Daily Options Report: Lyondell, Charter, Nautilus, Novellus, Coke and ETFs

by: Interactive Brokers

LYO - Following this morning's news of a takeover by Dutch plastics maker Basell, the stock market rewarded shares in chemical company Lyondell (LYO) with a 17 percent gain today – that's more than a five dollar premium on the previous 52-week high.

With underlying shares way, way up on the day at $47.00, and option volume equal to some 22 percent of the total open interest in play, it's no surprise that option traders favored the call side today. But might the options market be positioning for a higher bid from a rival to Basell, which just lost a bidding war for chemical maker Huntsman? Bearing in mind the $48 per share Basell bid, we noted an abundance of fresh positioning involving more than 7,450 lots, which went through at the August 50.00 call strike, while 2,173 new positions went through at the same strike in the September call series. A buyer of the August call on this strike is paying a 75 percent higher premium today for the right to buy Lyondell shares for $50 at the expiry of the August contract. For the pure volatility player, a buyer of the September straddle (call and put) at this same strike would pay a combined premium of $3.45 against the expectation that Lyondell shares will either see a move to the upside to $53.45 – more than a $10 gain on yesterday's close - or down to below $46.55, roughly on par with today's asking price for Lyondell.

CHTR – Charter Communications (NASDAQ:CHTR) - Options in the cable advertising/HDTV provider saw massive volume pickup this afternoon, soaring to 31 times their average daily volume. Against a two percent gain in underlying shares, which were trading at $4.69 apiece this afternoon – a new 52-week high - new volume in excess of 75,000 lots went through on the out-of-the-money January 08 put at the 2.50 strike. Sources on the floor told us that the lots were bought at a premium of $0.15 – which seems a curious bit of protection given the current price action in the underlying share. Implied volatility on Charter Communications options stands at a whopping 65 percent, against 40 percent historical volatility for physical shares.

NLS - Off-target earnings and a slew of analyst downgrades are weighing heavily on shares of fitness equipment maker Nautilus (NYSE:NLS) today, with a whopping 17 percent drop in share prices to $9.91. Related options activity showed a market eager to speculate in short-term downside, possibly troubled by the company's longer-term capacity to whip earnings back into shape. Implied volatility in Nautilus options, at a spectacular 50 percent is far above the historical average volatility in Nautilus share prices.

Options volume representing about 27 percent of its total interest was in play today, concentrated firmly in near-term puts. Heavy volume went through at the near-expiry July 12.5 put, where more than 6,000 contracts changed hands today against existing open interest. These puts traded predominantly to the ask side at a price of $2.40 – a 180 percent increase in premium from yesterday's session.

ZMH - We're not sure what's afoot at Zimmer Holdings (ZMH), but a dramatic pickup in options to buy shares in this producer of orthopedic implants showed an unusual market propensity to upside risk exposure. Today's circulating volume of more than 21,000 contracts is equivalent to 40 percent of its total outstanding interest, and is 22 times the daily average for this ticker.

Fresh positioning went through on the July call side, at the 90.0 strike, where new positions were entered in nearly 8,000 contracts today, just three days before expiry. Premiums were sharply elevated throughout the entire 2007 call-side series, notably a 400 percent price increase in the $1.25 cost of acquiring the right to buy 100 shares at a per-share price of $95.00 before the August expiry date. A move of this magnitude would require a climb in Zimmer shares above the company's 52-week high of $94.38. Still, nearly 4,000 contracts went through at that strike level today, and the 25 percent delta on the contract indicates that traders see a one in four chance that this optimistic bet will turn a profit within the next month. Zimmer shares gained 2.7 percent on the day, trading at $88.35 going into the close. Second quarter earnings are released July 25.

NVLS - Shares in chip component maker Novellus (NASDAQ:NVLS-OLD) gained more than 11 percent today, closing at 33.03 this afternoon, as bullish order bookings news were taken by the market as a positive proxy for chipmakers. With options volume equivalent more than half of its total open contracts moving today, puts out-traded calls by the narrowest of margins this afternoon. Heavy volume was seen earlier today at the near-expiry July 32.5 and 35 straddles. Further ahead, strike price positioning on both the call and put side is more conservative, concentrated at the 30 and 32.5 strikes. More than 2,500 lots went through at the August 30.0 strike against 2,100 on the put side. A surge in premiums appears to have favored the call side today, with the current going price for the July at-the-money 32.50 call reflecting a 300 percent price rise from yesterday's session. July in-the-money calls traded at premiums more than 200 percent above yesterday.

