Thursday's Options Report: XLE, FTI, SPN, CLHB, CVS, XLI, STT

Wednesday we pointed to market action in a slew of smaller offshore oil drillers, following an upside move for oil services stocks that outdistanced that of the broader energy market, despite the salutary onset of $100 oil. Our hunch was that even if the speculative and geopolitical forces driving oil north of the $100 mark were to recede in the early months of ’08, the hunt for new crude sources would be likely to continue, and continue in increasingly obscure and hard-to-access spots. Hence the option market’s keen attention to oil services companies with pronounced exposure to deep-drilling activities and ocean technology.

Wednesday’s symbolic New Year move for oil past the century mark was cemented again today by a surprisingly capacious, 4 million-barrel draw in oil supplies, and once again – it’s those highly specialized, smaller offshore drilling companies stealing a bit of thunder from the larger-cap energy companies.

(XLE) – Our thesis about a possible correction for crude oil futures following this early-year hoohah appeared to be corroborated by fresh put buying we observed yesterday at the March 75 strike in the energy sector ETF, the XLE. Today once again the XLE rates among the most actively traded option families on our platform, as its underlying share price registers a 1.4% gain to $80.63. Once again, with twice as many puts moving as calls, the positioning here appears defensive, either anticipating a correction or hedging against a long position elsewhere in one of the fund’s components. Fresh long positions were observed in the February 78 puts on a volume of some 11,000 contracts – and a look at implied volatility shows option traders anticipating a 26% greater degree of volatility than they have shown historically.

(FTI) - Options in FMC Technologies (FTI) hit our market scanners owing to a 6.5-fold increase in option trading volume, as its shares gained 10% to read $62.49 ahead of the noon hour. The company produces high-tech solutions for a fairly diversified array of industrial subgroups, but its services to the oil and natural gas sector includes subsea production and processing systems, undersea valves, surface wellhead systems, fluid control equipment, and marine loading systems. Earlier today it announced that it has been awarded a $980 million supply contract from Total SA for an offshore drilling project in Angola. Today’s market action shows calls outpacing puts by a factor of more than 11 to 1, much of it trading in deep-in-the-money calls at the 45 and 47.50 strikes, possibly as proxies for the actual share, and again at strikes 60 and 65. The current share price represents an 8% premium on its 50-day price average, but is still 7% below its 52-week high of $67.77.

(SPN) - Options in Superior Energy Services (SPN) are attracting nearly 5 times the normal level of volume today as its shares tack on another 16% gain to $41.60 – within 30 cents of its 52-week high. The company makes and markets post-wellhead products and services for offshore oil wells, self-elevating liftboats for offshore oil drillers, and an array of rental equipment. Today’s active volume of 7,688 lots stacks up to 13% of its open interest, and open interest shows bullish calls heavily favored by the market by a factor of 4.3. We note here an apparent inclination among traders to enter fresh longs at the January 40 straddle, a position which costs $3.15 and covers the buyer in the event of a break above $43.15 or below $36.85.

(CLHB) - In what may an environmental play on an anticipated boom in disruptive offshore drilling practices, options in Clean Harbors Inc ventured on to our scan of “hot by volume” tickers for a second consecutive day, with contracts trading at 6 times the average rate against a 1.2% advance in share price to $50.93. The volume here is squarely focused on April calls at the 55 strike, which given today’s inflated premium of $2.75 imply a break of $57.75 – that’s a buck and change past the standing 52-week high – by springtime. A look at the delta on that position indicates premiums pricing in a 42% chance of that happening. Clean Harbors runs an environmental emergency response hotline – 1-800-OIL-TANK – as well as 49 waste management facilities and 100 outposts in the U.S., Canada, Mexico and Puerto Rico. Option traders have sought upside share price exposure through calls more than twice as often as protection against downside via puts.

(CVS) – It’s not often that low rates of flu infection are cause for market dismay, but so it appears in pharmacy and sundries giant CVS. Disappointing same-store sales figures for the traditional “month of contagion” sent shares in the country’s largest drugstore chain down 6.7% to $36.72. Implied volatility at 26.3% shows about a 16% elevation above the historic reading. With nearly 40,000 options in play in the first 90 minutes of trading, CVS registered among the most active option families to pass our market scanners. Front-month activity showed a glandular swelling in put-side premiums, with the price of the 37.50 put up 475% on the session, and attracting volume of 5,000 lots to boot. Traders also sought immunity from a drop below $35 this month, putting 4,500 put contracts in play at that strike. Long positions at the 45 strike were entered in the January 2010 calls on volume of 12,000 lots.

(XLI) – Surprisingly bullish factory orders for November may have hastened traders to seek upside explsure in the XLI, the Industrial Select Sector SPDR whose components include blue-chip mainstays General Electric, United Parcel Service, 3M, Caterpillar, and others. Volume in the fund’s options advanced to 23 times the normal level as shares turned in a relatively flattish performance as of the noon hour, up .68% to $38.77. The volume appear appears fairly squarely localized in fresh longs in February 39 calls, which traded 10,500 times at around $1.10 per contract, supposing a break above $40 for the industrial ETF by next month. The remainder of the 30,000-lot volume was observed in fresh longs in the March 35 puts, which are trading on only about a 17% probability of landing safely in the money.

(STT) – This morning’s subprime scanners were set atwitter by news that State Street would take a $618 million charge for legal fees following customer gripes over its investments in subprime mortgages. The company also announced the immediate resignation of its investment management unit. Options in State Street Corp are trading at more than 4 times the average level today against a 7% gain in share price to $84.41, a new 52-week high, that was occasioned not by the glum writedown, but by news that its earnings and revenues excluding that charge would likely top forecasts. Early market action showed traders seeking long positions in May 65 and 70 puts, possibly anticipating a leg lower for State Street later this spring (its standing 52-week low is $58.69). Even post-disclosure, implied volatility at 42.7% remains sharply elevated above the 38% reading.