Monday's Options Report: ANR, Biovail, DDUP, GE, Merrill, C

Rebecca Engmann Darst co-authored this article.

(ANR) - Options in Appalachian coal maker Alpha Natural Resources – a leader in the production of metallurgic, or “met” coal, used in the production of steel - are moving at nearly 8 times the average volume today, against a marginal .74% gain in share price to $33.59. Today’s active option volume of 22,000 stacks up to about 20% of its open interest, with calls posting their heaviest traffic of the year today, owing to positions entered in the January calls at the 30 and 35 strikes. This may be indicative of bear call spread activity involving the fresh purchase of calls at the 35 strike at $1.20 with the concomitant sale of 30 calls for $4.70. In this case, the trader would open the transaction with a credit of $3.50, representing the maximum profit potential for the trade – and an expectation that Alpha shares will close below the $30 mark by next month’s option contract expiration.

(BVF) - Our market scanners detected an unusual level of activity in Biovail, a biotech company specialized in developing drug delivery technology. With shares trading 1.1% lower at $13.30 as of the noon hour , posting a new 52-week low as the company prepares to put the lid on a year that has seen its share price depreciate by some 30%, gapping 40% below the performance of the NYSE composite index during the same period. Options were trading at nearly 6 times the normal level this morning according to our scanners, with most of the 6,000-lot volume tied up in out-of-the-money calls at the January 17.50 and April 15 calls. Most of this volume appears to have been shorted or traded to the middle of the market. Earlier this month, the company settled a $138 million securities class action lawsuit filed by shareholders who alleged that the company and its management isued “misleading” financial statements with a view to inflating its share price. Biovail itself is reportedly proceeding with its own $4.6 billion lawsuit in Canada against a consortium of hedge funds and brokerage firms that it claims was conspiring to distribute information with a view to constraining its share price. Despite this ongoing rendezvous with the courtroom, implied volatility in Biovail options has remained fairly stable at 36%.

(DDUP) - One of a number of successful initial public offerings in 2007, shares in computer data recovery and contingency specialist Data Domain traded 4.4% lower for much of today’s abbreviated market session. The $25.97 price is still nearly an $11 premium from its offering price, but a $15 decline from its 52-week high of $41.14 set in late October, and it appears that option traders are looking for the bear momentum to continue in early ’08. A case of share-price teething pains, perhaps. Today its options hit our market scanners owing to a surge in option volume of 15 times the normal level, most of which was tied up in at-the-money put-buying at the 25 strike in the February and March contracts. Overall open interest is consistent with this defensive theme, with 1.5 put positions open for every call.

(GE) - On Friday we observed an unusual level of activity in General Electric options, with calls trading at the highest level since the company’s last divided payout. The option order flow appeared bullish, and we could see no other catalyst but possible speculation about GE’s plans to plan its footprint in the global nuclear reactor business. Once again today we’re seeing GE’s ticker as a marquee presence on our market scan of most active option families. Earlier today, Merrill Lynch announced plans to divest most of its mid-market commercial financing business, to GE’s corporate finance arm, GE Capital. The ensuing 1.45% appreciation in GE’s share price to $37.86, combined with 2 times the number of calls trading as puts, is somewhat unusual to see in a company on the spending end of a transaction like this. A look at the volume distribution suggests that traders may be selling the 37.50 straddle in anticipation of greater stability in GE’s share price heading into next year, while buying interest in the January and March 40 calls indicate a measure of confidence among some traders that GE can make another pass at the standing 52-week high.

(MER) - Given news of its sale to GE and capital infusions from Singapore’s Temasek and U.S-based Davis Selected Advisors, it’s surprising indeed to see markets shun shares in Merrill Lynch to the tune of a 2.6% decline to $54.07. The 41,000 contracts in play this morning appear evenly split between calls and puts, with what may be put spread activity in the January contract between the 50 and 55 strikes. This is concurring with buying and selling traffic in the January 60 calls against 37.5% discount in premium today. A look at the delta on the January 60 calls shows a slightly better than 1-in-4 chance that Merrill shares can pull above $60 by January’s expiry, even with this latest cash bailout from foreign shores. The current share price represents just a 7% premium on the 52-week low.

(C) – Finally, our curiosity was captured by an early spike in put trading activity in Citigroup, whose shares have otherwise basked in a 2.5% advance to $30.99 today. With nearly 380,000 options in action, Citi was the most active option ticker to grace our scanners on this holiday even, with nearly 8 times as many puts trading as calls, and these localized in deep-in-the-money strikes in the January contract, and on volumes many times multiple the level of existing open interest. Rather than brazen directional action, this volume appears to be a case of market makers trading massive volumes on the eve of a holiday hiatus by writing puts, collecting interest on a short stock sale as well as through premium