FRX - Despite news today of a 34 percent surge in Q1 profits, banner earnings for its antidepressant Lexapro, and unchanged year-end earnings guidance, options activity in Forest Laboratories (NYSE:FRX) appeared to follow share prices on a downside trajectory today. With underlying shares down more than two percent to close at $45.53, more than 25,000 option contacts circulated, more than three times as many puts trading as calls. Put volume in excess of 3,500 contracts clustered at the August 40.0 strike, while there may also have been some strangle activity going through at the August 50.0 call and the August 45.0 put. More than 7,000 contracts went through on the put side at the November 45.0 strike, where investors were paying elevated premiums of $2.80 for the right to sell Forest Labs shares at $45.00 apiece at contract's expiry.

KO – Shares in Coca-Cola (NYSE:KO) were warmed last time earnings season came around and in Monday's session reached a five-year high. Options trading following today's 2.6 percent gain in profits was muted. Company shares eased a tad to $52.90. The company earned quarterly profits of $1.85 billion on revenues of $7.48 billion, up 19.3 percent over the same period a year ago. The fizz came out of implied options volatility falling by a full quarter back into line with historic volatility on the shares. The at-the-money July 55 straddle was selling for a premium of 2.1 on Monday, but in today's trading that slumped to 1.45 in response to the lack of news. In the August and November series it appears that strangles between the 52.5 or 50 and the 55.0 strikes were in play today. Coca-Cola's shares have traded within the $51.00 $55.00 range for about three months.

GDXMarket Vectors Gold Miners (NYSEARCA:GDX) – With the dollar continuing to pack its bags for its trek to hell, investors are gearing up for potential windfall gains from the usual winner in times of dollar weakness, gold. This time options traders are banking on strength in the share price of the Gold Miners ETF, which closed today's session at $40.79. With some 10,500 contracts in play today activity is equivalent to around 7 percent of open interest in the fund. Buyers of call options in the August series were seen today at the 41.0 strike, where traders currently see a 52 percent chance of options expiring in the money next month.

The ETF invests in shares of gold mining companies such as Barrick Gold Corporations (NYSE:ABX), Goldcorp (NYSE:G) and Newmont Mining (NYSE:NEM). Those three holdings account for one-third of the total fund allocation.

IYRiShares DJ U.S. Real Estate ETF (NYSEARCA:IYR) – This real estate fund has run into headwinds ever since rising interest rates came along to compete with returns available from commercial and residential rents. The fund peaked at the time at around $95.00 per shares and has slumped to around $77.50. With the bond blowout perhaps over, that might be good news for this fund – at least judging by the actions of options traders. In the September series at the 76.0 strike investors sold 6,300 puts. The chances of those puts landing in the money are less than one-in-three, but they command a premium of 1.8. Sellers are keen to take in that premium in the hope that shares in these iShares will remain above $74.20 by expiration. Currently options volatility is running around 19 percent above volatility typical of the share price.

OIH – Oil Service HOLDRs Trust (NYSEARCA:OIH) – With the price of a barrel of oil reaching $75.00 today, energy related shares remain hot property. The put/call ratio on the OIH indicated a higher level of put activity on Tuesday's rally, however, registering 2.6 puts changing hands compared to each call. But it does look like traders are placing a couple of put spread trades aimed at protecting against a downturn in the fortunes of the sector. The August 160/175 spread traded 1,500 times at a net cost of 3.10. Taking that premium away from the distance between the strike prices means that if shares in the OIH fell from its current $178.89 a trader would start to make money below $175.00 and would maximize profits of 11.90 per contract at a share price of $160.00. Also in play Tuesday was the January 145/175 put spread, which nets out at 8.0 for maximum profits of 22.0 on a share price decline of 19 percent.

XLE – Energy Select SPDR (NYSEARCA:XLE) – With this fund closing at $72.28 there was interest in the August contract on the call side at strikes both sides of the current share price. The 74 strike traded at 1.90 on volume of more than 3,600 contracts. Implied volatility on the fund is close to 24 percent in comparison to 17.6 percent on the underlying shares. Major volume today was in the July puts at the 71 strike where 20,585 contracts traded. The at-the-money 73 puts also traded on volume of 4,700 lots at 0.60.

SMH – Semiconductor HOLDRs (NYSEARCA:SMH) – Semiconductor shares were firmer by 2 percent at $41.09 Tuesday. The August 40/42.5 strangle was in play on volume of around 14,700 contracts at a net price of 1.40. Investors who sense that volatility might increase would place such a trade and would hope that the share price will break out of its current range. With pricing implied by the strangle combination today, an investor would profit on a move above $43.90 or below $38.60. The volatility on the SMH ETF has been dropping off steadily since a September peak last year when it registered closer to 50 percent in comparison to 15.5 percent today.

VIX - The CBOE VIX index [VIX] gained a slight edge of 0.38% percent to close at 15.65. The Dow Jones industrial average gained 21-plus points on the day but pulled back just shy of the 14,000-mark to close at 13,972.70. The S&P 500 gained 0.03 percent to close at 1,549.01, while the Nasdaq composite index gained half a percentage point on the day, closing at 2,712.29.