gains.

KBR Inc. (KBR) – What’s good for the goose, as they say, might be good for the gander. We wonder if today’s rally in Fluor isn’t helping lift shares in fellow engineer, KBR. Its shares are 2.2% to the better today at $14.63 and our market scanners have picked up a bullish vertical call spread in the March contract. An investor paid a 2.0 premium for 5,000 calls at the 17.5 strike while bagging the 50 cent premium at the higher 25 strike. In this case the maximum potential profit is worked out by subtracting the net premium of 1.50 from the distance between the two strike prices, to yield 6.0. The trade begins to make money at a share price of $19.00, which is the lower strike price plus the net premium and the increases penny for penny if shares move higher towards that maximum potential gain at a share price of $25.00. Once again option traders are seeking solid companies whose core business (including government contracts) is clearly essential during a downturn.

Disney Co.  (DIS)– As one might expect, weakness in consumer spending is taking its toll at the Magic Kingdom and other Disney theme parks. The company noted in its quarterly earnings statement that the Lehman’s bankruptcy filing had marked a downturn in bookings. In addition Disney faced lower profits thanks to bad debt from Lehman. During the 2002 recession, shares in Disney were hit hard forcing a margin call from one of its major stockholders who was forced to sell a humungous block of shares at giveaway prices. Today’s option market activity seems to be telling us that investors are less pessimistic over Disney’s prospects. At the November 22.5 strike and with shares trading lower at $22.30 investors sold 3,900 out of 5,420 put contracts at 1.40 indicating that they don’t expect shares to slip much further and specifically below $21.10. In the January contract there was buying in the 30 strike call at a premium of one quarter dollar while 17.5 strike puts traded on similar volume to the middle of the market at 90 cents.

Goldman Sachs (GS) – We’re still trying to reconcile unsubstantiated street-chatter that Goldman Sachs might take itself private with a 3.1% share price decline to $78.15. It does beg the question, how would they pay? But we suppose the answer is, from their checking account. However, today’s price decline is more likely driven by reduced earnings outlook from a JP Morgan analyst, who says that the banker might now lose 58 cents in the fourth quarter instead of making as much as $2.02 per share. Option traders punished GS by selling calls in the November contract at the higher 80, 85 and 90 strikes and so anticipate little prospect of a snap back rally in the stock soon. Meanwhile sizeable activity was noted at the 70 and 75 strike puts where investors purchased around 10,500 contracts in all.