Tuesday's Options Report: AT&T, CECO, WYN, XLY, WM, Cisco

Rebecca Engmann Darst co-authored this article.

(T)- Shares in the country’s largest phone company, AT&T rose 6.4% this morning to $40.32, after the company boosted its quarterly dividend and announced plans to repurchase more than 6% of its outstanding stock by 2009. AT&T also predicted double-digit EPS for 2008, thanks in large part to its prosperous iPhone partnership with Apple. With more than 85,000 options trading in the early hours of the session, AT&T is one of the most active option families by volume according to our scanners. A look at the volume distribution shows traders rushing to take profit on open call positions at the December 40 strike. These sold off heavily this morning, open interest having nearly quadrupled in the past week to stand at more than 66,600 contracts before the boost in share price made these contracts 240% more valuable than they were yesterday. Calls at the January 42.50 strike looked like the center of profit-taking as well, selling off on a total volume of some 9,800 contracts. Implied volatility pulled back more than 10% early in the session, and currently reads 28%.

(CECO) - Options in Career Education Corporation have registered a 5-fold increase in trading volume this morning according to our data, against a 3.4% decline in share price to $27.53. The hike in volume was accompanied by a more than 14% spike in implied volatility to 69.5%. Shares in the for-profit vocational and technical education company, which serves some 90,000 students on campuses worldwide through a number of educational brands including Le Cordon Bleu Schools North America, American InterContinental University, and Sanford-Brown Institutes and Colleges, are currently priced at a 10% premium to the standing 52-week low. No news in the public domain as yet would explain the hike in implied vol and decline in share price, but option positioning suggests traders bracing for volatile price action, with immediate downside risk, over the next month. The 5,000 lots trading in the December 25 puts were freshly bought at around 75 cents apiece – an 87.5% increase in the space of a session.

Action in the January contract showed buying in the 25/30 strangle at a combined premium of around $2.70. This particular option strategy predicts either a break to the upside past $32.70 or down below $22.30 by January expiration. A look at this year’s price action in Career Education Corp. shares shows a real tendency toward pattern volatility, with shares making tests of $36 on two occasions, first in early May and then again in late October, before dropping to the $24-26 level again.

(WYN) – Option traders are heeding hints from Wyndham Worldwide’s CEO this morning, who hinted that the country’s largest hotel company, owner of the Ramada, Wyndham, Super 8 , Days Inn, and Travelodge franchises, might be in the market for further acquisitions to abet growth. The news, accompanied by earnings guidance for 2007 and 2008 that fell well short of street expectations, sent shares in the company down 8% to $28.13 ahead of the noon hour. The decline in share price, elicited by the heightened uncertainty over the company’s growth plans and prospects for the coming year, sent implied volatility 21% higher to 37.5%. Option traders sought protection in at-the-money January 30 puts, where fresh longs were entered at around $2.30 apiece. The move suggests traders looking to pad against at least another 50-cent downside move in Wyndham’s share price, putting it within a dollar of the standing 52-week low.

(XLY) – Option activity was brisk this morning in the Consumer Discretionary Select Sector SPDR, the ETF whose components include leisure industry strongholds from McDonalds and Walt Disney to News Corp and Amazon.com. Shares in the fund are mostly flat this morning at $34.87, but fresh positioning involving 20,000 lots in the March 30 puts sent its volume to more than 4 times the average daily volume. Indeed, this transaction alone matched up to more than 11% of the total open option interest in the ETF. It appears as though these contracts were mostly bought at prices of 55-60 cents apiece, making it an unusually bold directional wager on a sizable decline in the consumer discretionary sector by next spring. A move below 30 would send the ETF well below its current 52-week low of $32.68. Overall open interest shows more than twice as many open put positions as calls.

(WM) - Yesterday’s admission by Washington Mutual that it will resort to drastic retrenchment tactics from job cuts to office closures to convertible share sales to shore up liquidity in the face of staggering mortgage losses has sent its share price on an 8.2% downward spiral to $18.25 in early trading. With more than 90,500 options in play, Washington Mutual is one of the day’s most liquid option families, and a look at the 71.5% implied volatility reading shows option traders forecasting a rocky road ahead for the mortgage lender – indeed WaMu’s implied vol is twice that of the broader financial sector. While front-month activity shows a clear bias toward put positioning at strikes as low as 15, nearly 40% of the early trading volume in Washington Mutual options was centered in January 2009 calls. These were freshly bought at strikes of 20, 30 and 40, suggesting option traders making a bid for protection against share price soreness in the coming months, but an outlook for recovery further out.

(CSCO) – Shares in Cisco, the leading supplier of Internet network equipment, are up more than 4% to $28.80 after the company got a tandem vote of confidence from the market early in the session. First came AT&T’s announcement that it plans to use Cisco’s CRS-1 routers in a major upgrade of 25 nationwide Internet hubs forming AT&T’s backbone network. The company also benefited from bullish contagion in the tech space following Texas Instruments’ boost in earnings guidance. With nearly 78,000 option contracts in play, our scanners show more than 3 times as many calls trading as puts, with pronounced liquidity in December 27.50 calls, which traded to buyers and sellers, open interest having doubled to more than 33,000 lots over the past 5 sessions. Calls at the December 30 strike also attracted traffic from buyers and sellers, trading at a quarter apiece.