Thursday's Options Report: Yahoo, AKAM, Target, WMT, COST, DAL, FINL

Rebecca Engmann Darst co-authored this article.

(YHOO) – On a different note, it appears that an article in this morning’s New York Post has managed to do for Yahoo! what three days of gladhanding, jawboning, and showboating at the CES consumer electronics convention in Las Vegas could not – namely, send its share price higher. Yahoo! shares are up 3.5% this morning at $23.35, in sharp relief against the broader tech sector, after an analyst note appeared in the New York Post put the odds of a Microsoft takeover at 1-in-4. Despite the rally in share price, option traders are looking askance at the odds of such a move, looking to buy puts at the January 22.50 strike on volume of more than 52,000 lots, while January calls at strikes of 25 and up traded to buyers and sellers as the value of these positions doubled overnight. Out-of-the-money call buying was in evidence further down the calendar, with long positions at the April 35 strike bought at less than a quarter apiece – this price, it should be said, reflects barely a 9% chance of Yahoo! besting its existing 52-week low by April. Also worthy of attention is the sustained, high level of volatility in Yahoo!, which at 58% is 1.6 times the historic reading. This dramatic divergence between historic and implied volatilities has been on the ticker since mid-December.

(AKAM) – Circulating rumors that content delivery provider Akamai’s 9-year relationship with Apple may have soured appears to be fueling a wave of speculative put buying in the company’s options, sending volume to 7 times the normal reading. Akamai shares are down 4.2% to read $27.99 as of the noon hour. Implied volatility, which took off like a rocket from the start of the trading day, is up 17.3% on the session to read 77.3% - that’s elevated above a 44.9% historic reading and the highest reading we show on record. Those January 25 puts are moving on a volume of 20,000 lots, trading to buyers, along with puts at the 22.50 strike. Calls in the January contract are selling off heavily. Again, these January options expire next Friday so a buyer of these out-of-the-money put strikes is expecting a pretty heavy downside move in the space of 1 week.

(TGT)– Shares and options in Target are moving on a 2-for-1 news driver this morning, with last night’s news of the retirement of CEO Bob Ulrich stoking curiosity about his successor, Gregg Steinhafel. This morning, however, the company reported a bigger-than-expected decrease in December same-store sales and offered uninspiring guidance for Q4 sales. Shares in the quirky discount retailer are up 1.4% at $50.60 ahead of the noon hour, with more than 78,000 shares in play trading almost 4 times as frequently to calls as to puts. Front month activity showed traders bailing out of call positions at strikes of 50, 52.50 and 55. Cautious bulls may have looked to call spreads in the April contract to express a view toward stabilization between strikes 55 and 57.50, looking for appreciation in Target’s share price above the $55 level come springtime, but capping any upside through the sale of a higher-priced call. Traders in this case may be exercising an extra dose of caution, watching to see how Target’s higher-priced consumer goods fare against Wal-Mart’s in a defensive, value-seeking consumer environment.

(WMT) – Better-than-expected December same-store sales from big-box chain Wal-Mart provided a measure of retail relief to the market in early trading, and comfort to investors who have sidled up to the company’s mix of consumer staple and lower-price discretionary goods as the country heads toward economic slowdown. Wal-Mart shares are up 1.5% at $47.64, with nearly 62,000 options trading ahead of the noon hour, making it a heavily-trafficked one-stop shop for option traders today. With implied volatility at 27% still showing option traders expecting about 14% more volatility than its historic reading, some traders took the opportunity to sell front-month volatility at the 47.50 straddle, pocketing the $1.60 premium in the belief that Wal-Mart shares won’t stray from current levels in the next week.

(COST) – It was a good day for the warehousers today, with Costco Wholesale Corp reporting a 7% rise in December same-store sales, beating street estimates, and sending shares 2% higher at $68.69. Earlier this week, the company’s CFO said Costco would follow through with expansion plans for the U.S. market despite a weak economic outlook for the country, leveraging its position as the country’s top warehouse club operator to broaden its selection of products. Options in Costco traded at 3 times the normal volume today, with traders apparently selling out of put positions at the January 67.50 and February 65 positions. Up to today, bearish put positions outnumbered calls by a factor of 1.2.

Airline stocks are enjoying a bullish turn this morning following a spate of sector upgrades and renewed speculation that an M&A wave may be in the works.

(DAL) - Shares in Delta Airlines gained 8.4% this morning to $14.65, with more than 40,000 options in play making it one of the most actively traded tickers on our platform this morning. More than 5 times as many calls are in play as puts, with heavy volume in January calls at strikes of 12.50, 15 and 17.50. March calls at the 15 strike sold off on volume of 10,600 lots, as some traders may be taking profit off the table after open interest at that strike swelled to five times its prior size this week alone. The 95% implied volatility reading – elevated above the 78% historic reading – fittingly expresses the sense of tenterhooks that many market players must be feeling regarding Delta-related merger activity. The fact that it has remained at this highly anticipatory level for most of the New Year is a sense that some kind of M&A cue out of the airline space is just a matter of time.

(FINL) – A share price for the disabled list…! Shares in Finish Line, the nationwide sportswear retailer, grabbed our attention due to a push in option volume to 7 times the normal level. This occurred as its shares traded 1.7% lower at $1.68, the latest pit stop in a ruinous decline that began in January 2007 with shares at $14.75. Over the past 52 weeks the company has not just surrendered 87% of its market capitalization, but underperformed the S&P consumer discretionary index by more than 50%, and lost a court ruling ordering it to honor the terms of its buyout of shoe and hat maker Genesco. Despite some pretty dire odds, it would seem that some traders aren’t quite betting on the end of the line for Finish Line yet, given fresh call spread activity in the May contract between the 2.50 and 5.00 calls. This transaction, which involved some 25,400 lots at each strike, looks like a debit spread in which the higher-priced 5.00 calls were sold at $0.11 in tandem with the purchase of $2.50 calls at about 50 cents apiece. This implies a doubling in Finish Line’s badly-winded share price by spring training in May.

Comments

[kkin365]

Excellent. Very timely, particularly with reference to YHOO. Keep up the good work. However, disclosure would be appreciated. I have no position, stock or option, in any of these companies.