Thursday's Options Report: Moody's, Devon Energy, China Bak, Bear Stearns, Comcast

MCO – Moody’s Corp. The rebound in shares at ratings agency Moody’s continued today as the price of its stock added 6.3% to $50.37. Investors seem to be shrugging off the SEC investigation into the agency’s role in the subprime episode. Moody’s rates the risk of default and not the risk of bond price decline. Investors are understandably sour that several agencies including Moody’s failed to downgrade mortgage related debt until well after bond prices had fallen sharply.

The SEC hearings will investigate the actions of those agencies. Don’t forget that only one-in-five subprime mortgages defaulted and although this is historically high it was the fear of contagion that sent similar mortgage bond prices lower, whether they were in default or not. Such contagion my yet to be an excellent defense for the agencies, where at least one investor has attempted to sue for investment losses. Stock investors are taking the perspective that the agencies will not be on the hook or that if they are the punishment might yet be already in the price.

Having slumped from $75 earlier this year, investors might have shares targeted as a rebound candidate. As such we note a 2,500 lot sale of January puts at the 60 strike by an investor. That’s a bullish move, which might be a speculative bet that the shares will rise allowing the investor to hold onto the 10.5 premium received for undertaking to buy shares at a fixed price of $60 by expiration. Elsewhere investors seem to favor the October 55 call, where the 0.55 premium is four-and-a-half that of last night’s close, and the November 60 call where a 0.75 premium is higher by 150%. Decent volume was seen on each. Meanwhile implied volatility remains above that of the historic volatility on its shares but appears stable at around 55%.

DVN – Devon Energy became Thursday’s latest rumor stock creating opportunities for call buyers in the October series. There was no substantiated news on any takeover on the oil and gas explorer, but earlier in the year chatter emerged about possible stake-building by billionaire investor Carl Icahn. That followed the revelation of a stake in fellow energy company Andarko Petroleum. It turns out that Andarko is now led by James Hackett, who was formerly at the helm of Ocean Energy when it was bought out by Devon Energy.

The rumor created liquidity in the October call series where the 85 and 90 strike calls were active and volume amounted to more than half of the day’s volume and was equivalent to 13% of current open interest on the stock. At times like these when a stock moves rapidly often due to rumor, opportunities are carved out for fast-to-act options trader who quickly buy close to-the-money calls and sell them on rapidly to the next willing buyer. Calls at the 90 strike traded from premiums equivalent to $30 to $105 during the session, which was four times higher than Wednesday’s closing price. Shares in Devon rose 2.3% to stand at $83.62.

CBAK – Wednesday’s session brought another boom in option volume for China-based rechargeable-ion battery maker China Bak Battery, whose shares posted another 21% gain to $8.92 today. With options moving at 64 times the average clip, traders are seeking call-side exposure at the deep-in-the-money 7.50 strike in the remainder of the calendar year, while January calls at the 10.0 level attracted buyers on premiums of 2.30 – a quarter of the current share price. Delta on the calls indicates the market pricing in 57% certainty that this bullish bet will land in the money in the New Year. No news as such appears to be driving today’s action, which permeates a number of Chinese ADR-traded tickers. Implied volatility on these shares gapped 44% higher from the opening and now stands at 155.51%.

DRIV – Digital River Inc. Shares of the online media sales generation company gave back early gains, trading 1.5% lower at $43.90 despite earlier bullish call options trading, which may have spurred some underlying buying in the stock. The company had seen its shares trading as high as $60 in both November 2006 and May 2007, but since then has seen its fortunes flag with the price trading at $41.71 just last month. Today saw the purchase in decent size of the November 45/55 call spread in 5,000 lots at a net cost of 2.90. With only 42,909 of current options open interest this 10,000 lot spread accounts for approximately one quarter of current interest in the options series.

Technically speaking the $42.50 stock price seems to have put in a decent floor during the last month with the recent subsequent sideways price action creating the potential break of a downtrend in place since late April. If this call spread buyer is right in looking for shares to rally back towards $55 the maximum profit potential is at 2.10 at the upper strike.

BSC – Bear Stearns was Wednesday’s late story were the NY Times spurred investor appetite by reporting that the investment bank was in serious talks to sell a 20% stake to an investor. Thanks to the mention of Warren Buffet in the article shares leapt higher and traded at a two-month high. Interestingly call and put volume was remarkably balanced during the frenzy. It could have been the case that put sellers found it as affective to follow that course as to chase puts higher.

Today, however, although the rumors haven’t gone away, at least one Buffet follower was heard to cast doubt on this having the hallmark of the legendary investor, despite his legacy at Salomon Brothers in the ‘eighties following allegations over bond market manipulation.

Today’s option market activity, with shares down 1.6% at $121.05, is focused on calls between the 120 and 130 strikes as bulls look for more meat on the bones of this rumor. It also appears that some sporadic put selling may have gone through at the October 120 puts, which might be a sign of confidence to investors who believe that the worst is behind the Wall Street name.

WFMI - Home in the range…or so it may go for Whole Foods (WFMI) share prices in the coming month. Having posted stellar gains yesterday on back of an analyst upgrade, Whole Foods options are trading at about 5 times the average volume on a moderate.25% premium in share prices. Today’s action shows some traders looking to sell the November 45/50 strangle, a move in which the combined premium of $2.82 is held as a credit against the belief that Whole Foods will remain in the $45-50 range into November’s expiry.

October action has shown some closing out of position in the 50 calls, which sold to the bid at $0.67 – off the highs from yesterday but still four times higher than the going price for the contract 3 days ago. Open interest in those October 50 calls had more than doubled in accumulation this week, but it appears that some traders may be paring back bets for continued spectacular upside in the newly consolidated natural foods chain, masticating the latest share price gains thoroughly before wagering on bigger moves.

CMCSA - Options in cable industry leader Comcast (CMCSA) are trading on a volume of 31,000 lots today with shares flat at $24.33. Today’s share price action seems but a blip in the radar - it’s barely a buck above the 52-week low for Comcast, which in addition to its vanguard video-on-demand offerings, is looking to add 2.5 million subscribers this year via a foray into digital telephony. These initiatives were detailed in a spate of high-profile appearances by Comcast executives at industry events this week, and it appears that a trader closed out a 10,000-lot position in the April 22.50 puts and shifted the exposure to the upside by buying into the April 27.50 calls at a price of around $1.15 per contract.

NSM - The market’s ongoing fascination with cell phones and their gimmicky accoutrements – still stalwart in the consumer goods arena despite lagging discretionary income and sentiment on the U.S. market - has lent residual appeal to the Silicon Valley crowd that produces all the stuff inside. Cue National Semiconductor (NSM), which for a second day has piqued our market scanners owing to a high level of option volume relative to the daily average. Today, with shares trading .5% higher at $27.16, options are moving at some 7 and a half times the usual, virtually all of it ensconced in calls.

It appears that some traders are looking for historic highs for National Semi next spring, as 5,000 lots in the May ’08 35.00 calls were bought on the offer. The company last broke above $30 in May of 2006, but a look at the delta on that call shows option traders pricing in nearly a one-in-four chance of a big break higher next spring.

Comments

[Carpe Max:]

Moody's was undoubtedly well prepared for Congress. According to NewsVisaul www.newsvisual.com/new... one of Moody's Directors is a former Senator who used to sit on the very committee that questioned Moody's and S&P. Most likely the Moody reps knew what questions to expect.

2007 Sep 27 04:59 PM