Monday's Options Report: Lowe's, Target, Men's Warehouse, Countrywide, Freeport McMoRan

Traders didn’t follow through with the futures-inspired gains evident in pre-market trading today as index values were unchanged to lower. It seems that investors’ aspirations might be coming back down after Friday’s discount rate cut from the Fed inspired an enormous rally.

There were hefty Asian market gains especially once investors could focus more clearly on growth prospects and demand for commodities going forward. In the United States, it’s another big week for retail stocks. Already Lowe’s Corporation has announced and the strong results took the glory despite the less optimistic outlook. The results from the home-improvement chain contrasts to comments from management at Wal-Mart last week. The haze is lifting that it’s all about strategy.

LOW – Lowe’s Corporation. Second-quarter earnings beating analysts’ profit expectations for the period but with a downgrade of year-end guidance was rewarded with a 6.7 percent in gain in shares for Lowe’s (LOW). With shares at $28.68, today’s option volume of nearly 23,000 contracts narrowly favored the put side. Implied volatility has pulled back to 27 percent, 6 percent below the historic volatility shown in Lowe’s shares. With that in mind, it makes sense why we saw the degree of selling in the September 27.50/30 strangle that we did. A seller of this position takes the $1.05 premium in the anticipation that Lowe’s shares will remain hemmed in the range of those strike prices over the next month. Elsewhere, we observed heavy volume in the October 27.50 puts, and selling in the January 30 calls, where more than 2,000 lots traded on premiums up some 45 percent.

TGT - Tomorrow’s earnings report from Target Corporation will be closely watched for comments on the consumer retail environment. Implied volatility is approaching 45 percent this morning, with options traders pricing in about 5 percent more volatility than Target shares have shown in the past. With shares up nearly half a percentage point at $61.47, today’s 5,000 moving options represent a tiny amount of this ticker’s total open interest. Puts are outmoving calls by a factor of 1.5 – a level of volume that accurately mirrors the overall proportion of puts to calls in this ticker.

MW – Men’s Warehouse. There was out-of-the-gate interest in call options on this stock Monday. The company releases earnings Wednesday after hours and today shares are trading a little easier at $50.34. It appears as though there is a seller of the September 55 calls at premiums between 1.6 and 1.05 today. The option activity is pretty unusual since the total outstanding open interest on the company is just 3,177 lots. Today’s call activity towers the current interest at that specific strike by tenfold. A seller of calls is possibly protecting against a long stock position. But they may also been translating the view that there is little prospect of MW shares reaching $55.00 ahead of expiration next month. Looking back at the price chart, shares spent around six days above that price in July, but plummeted towards $45.00 thanks to concerns over consumption in recent weeks. In order to trade at the strike, shares would need to rise 9.2 percent. In order to reach the minimum breakeven based upon the lowest cost paid today shares would need to rally 11.4 percent. Earnings of $0.93 per share are expected Wednesday in comparison to $0.65 one year ago.

CFC – Countrywide Financial. With its share price at $20.20 today, down 5.8 percent, it’s a pity that the same can’t be said for traders’ vision regarding the outlook for the stock. The saga continues for this mortgage lender where shares have reversed course having reached $22.68 to start the week. Heavy options volume is pretty evenly split with call-side action in the September contract running as high as the 27.5 strike. On the put side the 15 and 20 strikes have both seen volume in excess of 5,000 lots perhaps indicating a put spread with an investor looking for further share price weakness. The October puts have even volume between the 15 and 20 strikes, while the January 20 and 22.5 strikes are well sought after today. But the bulls refuse to give up in this case with call activity seen in the January 25 and 30 lines.

XLF – Financial Select SPDR. It’s awkward trying to read the tape on financial stocks today. The tone is more cautious than late last week and today shares are lower by 1.2 percent at $34.08. The put/call ratio of 2.1 indicates more than twice the volume has occurred to the puts side today. There is almost equal put volume building at the 30, 32 and 34 strikes, which could indicate a combination of bearish spreads with investors selling some premium here to fund higher strike purchases. In the December contract the 30 and 33 lines have seen respective volume of 5,000 and 9,800 lots, again leaving us wondering whether some interest today involves spreads. On the call side in December, 8,900 lots have traded at the 35 strike.

FCX – Freeport McMoRan – The market rebound has been felt nicely in commodity-based stocks around the world and today FCX recouped a further 2.7 percent to $78.83. In the heat of the moment last week shares fell beneath $67.50 for a short while. Today it appears that a call ladder is in play in the September contract judging by sales and volume readings. The 80 calls have largely been bought 5,500 times at around 4.7 while the 85 calls have been sold 2,000 times at 2.40. The 90 strike has been bought 2,600 times at 1.30. A trader playing those combinations (but in equal size) would implement a bullish trade at a net cost of 3.6. A rally in shares between $85 and $90 would see profits of 2.4 and would begin to rise infinitely above the 90 strike where the trade gets net long of a further call.

VIX – The CBOE Volatility Index [VIX] dropped by 8.4 percent to stand at 27.49 as fears over a financial Armageddon subside. Within overall volume of almost 70,000 contracts, more than half has its epicenter today at the September 25 line where three blocks of around 12,000 have traded mid-market making it difficult to know if someone is adding to or depleting a large 115,000 open interest position. The 35 and 40 lines at the same month have also traded on volume of a couple of thousand lots.