Monday's Options Report: Merrill, CFC, Yahoo, UA, and American Tower

MER – A look at the option action behind last week’s bete noire, Merrill Lynch, shows some traders willing to make a contrarian bet against downside volatility in early 2008. This morning’s headlines hold that the departure of embattled Merrill Lynch CEO Stan O’Neill is all but sealed – save the golden handshake – after last week’s disgraceful write-down and reports of an unsolicited deal overture to Wachovia. Shares are treading water, .24% higher at $66.26, with a 39,000-lot volume revealing twice as many calls moving as puts. With varied premiums on both put and call sides, one trader apparently saw fit to take a leap on a solid recovery for mother Merrill come New Year. This was in evidence in the purchase of 4,000 lots in the January 85 calls, which were bought for $0.55. It’s important to note here that while $80 is the average share price for Merrill for the past six months, the share hasn’t actually traded at this level since late-July – pre-crunch fallout. A look at the delta on this call shows just a 10% chance of the bet landing in the money in January, but seems a clear wager on the part of some traders that after O’Neill’s dubious (and as yet unofficial) adieu, there’s nowhere for Merrill shares to go but up.

CFC – With shares down 4% to $16.63 in early afternoon trading, shares in the nation’s top mortgage lender Countrywide Financial are giving back some of Friday’s extravagant post-earnings gains. Option traders are also tweaking their positions more circumspectly, with 65,000 lots in play showing a volume bias to the puts. The November 20 calls which were so richly sought out by traders late last week have sold off heavily today as traders have looked to buy November 15 puts. Heavy volume in the December contract was seen in the 12.50 puts, which traded to the middle of the market at $0.80. Again, it’s hard to detect a bullish or bearish order flow based on today’s traffic – buyers may have been closing out positions opened last Thursday when the December 12.50 put was worth a whopping $2.25 before taking a pitfall to $0.70 on Friday.

YHOO – Yahoo! - Options remain extraordinarily liquid this morning, with more than 225,000 options moving against a near-5% dip for its share price to $31.97. We could find little in the way of news catalysts to explain the retracement, apart from reports that the company’s sales division has been hit with the resignation of a couple high-placed executives. Market option remains largely divided as to whether Yahoo! can meet its Q4 cost-control targets without resorting to layoffs. With call premiums sharply lower on the declining share price, today’s volume favors the calls by a factor of nearly 4.5. Heaviest volume is concentrated in the November calls, where the 32.50 and particularly the 35 calls have traded vigorously to buyers and sellers.

UA – Under Armour Inc – Shares in athletic wear maker Under Armour have eked out a meager half-percent gain to $59.90 this morning, one day before it’s due to the report before the bell. Last week, the company was in the analyst spotlight on news that it was competing unfavorably with the likes of Nike and Adidas. Today’s market finds UA options moving at more than 4 times the average rate. Strangle activity in the November contract between strikes 55 and 65 appears to be in play, though we cannot ascertain whether this position is being bought or sold, while traders appear to have taken advantage of higher call-side premiums to sell December calls at the out-of-the-money 70 strike.

AMT – American Tower Corp – Options in this producer of telecommunications broadcast towers are trading at 15 times the average rate today, against a 1.8% gain for shares to $46.13 – a new 52-week high. Earlier this month news emerged that American Tower was actively exploring possible tower acquisition targets in India. Much of today’s volume appears tied up in strangle activity involving 20,000 lots in the January contract between the 40 and 50 strikes, although the transaction is too new to ascertain whether the position was bought or sold. The combined premium of $1.75 is put toward an anticipation of volatile breaks above or below the strike prices in the case of a bought strangle, or set aside as a trade credit by a strangle seller who expects rangebound price activity in January. The strangle and its implications for volatility is an interesting trading course to take for a company currently trading near all-time-highs.