Wednesday's Options Report: JPM, JDSU, eBay, Intel, RHT, BEAS, TASR

(JPM) –Earlier this morning, the country’s third-largest bank, JPMorgan Chase, reported a 34% decline in fourth-quarter profits due to subprime mortgage exposure, higher loan loss provisions, and fewer revenues from its trading activities. CEO Jamie Dimon, who has enjoyed a good deal of positive buzz in the financial press as a kind of “honor scout” among big-bank CEO’s, was explicitly cautious in his outlook for 2008. While JPMorgan’s woes seemed to underscore some of the beleaguered sentiment behind yesterday’s selloff, investors appeared to take heart in the less-drastic size of JPMorgan’s write-down, its relatively strong business diversification, and the effectiveness of Dimon’s management. These factors sent shares in JPMorgan Chase 5% higher to $41.10. Its options are among the most actively traded on our platform today, with 55,000 options in play before noon trading twice as frequently to calls as to puts. Buying interest was observed in the at-the-money 40 strike in the January and February contracts, while calls at the higher 42.50 and 45 strikes in the February contract traded to sellers – perhaps evidence of traders being mindful not to cast JPMorgan as the Cinderella in a recession-tinged fairytale in which virtually every major bank is being cast as one of the homely stepsisters.

(BEAS)– Yesterday we noted an increase in option trading volume to more than 12 times the normal level in BEA Systems and a massive elevation in its implied volatility, on no apparent news catalyst. Lo and behold, earlier today it was announced that the company had at last accepted a buyout bid from Oracle, valuing the company at $19.37 per share. That’s still below the $21 sticker price that BEA Systems put on its hand in marriage months back, when news first broke of Oracle’s interest. Today its implied volatility has receded dramatically, down more than 65% to read below 18%. Its options are trading at 5 times the normal level as BEA shares trade 19% higher at $18.56. Traders aren’t venturing further afield than the at-the-money calls, however, with buyers still flocking to the January 17.50 calls, due to expire on Friday. Calls were bought at the same strike in the February 17.50 contract, with positioning in volatility-type plays or contrarian put activity conspicuous by its absence.

(JDSU) - Options in JDS Uniphase, the world’s leading vendor of broadband and fiberoptic equipment, are trading at more than twice the normal volume today as its shares trade 1.6% lower at $11.16, having set a fresh 52-week low earlier today. A look at call volume shows these contracts trading at their heaviest volume since August, with traders buying the at-the-money February 11 calls but shorting calls at the March 13 strike for around $0.35. JDS Uniphase shares traded in a $4 range from $12 to $16, fairly consistently from June to December, before taking a 20% leg lower in the past month. Today’s volume suggests some expectation that the previous range may be cut in half, with shares remaining at current lows over the next month, not to exceed $13 in March. Added incentive for selling calls at that higher strike level may have come from the high implied volatility reading, which at 56% is sharply elevated about the 37% historic reading.

(EBAY) – Shares in online auction site eBay are clinging to a miniscule .11% advance to $28.00, having set a fresh 52-week low earlier in the session. Grappling with fraud and security issues, as well as market share encroachment from Amazon.com, the company’s share price has declined 14% in value for the year-to-date. With its options ranking among the 20 most liquid tickers on our platform according to “Most Active by Option Volume,” we were struck by the degree of traffic in out-of-the-money puts. It appears that a trader may have closed out a position in January 25 puts for just a nickel this morning, and possibly reinvested the takeout price in February puts at the even lower strike of 22.50, which traded for $0.15 apiece. These contracts confer the right to sell eBay shares at a 19% discount to its 52-week low next month – possibly a very strong hint that at least some are expecting no great shakes from the company’s quarterly earnings report next Wednesday. Implied volatility at 51% certainly suggests some rough times ahead for the company, showing option premiums pricing in about 35% more share-price choppiness than eBay shares have shown historically. This escalating implied volatility trend has been in place since around the first of the month.

(INTC) -Intel shares declined more than 15% in extended trading, after the company’s sales growth fell short of street expectation, and issued guidance for Q1 of 2008 that seemed to confirm fears of softer demand for tech-sector stalwarts. Shares are down 11.5% as of the noon hour at $20.12. Days ago we noted what looked like a heavy degree of activity at the then-at-the-money $22.50 straddle, which at $1.61 was pricing in about a 7% for Intel shares by the end of trading Monday. Having captured that swing and then some, the price of the $22.50 straddle is now $2.46 – generating a $850 per-contract gain for anyone who bought the straddle two days ago and chose to cash out now. Today’s option battles are unfolding one strike lower, in puts and calls at the January 20 strike. We continue to see evidence of volatility positioning in the February contract, with buying and selling in straddle and strangle combinations with a strike floor as low as $17.50.

(RHT) – Options in open source software giant Red Hat are attracting more than 12 times the normal level of volume today as its shares trade 1.7% lower at $18.92 – that’s within a dollar of the 52-week low set back on December 19. Our attentions were grabbed by fresh, conspicuous call activity in the June ’08 and January ’09 calls – calls outpacing puts in the volume stakes by some 30 to 1 today. These calls were bought at strikes of 20 and 22.50 in the June contract, while the January ’09 22.50 calls traded to the middle of the market at prices of $2.30 and $2.55. The premiums on these calls alone would imply a test of the current 52-week high by next January.

(TASR) – “Don’t tase me, bro!” That’s what we – and doubtless many other option-watchers – exclaimed upon observing an increase to twice the normal level of trading activity in Taser International. This maker of stun-guns, behind the bizarrely popular catch-phrase of 2007, raised eyebrows at last week’s CES conference by unveiling new models of its non-lethal (but apparently, very painful) weapons in fashion colors, along with a music playing holster. Shares in the company are down 4% today at $10.88. We were stunned - pardon the pun - to discover that most of today’s 12,000-strong option volume appeared in the January ’09 contract at the $10 line. Calls here were freshly bought for $3.90 in this time-value-rich position, while puts at the same strike traded freshly to the middle of the market at $2.30. We can’t conclude for sure but it may have been long straddle, a position costing more than half the current share price on a long-range bet that Taser shares will shoot up past $16.20 or backfire below $3.80. If that seems like a wild bet, consider that Taser shares have traded between $7.44 and $19.36 over the past 52 weeks. With 2.6 call positions open for every put, it looks like the immediate sentiment favors upside for Taser shares as the company tightens its grip on the market for…ahem…leopard-print stun guns.