Wednesday's Options Report: CAKE, Apollo, COH, TTWO, KMX, AIG, TRB, Morgan

(CAKE) – Cheesecake Factory - Options in the casual dining giant are trading at nearly 7 times the average rate as shares are up 6% to $23.53. Implied volatility is up 14% on the session and now sits just below 45%, making it one of the day’s top implied volatility gainers. Calls are outmoving puts by 13 to 1, with fresh liquidity in the December 22.50 and 25 calls, and outright buying in January calls at the 25 strike. This may be tied to reports that activist shareholder Nelson Peltz’ Trian Management Fund has received FTC approval to buy a sizable shareholding in the company. The massive upside move in share price was accompanied by a 27% spike in implied volatility to 44%, making it one of the top volatility gainers according to our market scanners. It is worthy to note that heading into today’s session, market sentiment on the outlook for Cheesecake Factory shares favored bearish puts over bullish calls by a factor of 2.6. Indeed, the move comes on the very day that Cheesecake’s peer in the casual dining space, Darden Restaurants (owner of the Olive Garden and Red Lobster chains) reported very dour earnings amid a very dampened analyst consensus for consumer spending in casual dining franchises in 2008.

(APOL) - For-profit vocational and online schools have been a recurring, if somewhat eclectic, theme on our option scanners – note our recent coverage of unusual option activity in both Corinthian Colleges and Career Education Corporation. Today’s mover is Apollo Group, the owner of online degree giant University of Phoenix, Western International University, and others. The more than 12,000 options trading stack up to some 13% of the total open interest , and the flurry of activity is accompanied by an 18% spike in implied volatility to 54%. This action is occurring as its shares trade 2.8% lower at $71.33.

Earlier this month, Apollo’s former CFO testified under oath in a class action suit against the company that Apollo deliberately withheld the content of a U.S. Department of Education report that accused the company of violating federal bans on enrollment-based staff salaries. Despite its legal woes, Apollo shares have shown a remarkable level of resilience in 2007, with all told some 88.6% in returns for the year to date, outpacing sector peer Corinthian Colleges by some 66%. Option traders, however, may be anticipating the end of the line for its charmed run, given the level of buying we observed in January puts at the 65, 60 and 75 strikes.

(COH) – Ado over the addled state of the U.S. mass-market consumer appears to have spilled over into the more affluent producer segment. Shares in Coach, the country’s largest maker of luxury leather goods, dropped 2.6% to $30.31 this morning, setting a fresh 52-week low, after a Bank of America analyst broke news that Coach had slashed prices of nine of the 48 purses featured in its holiday catalogue. It’s been a tumultuous 2007 for Coach shares, which are currently trading at 56% of the value of their 52-week high after an autumn tumble sent its shares from the $50 to $30 level in a matter of a few weeks. Its travails are written all over its historic volatility reading, which stands at 48.3%. A look at the 48.4% implied volatility reading shows option traders taking a more measured view of the outlook at Coach, perhaps feeling that the worst of its shocks have already been absorbed. Call spread activity in the January contract between the 30 and 35 strikes would seem consistent with this view.

(TTWO) –Take Two Interactive – Options are moving at 2.3 times the average volume as shares advance 6% to $19.10. With contract expiration nearly upon us, it appears that traders may be making closing purchases of December 20 puts at $1.45 – open interest having built at this strike around September 21 when the same position could be shorted for $4.70-$4.80 in premiums. Given the similar levels of volume involved, the trader may have used some of the profits to fund fresh longs the June 25 puts, which were bought for $8.60. Also noteworthy here is the substantial elevation of implied volatility, which at 74% is head and shoulders above the 59% historic reading, in continuation of a volatility trend that has been intact since late-October.

(KMX) –Carmax – This morning’s 6% slide for shares to $20.27 has options moving at twice the normal rate, this after the company missed street estimates for Q3 EPS, reporting a 34% decline in earnings for the quarter and trimming its year-end earnings guidance. With shares trading 8% lower at $19.81, option traders appear to be taking the opportunity to take profit in December 20 puts, open interest at this strike having compounded some 250% over the past week to number 8,287 contracts. Action in the January contract shows traders inclined to sell volatility in the form of the 20/22.50 strangle combination, which costs $1.75 today. A trader in this instance sells the strangle, pocketing the premium in the expectation that shares will remain hemmed in the range of the two strike prices by expiration.

(AIG) –American International Group – A single transaction involving 58,500 lots in the out-of-the-money January 45 puts catapulted option volume in insurance giant AIG into the top 10 most actively traded option families according to our scanners. These options traded to the middle of the market at around $0.45 apiece, a curious move as AIG shares trade .71% higher at $57.09. A look at the delta on that put shows option traders pricing in only about an 8% possibility of the contract landing profitably by next month’s expiry.

(TRB) – Tribune Company – With funding over a $8.2 billion public-to-private deal in the balance for the owner of the Chicago Tribune and the Chicago Cubs baseball team hanging in the balance, shares are 4.4% lower at $31.90 as implied volatility climbs 117.7% to read 45.6%. With 57,000 options in play, it’s one of the day’s most active option families with calls outmoving puts by a factor of 5 to 1, veering toward the closest-to-the-money 32.50 strike in the December and January contracts.

(MS) - The market’s sentiment toward the financial space has made a return to the north-is-south, left-is-right approach following this morning’s gargantuan Q3 writedown from Morgan Stanley. Despite an admission of a $9.4 billion writedown and a net loss for the third quarter of nearly $3.6 billion, investors seem content to look the other way, instead applauding Morgan Stanley’s sale of a $5 billion stake to China Investment Corp in a bid to shore up capital. Shares are up more than 4% to $50.20 at the noon hour. What a very odd approach indeed – especially given the market dressing-down delivered to sector outperformer Goldman Sachs despite very strong numbers from that brokerage yesterday. With nearly 53,000 options in play this noon hour, we’re observing brisk liquidity at the December 45/50 strangle, which is trading to buyers and sellers. Meanwhile, the January 55 calls have traded heavily to the middle of the market at around 50 cents a pop - a price reflecting a less than 1-in-4 chance that its shares can make a move past $55 stick through January expiration.