Options Update on Vale, Sysco and Kroger

Includes: ACN, KR, SYY, VALE
by: Cullen Roche
  • The VIX jumped over 7% on the day as investors reached for protection.
  • Goldman Sachs reiterated its conviction buy rating on shares of Accenture (NYSE:ACN) and increased its price target from $47 to $50.
  • [[SYY]] – Sysco Corp. – The largest North American distributor of food to the foodservice industry received an upgrade to ‘buy’ from ‘hold’ with a $34.00 price target at Citigroup Tuesday. Shares rallied more than 1% to a new 52-week high of $28.80 during the trading session. Investors bulked up on near-term put options despite the bullish upgrade at Citi. It appears 2,300 puts were picked up for an average premium of 10 cents each at the December 27.5 strike. Another 2,700 put options were coveted at the January 27.5 strike for 40 cents premium apiece. Perhaps investors are picking up cheap downside protection to secure the value of underlying stock positions. The increased demand for puts on SYY lifted option implied volatility on the stock 9.46% from an opening value of 18.49% to an intraday high of 20.24%.
  • [[KR]] – The Kroger Co. – The operator of retail food and drug stores wins the award for the steepest declining stock in the S&P 500 Tuesday with shares down as much as 14% to $19.61 in earlier trading. Shares of the largest supermarket chain in the U.S. nosedived after the firm cut its full-year profit forecast from $2.00 per share to $1.70 per share. Additional impetus for bearish momentum in the stock stems from Kroger’s weaker-than-expected third-quarter earnings of 27 cents per share, which disappointed analysts expecting an average of 36 cents profit per share. Option traders displayed signs of optimism despite near-term gloominess. Investors initiated long-term bullish positions on Kroger by purchasing 16,200 calls aimed at the 20 strike for 2.47 per contract expiring in January 2011. Call-buyers stand ready to accumulate profits if shares rally 14.5% to surpass the breakeven price of $22.47 by expiration. Near-term bullish traders bought about 3,900 calls at the December 20 strike for 35 cents premium apiece. Option implied volatility contracted 10.76% during the session to an intraday low of 27.94%. Kroger’s shares improved to $20.50 as of 12:15 pm (EDT).
  • A big trader was seen initiating a bullish position in shares of Vale (NYSE:VALE):

[[VALE]] – Vale S.A. – Option volume on iron-ore producer, Vale, exploded this afternoon after one investor exchanged 102,200 puts in the June 2010 contract. The put activity actually implies bullish sentiment on Vale despite the 3% decline in shares this afternoon to $27.36. It appears the contrarian trader sold 51,100 in-the-money puts at the June 29 strike for a premium of 4.45 each, and purchased 51,100 puts at the lower June 23 strike for 1.75 apiece. The iron-bull receives a net credit of 2.70 per contract on the trade, which he keeps if VALE’s shares rally above $29.00 by expiration in June. Shares closed at $29.40 just last week on December 2, 2009. The investor is exposed to losses to the downside if shares decline through the breakeven price of $26.30. Maximum potential losses of 3.30 per contract accumulate for the trader if the stock sinks 16% from the current price to $23.00 by June’s expiration day.

Overnight saw more headlines around Dubai World’s entities (especially Nakheel’s weakness down almost 8pts Tuesday! and Istithmar losing the ‘W’ Hotel) and U.S. and U.K. sovereigns took a bit of a blow on a weak statement by Moody’s on pushing AAA limits (lol – what are those limits?). Greece staggered further and as my wife would say – “I think the told-you-so dance might have to appear” – as it appears that sovereign risk (especially the Dubai shenanigans) are not just a ‘blip’ as so many long-only talking heads would have us believe. Dubai (the sovereign) jumped 55bps back to 555bps (120bps wider in last 4 days).

Greece jumped 20bps more Tuesday, taking out the 11/26 wides and backing it up to March 14th wides, having moved 40bps in the last 4 days. Ireland got dragged wider also (not helped midday by Lenihan’s comments on savings and outlook) as SovX intrinsics moved 3bps wider to 68bps and skew finally compressed as SovX moved 6bps wider (as we see Ireland and Greece now account for almost 36% of SovX risk). European FINLs Sen-Subs decompressed modestly Tuesday as FINLs widened in harmony with the systemic sovereign risk. Notably, SovX underperformed ITRX Ex-FINLs, ITRX LoVOL, and Sen-Sub Tuesday.