Thursday's Options Report: Sears, CVS, EP, THC, COV, DELL

(SHLD) - Shares in Sears Holdings plummeted more than 12% this morning after the company reported a surprising shortfall in quarterly profits, delivering earnings of 1 cent per share, sucker-punching the analyst estimate of 53 cents per share. Of note here is that the price of yesterday’s at-the-money straddle at the close of the session stood at $13.05, reflecting the possibility of 11% price move after the earnings report. While earnings reports often don’t elicit the extreme price moves suggested by the price of the straddle, in the case of Sears the options premiums proved particularly prescient.

With shares down 12.5% at $101.95, Sears options are among the day’s most liquid families according to our market scanners. Trading is characterized by a rush to defensive action through put buying in the December contract at strikes of 100 and 110. Overall open interest continues to show a bias of open call positions to open puts – calls outweigh puts by a factor of 1.6 – and again, today’s slide for Sears follows a session in which the retailer’s gains outstripped even the broader market rally, with traders showing particular affinity for calls at the 150 strike further afield in March. Some analysts are speculating that the dismal nature of the latest report is certain to put pressure on Sears to divest some of its real-estate holdings or hasten the acquisition of upscale fixtures-and-furnishings outlet Restoration Hardware in a bid to woo been then/done that shoppers. Actions of this sort might improve the company’s share price prospects further out, and yesterday’s volume in March calls might be predictive in that respect.

(CVS) – We were forced into gumshoe mode late yesterday by an incredibly vexing trade that went through 10 minutes before the close in drugstore chain CVS. The trade involved 100,000 lots at each strike of the January 40 puts and 45 calls, and again in the February 37.50 puts and 47.50 calls – i.e., a 400,000-lot transaction that was distinctly out of the money. Our market scanners picked this up in a heartbeat, detecting volume more than 28 times the daily average – and indeed, upon closer examination the 4 million shares implicated in an option trade of this size represented twice the moving volume in CVS shares yesterday. Particularly troubling was the fact that CVS shares moved little yesterday, up barely a percent against a broad market rally in which retailers took an exuberant part. Marketmakers we spoke with indicated that the trades were sold risk reversals, with a trader buying the calls and selling the puts in each instance – while that seems bullish, particularly given the out-of-the-money nature of those strikes, we were cautioned that directional trades are rare on such heavy volumes, and that some kind of earth-splitting hedge was likely occurring instead.

CVS options continue to surface in our market scan today, with shares down nearly 3.5% to $40.06 and twice as many puts trading as calls, mostly in at-the-money puts in the December and January 40 strikes.

(EP) - Options in El Paso (EP), operator of the country’s largest natural-gas pipeline network, are moving at 9 times the average rate against a 1.2% bump up in share price to $15.87. Yesterday it was announced that the company intends to buy a 50 percent holding in the Gulf project, a so-called LNG (liquefied natural gas) terminal under construction in Mississippi. El Paso is the owner and operator of one of the country’s five existing LNG terminals, in the state of Georgia. Most of today’s 46,000 contracts are wrapped up in January 14 puts, which traded to buyers and sellers in comparable quantity on a volume of 25,000 lots. This stands up to more than half the open interest at this strike, which began building in September and has remained fairly stable ever since.

(THC) – Options in Tenet Healthcare are moving at more than 5 times the average frequency today as its shares trade 2.4% higher at $5.03. Dallas-based Tenet, which owns and operates 56 hospitals around the country, announced yesterday that it has entered a landmark two-year coverage agreement with UnitedHealth, the country’s largest health insurer. The development appears to have emboldened traders to enter fresh shorts in December at-the-money puts, which traded 7,700 times today at around $0.35, where open interest prior to this morning numbered no more than 700 contracts.

(COV) – Options in Covidien are moving are trading at more than 11 times the average frequency as shares nudge half a percent lower at $38.88. With options trading on a combined volume of 5,500 lots, most of this activity was lodged in fresh strangle selling in the April contract between strikes of 35 and 40. A seller of this position takes the $3.40 combined premium in the confidence that shares will remain bound in the range of the two strike prices. In the case of Covidien, rangebound activity within the strangle is a pretty staid range indeed, given that its 52-week low is $36.75.

(DELL) – Finally, world’s second-largest PC maker Dell is due out with earnings after the bell, and with nearly 65,000 option contracts in circulation before noon it’s a denizen of our “most actively traded options” scanner. Shares are trading 1.2% higher at $28.00 as of this dispatch, and a look at pricing on the at-the-money 27.50 straddle indicates preparation in the market of 10% price move on back of the earnings report. Volume shows a resolutely bullish expectation, however, with 2.6 calls trading for every put today, characterized by buying in the December calls at strikes of 27.50 and 30, and interest in this upper strike carrying over into the January contract. Implied volatility in Dell options reads at 41%