Thursday's Options Report: Apple, Ford, Kraft, Baidu, Emulex, Millennium

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 |  Includes: AAPL, BIDU, ELX, F, MDLZ, MLNM
by: Interactive Brokers

AAPL – All of the raging debate and speculation about the iPhone in recent weeks turned out to be a smokescreen when Apple (NASDAQ:AAPL) announced results Wednesday. Immediately shares dropped before the smoke cleared and investors once again realized that Apple has become one of the most successful businesses ever at launching success stories. And the last quarter had nothing to do with iPhones as much as it did the personal computer and the MP3 music player.

It also turns out that AT&T’s earlier announcement of iPhone sales of 146,000 turned out to be nothing but a sucker-punch. Apple reported sales of 270,000 but reported a mere $5 million in revenue from the product in the last quarter. What drove the core business at the time was a 35 percent year-over-year increase in revenues from Macintosh computers to $2.53 billion and a similar 22 percent rise in iPod sales for revenues of $1.57 billion. Apple’s management reminded analysts that it expects to sell one million iPhones by the end of the current quarter and 10 million by 2008. Readers should note that it took seven quarters to reach sales of one million iPods.

Adding to the glee, which has sent Apple’s shares through $150 each today, is the fact that thanks to competition in the chip sector, gross margins at the company rose 21.8 percent to 36.9 percent for the quarter. The Apple that investors once knew as just a computer company is no longer: It’s revolutionized itself thanks to the kick start that its technology affords, and with the added billions in revenue, there’s no satisfying hungry investors looking for a Google-style price tag.

Options activity remained hectic to start the morning session with 350,000 option contracts traded in Apple before 10:45. The August 150 calls were most active and the implication is that traders expect further gains to a share price of $154.80 before August’s expiration. The 145 and 160 calls were equally active (17,000 lots apiece). The upper strike there is worth 1.65 or 14 percent more than yesterday.

On the put side – investors are seeking protection most actively at the 135 and 115 strikes in the same month. The cost of insurance at the upper strike there is 1.15, meaning that if shares fell to $133.85 the puts would kick into action.

VIX - The CBOE VIX index [VIX] rose to break through the 20 level out of the gate as index values swooned. Options trading was a little more coordinated today as the VIX gave up some gains to stand 8.7 percent higher at 19.70. We’ve noted investors constantly reaching for ever-higher strikes in the last month or so, yet today the action appears fine-tuned to the 22.5 strike. Perhaps they feel that it’s too late to dive in at this juncture. Of interest, however, is a 3,700 purchase of February calls at the 22.5 strike for a cost of 1.80. The September 22.5 call traded 3,380 lots at around 1.10, while the 30.0 call finally saw action of 1,030 lots late in the morning session. More action in the November 18 strike where almost 30,000 contracts traded at 2.75. The deferred futures contracts are around 3 percent higher today – and so lagging the spot index, which may indicate a lull in the proceedings.

SPX - Higher energy costs and an uncertain credit outlook combined to topple the SPX below 1500 within the first minutes of trading. Heavily weighted components such as XOM, C, JPM, & COP were all down more than 2 percent, too much to be offset by the nice gains in AAPL. The August 1500 line was a favorite out of the gate, as 20,000 contracts traded between calls and puts, most in the 19% implied volatility range. This was significantly higher than last night’s at the money strike of 1515, which went out around 17 percent. Volume was tightly concentrated in the front expiry, with notable exceptions of 5500 contracts trading in the March 2008 1525 put at 79.50, just shy of the 18 percent implied volatility mark, and the delta neutral Sept 1510 straddle, which traded at 81.00.

F – July hasn’t been a kind month for Ford Motor Company (NYSE:F). Shares peaked at the end of June at $9.70 before sliding all the way back down the chute to $8.05 in the session ahead of earnings yesterday. However, instead of reporting an eighth straight quarterly loss, Ford surprised with a profit. That’s sent shares 3.5 percent higher to stand at $8.25. Implied volatility is lower as a result but still stands at 50 percent higher than the volatility as displayed by the share price. Almost 30,000 options traded with curious interest in the December series where 6,000 puts at the 5 strike and 4,000 calls at the 13 strike were in play. Elsewhere the January ’09 puts at the same 5 strike were bought 4,500 times.

KFT - The WSJ noted today that legendary value investor, Warren Buffet through his Berkshire Hathaway investment company, was indeed stake building in Kraft Foods (KFT). We raised this specter several weeks ago following hectic options activity only to have that notion scuppered by factual news that it was activist investor, Nelson Peltz who was building a stake. Shares in the company failed to buck the broad market decline today as shares slid 2.3 percent to $34.02 late in the week. However, options volume was buoyant with 41,000 lots changing hands and the appearance of a couple of strangle trades in the August contract. The 32.5/35 strangle may have traded around 10,000 lots at a premium of 1.10, while 2,000 lots may have traded in the 35/37.5 strangle at 1.60. Overall, call trading has outpaced put positioning in today’s action by around two-to-one. The September 37.5 calls, which would need to see a share price increase of 11.7 percent to come good, have traded 5,300 lots today at around 0.50.

BIDU - More than 50,000 option contracts have traded under the red-hot ticker of the “Chinese Google,” Baidu.com (NASDAQ:BIDU), where it seems that the market’s insatiable post-earnings hunger for Baidu.com shares has (predictably) carried over into a bonanza on calls. Proxies for shares or a real anticipation of continued share price growth? With Baidu.com shares trading 17 percent higher this morning at $212.75 this morning, call-side traffic centered at the August 220 strike, where 3,597 contracts traded at premiums up 40 percent on the day. Implied volatility is elevated at 53.32 percent, a slight premium from the 51.78 percent historic variation in Baidu.com shares. The 230, 240 and 250 strikes in the August calls were also well-trafficked, with a combined total of more than 5,500 contracts traded at those strike prices.

ELX - Another volume gainer this morning is computer hardware maker Emulex (NYSE:ELX), where traffic is nearly ten times the daily average. Virtually all of today’s activity is moving on the call side, at deflated premiums compared to the puts. Given the lot sizes involved, we observed what may have been selling of a call spread at the September 20 and 22.50 strikes. The same strikes attracted call-side volume in the October series. Shares are down 3 percent at $20.96. Implied volatility on the option series is 40.13 percent. The moving volume of 9,731 contracts is equivalent to 30 percent of its total open interest.

MLNM - Options volume in Millennium Pharmaceuticals (MLNM) got a boost after today’s in-line quarterly earnings report. Despite a 2 percent slide in shares, which were trading at $10.33 at the top of the noon hour, options traders responded by putting 5,600 contracts into play – equal to roughly 11 percent of its total open interest. Most of this positioning appears to have been in the September 10.00 puts, 5,000 lots of which went to the bid this morning at a flat, $0.30 premium.

By 11:30am the Dow Jones industrial average lost 1.67 percent or 208 points to 13,566.60. The S&P 500 slumped by 1.94 percent or 28.26 points to 1,488.68, while the Nasdaq composite index lost 1.77 percentage point this morning for a 44.46 point slump to 2,604.77.