Thursday's Options Report: PIR, CELG, ERIC, Red Hat, MBI, ORCL, Nike

Rebecca Engmann Darst co-authored this article.

(PIR) - Shares in Pier One Imports, the maker of the iconic, dorm-friendly papasan chair and other ethnic-inspired wicker-and-rattan home furnishings, staged an unprecedented 40% rally to read $5.51 before noon. Earlier this morning the company reported a net loss for the third quarter that rang in well below analyst estimates. This seems to have left the market with a collective gaping maw as to how a company distressed 60% from its 52-week high, with unmitigated exposure to the retail and home improvement sectors, and earning its livelihood as an importer of foreign-made home furnishings in a dollar-bearish climate can still breathe life in its margins. Its ignominious decline, which began well before this year’s housing market meltdown came home to roost in shares with retail exposure to the sector, was enough to goad investor Warren Buffett into trimming his once-9% holding to around 4%. Subsequent rumors of a possible Danish buyout of the company failed to have any pneumatic effect on its share price.

Bearing all this in mind, you can see why option traders might retain a note of seen-it-saw skepticism, and while call volume in Pier One is registering at an all-time high this morning, we’re seeing evidence of straddle selling at the January 5.0 line, a move which implies option traders pocketing a combined premium amounting to 20% of the current share price in the belief that its shares will remain around the $5 mark into January’s expiration period. Evidence of a recovery first appears to emerge in the March contract, where calls at the 7.50 line were bought and sold actively at around $0.35, reflecting a slightly better than 1-in-4 chance that Pier One shares can recoup above the $7.50 line by spring.

(CELG) – Early in the session our market scanners detected a sizable, 19% spike in option implied volatility in Celgene, the multinational pharmaceutical company and maker of remedies Revlimid and Thalomid. With implied volatility reading 59%, its 77,777-strong option volume ranked Celgene among the day’s most liquid option contracts, but little movement was detected in its share price, which currently stands 1% higher at $47.77. The move appears to coincide with an announcement that Celgene’s CEO will present Q4 and full-year numbers for the company, along with guidance for 2008, at a healthcare conference just after the New Year. Celgene shares were hammered earlier this month after data on Revlimid, which is used to treat multiple myeloma leukemia, compared unfavorably to a competitor’s drug. The share price stabilized on subsequent positive analyst gab, but remains within a dollar of the 52-week low. With calls and puts trading at comparable rate, positioning appears to affirm the bullish outlook, given the pressure to sell puts at the January 40 strike, in favor of call buying in the January contract at strikes as high as 60. It’s worth noting here that the December 10 selloff in Celgene shares sparked a wave of fresh, speculative shorting in December 50 puts, anticipating a rapid bounce back – with one day left in the current contract period and shares still $2 below the $50 mark, it looks like any residual shorts at that strike are likely to be exercised.

(ERIC) – Yesterday we noted a sizable pickup in call volume in Swedish wireless giant Ericsson, even as its share price continued to linger within around 25 cents of an abysmal 52-week low. Yesterday’s volume was localized in April calls. Activity in Ericson once again ticked our scanners with a 5-fold increase in trading volume, occurring as shares traded flat at $22.54. Earlier today it was announced that the company had struck a three-year deal to become the sole supplier of a Chilean nationwide network expansion. The news failed, as other lucrative contract nabbing announcements appear to have failed in recent week, to nudge Ericsson shares much higher. Still, it did appear to elicit a wave of fresh buying in July calls, which traded on a volume of 10,000 lots where prior open interest numbered only about 2,600 positions. The $1.90 premium supposes a move above $26.90 simply to break even – a slack expectation given that shares have traded as high as $43.41 over the past year.

(RHT) –Hours before it’s due to report earnings after the bell, we observed a 4-fold increase in trading volume in Red Hat options during the first hour of market action, as shares advanced 1.5% to read $18.53. Option traders appear bullishly positioned with great relish in January calls, where fresh longs appeared this morning at the $17.50 line and the January 20 calls attracted volume of nearly 22,000 lots – twice the average volume. This move comes in an atmosphere of sharply elevated implied volatility, which at 51.4% stands 1.36 times the historic reading.

(MBI) –Shares in bond insurer MBIA tanked 21.5% to $21.17 this morning after the company came clean about a $30.6 billion level of exposure to high-risk, so-called “CDO-squared” bonds. Rather than bestowing brownie points on the share price for candor and honesty, investors sent MBI shares through the 52-week floor. Meanwhile, on the option front, we observed a massive, 30% charge in implied volatility to stand at 160%. Twice as many puts are trading as calls, with investors seeking short-term shelter in December 20 puts, which were bought on volume of some 11,000 lots where open interest prior to today read just 4,300. Fresh traffic was also observed in December puts at the 17.50 and 15 strikes, much of which was freshly written – suggesting some option traders are pocketing the premium in confidence that MBIA’s shares won’t retreat below those levels before expiration tomorrow. Calls at the December 20 and 22.50 line were bought, possibly representing closing purchases as the value of these positions eroded some 90% on the session. Calls at the 25 strike were freshly bought, however, at twice the level of prior open interest, possibly in conjunction with straddle or strangle combinations involving puts.

(ORCL) –Solid numbers from the world’s leading producer of database software sent shares on a 6.7% upward trajectory to $22.17, as the market read Oracle’s strong presence in “indispensable” business process software as a defensive asset that could potentially shield the company from the aftereffects of a slowdown in consumer spending. A sense of the market’s relief was palpable in Oracle’s implied volatility reading, which immediately receded some 24.6% to 29.5%. The current share price is within a dollar of its 52-week high, and while 5 times as many calls are trading as puts, the go-to point remains the at-the-money 22.50 strike, both in the December and January contracts. Action in the January calls appeared to show selling at that 22.50 strike, possibly in conjunction with bull call spread activity at the 20 strike.

(NKE) –Solid earnings aided by banner European sales added a 5% swoosh to Nike shares this morning, which currently stand at $67.13 as its options command 3.6 times the usual level of attention. A look at time and sales suggests that call/put spread activity, or possibly strangle combinations are in favor in the January contract, with put-side volume favoring the 50, 60 and 65 strikes, and call-side activity at the 65 and 70 strikes. A look at the delta on that upper strike shows option premiums pricing in a less than 1-in-3 likelihood that Nike can sustain a break of $70 through January, despite a stellar $10 win streak that has accumulated since September, topping out at $67 earlier this month.