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Bank of America (NYSE:BAC) – Will nice guy Bank of America, end up finishing last because of their January 1 acquisition of Merrill Lynch & Co.? BAC, America’s largest bank by assets, has absorbed greater than expected losses from their newest cohort’s dismal fourth quarter performance. Despite the $25billion in federal funding they have already received, it is likely that Treasury Secretary Henry Paulson will hear, “Please Sir, may I have some more” of your $700 billion in TARP rescue funds. With only five days until BAC’s fourth quarter earnings are expected to surface, many analysts are slashing estimates, pessimistic about the impending results. Will BAC be able to successfully integrate Merrill, as well as their other recent acquisition, Countrywide Financial Corp., and carry their now far heftier team through the financial crisis? Option traders appeared to misjudge the magnitude of Bank of America’s decline during the first half hour of trading and appeared to be more disposed to buy calls and sell puts. However, the fact that its shares slumped to a far deeper low saw elevated demand for puts expiring tomorrow and then in the February contract. Shares are currently 23% lower at $7.87. An early seller's January puts at the 7.5 strike sold 4,500 lots at 14 cents before demand for protection against a slump in the shares saw buyers pay premiums as high as 94 cents later in the morning. That series has mid-morning volume of 53,800 contracts and is the single most trafficked option in today’s session. Today’s trading dwarfs the current number of established positions of 34,991. Investors were also premature in their conviction to buy calls at the 10 strike expiring tomorrow when they paid up to 28 cents. Premiums dropped to as low as 7 cents as volume picked up to 31,000 lots. At the February expiration traders picked up put options at the 6.0 strike for 50 cents, which are now bid 1.05. The uncertainty surrounding BoA has sent option implied volatility skyrocketing by 76% to 209% today.

Citigroup Inc (NYSE:C) – Implied volatility at Citi was up by around half to stand at 232% Thursday, while demand for January 2.5 strike puts was evident with investors lifting offers at 18 cents. The weight of demand for puts at the 4.0 strike saw prices gap higher at one point as shares in Citi hit the skids. Once again there was early selling seen in put options in both February and March at the 4.0 strike and to put that in perspective, the February puts sold at 80 cents are now trading at 1.15, while the March puts sold at 89 cents are now trading at 1.30. Demand for 3.0 strike puts expiring in February was twice as heavy as those willing to sell and were heavily bought at 44 cents before premiums reached 71 cents this morning. Volume at that strike reached 33,000 contracts.

Apple Inc (NASDAQ:AAPL) – Tim Cook, COO of Apple, and interim decision maker during CEO Steve Jobs’ medical leave, must feel pretty underwhelmed by the lack of confidence indicated by AAPL’s decline in share price, which was seemingly spurred on by Jobs’ cataclysmic announcement on Wednesday. Speculation on Jobs’ health has been rampant since his absence from the Macworld Expo in San Francisco, but a general medical leave still leaves iPod listeners and Genius Bar employees alike searching for the root cause of the Apple head honcho’s hiatus. Analysts express confidence in Cook’s ability to competently lead Apple through this dark Jobs-less period. Overall option trading was relatively balanced although there was a clear bias towards 80 strike put options expiring Friday where 35,000 contracts have changed hands so far. The near one dollar premium implies further share price slippage from the current $81.20 to $79.00 before puts bought would come good. In the April contract option bulls appeared as they placed call spread combinations between the 100 and 110 strikes. Buying the lower strike at 3.85 and selling the higher strike at 2.00 produced a net debit of 1.85, which means that these investors Apple will be trading above a breakeven $101.85 by April’s expiration. Maximum profits of 8.15 per share would occur if shares recapture the higher strike price by that time.

Cypress Bioscience Inc (CYPB) – FDA approval to sell its fibromyalgia treatment saw Cypress shares surge by one quarter to $9.05. Option traders put 29,000 lots into play, which is high relative to the open interest of 115,947 lots. As one might expect the positive development put call options in demand where buyers targeted the 10 strike in February and March. Shares would need to keep rallying to make good on today’s transactions in which nearly 10,000 calls bought at 80 cents require a further 19% gain for its shares. Open interest at that strike is just 8,211 lots in comparison. At the March contract premiums of 1.10 were paid requiring a further 23% gain before naked buyers break even. Today’s 4,000 lot volume exceeds existing bets at that strike where less than 2,000 calls are owned. June 12.5 strike calls were also lightly traded at premiums of 1.30. Option implied volatility dropped through the floor to 72% from a previous 215%.

Sequenom Inc (NASDAQ:SQNM) – Genetics and molecular diagnostics company, Sequenom Inc., aims to expand their operations to cancer diagnostics by placing a $41million bid for genomic diagnostic test producer EXACT Sciences Corp. EXACT rejected the bid in favor of a self-reported strategic alternative that they believe will yield “greater value” to shareholders. Though the San Diego based Sequenom may feel the sting of rejection, they can still applaud their strong share price which has remained fairly close to their 52-week high of $29.14, an admirable quality for any company, but particularly in an economy that has been diagnosed with crisis. Options activity was evident in what looked like a calendar roll between the two January contracts expiring 2010 and 2011. An established 16,000 lot call position at the 40 strike 2010 expiry appears to have been rolled into the 30 strike 2011 expiration. The build in open interest in the closer strike has been gradual and today’s timely closure of this position is possibly being done at little financial damage to the investor judging by past premiums paid. Sequenom has performed nicely in comparison to the broad market and has certainly held its own. Perhaps this investor decided today to pare expectations and rein in the strike price by $10.00 today. Still, bear in mind that one analyst just raised its prediction for shares to $45, which almost requires a doubling from today’s $24.10. The simple breakeven on today’s 30.0 purchase means that shares would still need to rise to $40.75, but from this investor’s perspective – the sooner the better.

Source: Thursday Options Update: BAC, C, AAPL, CYPB & SQNM