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SHLD – Sears Holdings. We noted a strong two-day rally in shares of retailer Sears, pinning the ascent on the return of the company’s holiday season shopping catalogue. Today, however, shares are 3.4% higher again following the revelation that Pershing Capital has bought a 5% stake in the company. William Ackman is one of those investors whose investing prowess is enough to move stock prices by mention alone. Today’s news of a stake is confirmation that there is value to be had in the company where shares, currently at $142.94, have been as high as $195 just six months ago.

The Ackman purchase is an odd move given that Sears and Kmart was resurrected by Chairman Edward Lampert. Ackman last year successfully thwarted the rival investor’s ambitions to take control of Sears Canada and complained that the price was too low and that Lampert was trying to bully investors. Investors should remember that Ackman is an activist and meets with management to discuss ways of aiding the share price. Having persuaded McDonalds to raise its dividend and having apparently floated the notion that Target should sell its credit card operations, one wonders what is on his wish-list for Sears. Mr. Ackman has stakes in both McDonalds and Target.

Option investors greeted the news by raising implied volatility on the options series by 10% to 41%. Apart from that there was only one notable strategy in play, which predicts a break for Sears shares out of a $140 to $145 range heading into October’s expiration. Buying the October 140 puts at the same time as buying the 145 calls is a good strangle play for options traders sure that volatility in the shares will pick up. At a combined premium of 7.5, the share price has some way to go before making the strategy profitable. For that to happen shares must breach $152.50 or decline below $$132.50.

EEM – iShares MSCI Emerging Market Index –Much of the media seems to be drawing an analogy between the Fed’s response to the combined Asian crisis and LTCM debacle in 1998. The result then ass it is today is a boost in shares in emerging markets. Yesterday we noted a large bullish play on the emerging market sector, while today and closer to home, an options investor is looking to protect from any recoil in shares of emerging stock markets. Today shares are modestly higher at $151.40 after having got out of the wrong side of the bed. A large block of January puts at the 140 strike (around 12,000 contracts) have traded at a premium of 7.4. The current cost of insuring against a decline in this fund is rising thanks to an uptick in implied volatility, which is now registering a reading of 35.8% or around one quarter higher than that found historically on the underlying share price. The breakeven on today’s put play is $132.60, which is more than 12% lower than shares are currently trading.

ARAY –Accuray Systems Inc. News that this radiosurgery company had sold its first CyberKnife Robotic Radiosurgery System outside of the U.S. helped send shares in the stock higher by 5.7% to $19.54. Hospital Corporation of America (NYSE:HCA) bought a CyberKnife System for its Harley Street Clinic in London. The company is unique in offering the world’s only radiosystem cleared by the FDA to treat tumors anywhere in the body “non-invasively and with sub-millimeter accuracy,” according to a press statement. Options open interest in the stock is miniscule at just under 4,400 contracts. Today 26 times as many calls were in play as bulls took a firm hold. The most active contract was at the November 20 strike where 520 lots were largely bought at premiums 40% higher than yesterday. Given the fact that ARAY’s shares are in recovery mode having slumped to $13 a piece in August coupled with the fact that they have traded as high as $31 earlier this year, it’s odd that investors are not reaching for higher strike prices just yet. Perhaps that’s because implied volatility at 81% is pretty high. The at-the-money December 20 straddle for example would cost an investor 6.0 implying that shares would need to break out of a price range of $14 to $26 before an investor can consider making money.

NTRI - Can an entire weight-loss industry be toppled by a single pill? Diet company NutriSystem is struggling in its battle to win new customers against the rising appeal of supermarket over-the-counter drug Alli. NutriSystem reported a 7 percent drop in new customers this morning and slashed its earnings guidance for the quarter, a development widely attributed to the popularity of Alli. The move led NutriSystem shares to shed some 31% this morning (no equivalent in dress sizes) to $32.69. Options volume picked up metabolically, with contracts trading at about 4 times the average clip on a volume equivalent to more than a third of its outstanding contracts. Although the 800% increase in put-side premiums makes it hard to deny a bearish skew to today’s action, it looks like traders are buying and selling the October 35/40 strikes in straddle or strangle plays in anticipation of continued volatility through the rest of the current contract period. For a volatility player, NutriSystem’s swings have all the frazzled intensity of a yo-yo dieter. Shares were trading as high as $74.09 in July – but even this 44% documented degree of volatility is slim compared to the 72% volatility that option traders expect from the celebrity-endorsed diet company going forward.

WTW - Arch-competitor WeightWatchers (NYSE:WTW), which in addition to a NutriSystem-style signature diet plan and an array of celebrity spokespeople includes a social component of meetings etc., saw its options trading accelerate to nearly 4 times the average, against a meager quarter-percent decline in shares to $57.40. The 2,370 contracts trading represent well more than a quarter of the outstanding contracts, and it appears that traders are positioning for a loss in Weight Watchers shares below the $55.00 mark in November.

RIM - Today’s release of after-the-bell quarterly earnings from Research in Motion has option traders poised for the Blackberry maker to blast past the incumbent 52-week high of $100.98. With shares up 2.8% in early trading at $99.03, more than 161,000 lots have already changed hands, with heavy buying in the October 100, 105, and notably, 115 calls, which were greedily lapped up for $2.13 apiece today. As is often the case with RIM, price positioning shows the lusty aspirations that traders hold for this most charmed of tickers. The watermark for trading in the November calls was upped to 125, while in the December contract we observed eager buyers and sellers at the 135 mark.

SUF - We were intrigued by this morning’s 8-fold pickup in option volume at Nevada-based oil services company SulphCo. The company is the originator of so-called Sonocracking technology, which uses high-powered sound waves to change the molecular structure of crude oil - thus altering heavy crude oils into sweeter, lighter, more usable crudes. Without any apparent news catalyst that we could see, it appears that a trader may have availed himself of the 10% gain in shares to $8.50 to open a 14,000-lot strangle in the January contract involving the 5 puts and the 12.50 calls. SulphCo shares have traded from a low of $2.25 to a high of $9.28 over the past 52 weeks – a fact reflected in its 92% historic volatility. Implied volatility, meanwhile, stands at a sonocracking 126%.

PPCO - Shares in Penwest Pharmaceuticals dropped 15% today to $9.60, as options picked up to nearly 6 times the average volume. The fast drop followed news of a patent challenge involving a slow-release pain relief drug in Penwest’s pipeline. The news sent implied volatility on Penwest options skyward at 87%, compared to 36.5% past volatility in share prices. This morning’s moving volume of 29,300 contracts matches more than half its open option positions – a figure that until today privileged the bullish call side by a factor of 1.5. We’ll see if that proportion changes after today. With premiums inflated on the put side, we observed traders looking to close out positions in the October and January 10.0 puts, while buyers moved in to claim the December 10.0 puts.

Source: Thursday Options Report: Ackman's Sears Buy Raises Volatility; NTRI, RIM, WTW