Monday's Options Report: IBM, Ericsson, AMT, NSM, TWB, XLP, Intel, AUY, C

Rebecca Engmann Darst co-authored this article.

(IBM) – Big Blue provided a welcome heave-ho to much of the apocalyptic sentiment that seized the market on Friday. Earlier this morning, IBM reported an unexpected 24% increase in Q4 earnings compared to the same quarter in the previous year. The news elicited quick gains for the broader tech sector and sent shares in the company 5.7% higher to $103.30, bringing it back above the $100 mark after last week’s ominous dip into >100 territory for only the second time in the past 52 weeks. Options trading in IBM quickly advanced to more than twice the average level of volume, making it one of the day’s most actively traded option families, as front-month puts at the 100 strike sold off heavily, and calls at the 105 strike were bought on volume nearly matching the existing open interest. In the February contract we noted heavy traffic in 110 calls, but fresh shorting in the 115 calls indicates at least some inclination on the part of the market to put the skids on a new test of IBM’s current 52-week highs. Indeed, IBM’s implied volatility reading at 31.7% is still flirting with November’s high of 35.9% - a sign that option traders feel the company’s share price is still vulnerable to turbulence action in the coming weeks.

(ERIC) - Options on the American depositary receipts of Swedish wireless giant Ericsson are drawing about 8 times the normal level of attention this morning against a 4% advance for its shares to $23.93. The company has attracted a spate of positive analyst attention in recent session, most recently from Swedish bank Swedbank, touting bullish prospects for its development of video on-the-go capability to mobile phones. Disappointing sales projects last fall led to a despairing 41% drop in its share price in the final quarter of 2007, but a Bloomberg survey of analysts is predicting a 53% recovery for Ericsson shares this year on the mobile phone video offering, outclassing even last year’s phenomenal growth in Google. Yikes – now there’s a charged prediction!

Traders, still possibly somewhat cautious about Ericsson’s prospects given its recent battering and a challenging market environment, appear to be using bull put spreads, rather than flat-out calls, to express a moderately bearish outlook. They appear to be doing so in the February contract at strikes 22.50 and 25, possibly selling the 25 puts freshly at around $2.05 apiece, partially funding the purchase of puts at the 22.50 strike at around $0.83. Ericsson’s break above that lower strike price only just materialized over the past week, so a long position at that strike would protect the buyer against a new jaunt lower in its share price that might result in the higher strike being exercised.

(AMT) – More evidence of anticipated volatility in the wireless space was observed in American Tower Corporation. The company, which owns and operates wireless broadcast towers at more than 14,000 sites on the North American continent, presented a near-6-fold increase in option trading volume on no apparent news catalyst. This occurred as its shares traded 1.5% higher at $39.61. Besides the bump in trading volume, we were struck by the fact activity appeared so firmly situated in fresh longs in the April 37.50 straddle. This position, which at $5.75 costs 14% of the current share price to enter, generates profit for the buyer in the event of a break below $31.75 or above $43.25. The current implied volatilty reading of 33.7% shows only a marginal elevation above the 32.5% degree of historic volatility, and has shown no apparent change since early September.

(NSM) – Options in National Semiconductor attracted 4 times the normal level of activity per our “Hot by Option Volume” scanner. This occurred as its shares traded .30% lower at $19.74, just a nano’s breadth above Friday’s 52-week low of $19.59. Today’s option activity appears squarely rooted in January puts at the 20 strike, which sold off heavily at around $0.50. This may have represented the closing sale of some of the open interest built back in late-September when the position could be bought for $0.15 as the underlying share price read $27.02. Since then, National Semiconductor’s share price has taken a 26% shave, making defensive put positions generally richer.

(TWB) – Our option scanners detected an increase in option trading volume to nearly 8 times the normal level in Tween Brands Inc. The clothing company was spun off from women’s fashion label The Limited, but caters to a younger, preteen demographic via its Limited Too and Justice Brands, as well as licensed merchandise under the Hannah Montana, Jonas Brothers and Webkinz franchises. Today’s near-2% decline in share price to $27.86 appears to be the upshot of an analyst downgrade by Merrill Lynch – surprising, as it comes just a week after Tween Brands reported solid holiday sales, and flying in the face of some analyst contentions that even amidst a slowdown in U.S. consumer activity, parents are still likely to spend money on kids. Still, today’s option activity doesn’t suggest contrarian action against the downgrade, with what looks like put-spreaders out in force in the February contract, entering fresh longs in puts at the 22.50 strike at $0.80 against the sale of 20-strike puts for $0.80.

(XLP) – On Friday, in the midst of that day’s wilting sell-off, we observed a big spike in implied volatility and bearish put-side positioning in a number of consumer staples tickers – to wit, Procter & Gamble, Coca-Cola, and Colgate-Palmolive. The action appeared to be tied to an analyst downgrade of European food and beverage giants Diageo and Uniliver, and may have been reinforced not only by the larger selloff in equities, but also spiralling corn prices and their red-flag implications for inflation. With that in mind, we were interested to see this morning’s more than 6-fold increase in option trading volume in the XLP, the consumer staples SPDR, of which Procter & Gamble, Coke, Colgate-Palmolive etc., are all components. With the underlying share price showing a slight .35% decline to $28.17, option volume apeared in March puts at the 28 strike, which were mostly sold at a price of $0.65, possibly in a contrarian bet against a slowdown in the consumer staples sector that would lead to that put being exercised in the springtime.

(INTC) – With chip giant Intel due to report earnings tomorrow, it’s little wonder with 105,000 contracts moving, its options are among the day’s most actively traded option families on our platform. The action is unfolding against the backdrop of a 4% gain in its share price to $22.87, roughly twice the gain in the Semiconductor Holdrs Trust (SMH). The price of the at-the-money 22.50 straddle shows option prices anticipating around a 6% up-or-down price move in Intel shares – this as Intel’s 46% implied volatility reading shows its highest level in at least a year. Indeed, it’s at the at-the-money call strike that most of the action is playing out. We cautiously offer that an abundance of call selling at the January 25 strike would suggest that the market is capping any spectacular upside from its earnings report. Front-month puts at strikes of 20 and 22.50, meanwhile, were mostly bought.

(AUY) – Shares in Canadian miner Yamana Gold Inc. gained 6% this morning to $17.42, setting a brand-new 52-week high, after the company forecast a 39% rise in 2008 in step with spiralling gold and metals prices. The company operates seven gold and copper mines in Brazil, Chile and the U.S. The news led option traders to put the equivalent of 16% of its open interest into play, most of it in January calls, which are due to expire at week’s end. The January 17.50 calls were heavily trafficked as the value of this position swelled 166% overnight. Calls at strikes of 12.50, 15 and 17.50 in the February contract also attracted buyers.

(C)- CNBC news reported this morning that Citigroup is on the eve of announcing a massive wave of job cuts, involving some 24,000 positions mostly in its fixed-income buisness, as it grapples with a $24 billion writedown. The news elicited little in the way of dramatic share price movement, with a .32% increase to $28.65, in line with the broader financial sector. With some 155,000 option contracts in play as of the noon hour, Citi options are among the most actively traded on our platform, and show heavy traffic in the January contract, with buyers and sellers trading the 27.50 puts and 30 calls, and buying 30 puts possibly looking to capitalize on volatile price action if the downsizing announcement is forthcoming. Positioning in the February contract looked defensive, however, and showed traders entering long positions on a total volume of more than 12,000 lots at the 27.50 strike, as the current $1.22 price of the contracts reflects about a 39% chance of Citi shares dropping below the current 52-week low again in February.