Monday's Options Report: CAT, LGF, McDonald's, MSFT, UXG

Rebecca Engmann Darst co-authored this article.

(CAT)– Caterpillar – A Bear Stearns upgrade of the world’s largest producer of construction and mining equipment sent its shares 1.7% higher at $67.62. Interestingly, the share price move elicited a rush to fresh positions in March 65 puts, which are trading to buyers and sellers with equal zeal on a volume of 23,500 lots – 10 times the existing open interest at this strike. With today’s premium ringing in at $2.70, a buyer of this position looks for a dip to $62.30 over the next month – just 4 percent above the 52-week low – while a seller takes the other side and predicts buoyant action above the $65 level for the next month. The interest in this single strike sent put volume to quadruple that of calls today – and a look at open interest also shows a slight privilege to the defensive puts by a factor of 1.1.

(LGF) – Option activity in Lions’ Gate Entertainment, the production company behind the latest installment in the Rambo franchise as well as Oscar faves “Away From Her,” “3:10 to Yuma,” and “Juno,” soared to 37 times the normal level today – the heaviest volume on record. Earlier today it was announced that Lionsgate had reached an interim agreement with the striking Writers’ Guild of America. Shares in Lionsgade are up .74% at $9.50 over the noon hour. Implied volatility has remained more or less stable today, with the 35% elevation above the historic reading intact for most of the duration of the strike. Today’s option volume, however, is wrapped up in 5/10 call spreads in the January ’09 and January ’10 contracts, possibly a trader rolling over the position from the 2009 contract into the 2010, with the $5 call entered as a long position for $5.45 against the sale of the higher call strike for $1.70. Closing out an existing call spread position in the 2009 would have given the trader $3.65 per contract to help defray the $3.75 debit cost of the 2010 trade. Lions’ Gate shares traded above the $11 level for most of the first half of 2007, but took a big hit during the market turbulence of August, and amid back-to-back earnings disappointments.

(MSFT) –Microsoft - Today’s news of a delay in the launch of its heavily touted SQL Server 2008 appears to have sent the software giant’s shares lower by 1.4% at $32.50. Option traders have put more than 85,000 lots in play, with twice as many calls moving as puts. Call buying is in evidence in February calls at strikes of 32.50 and 35, with premiums down up to 36% on those strikes – possibly posing an attractive value to investors bullish on Microsoft’s share price outlook heading into the next month.

(MCD) – McDismal December sales from recession-portfolio favorite McDonald’s elicited a 6.7% drop to $50.46 in the price of the stock. On theoption front, the 45,000 lots trading as of the noon hour made Mickey D’s one of the most active tickers on our platform. Implied volatility has come off sharply, now within 4 percentage points of the historic reading – the lowest spread between implied and historic volatility since late-December. But with put-side premiums sharply higher given the slide in share price, the trend among option traders today has been to sell volatility via short positions in straddles and strangles at the $55 line, with puts attracting activity in the February contract at strikes as low as $47.50. The outlook in March does appear more bullish for McDonald’s however, as would seem to be suggested by call-buying activity at the $50 strike – the price of this position down 65% today, possibly presenting an attractive bargain to traders who still believe in the allure of the golden arches in a downtrodden economy.

(UXG) – US Gold  - Shares are up 13% on the session to $3.68, with options moving at 39 times the normal level, due in large part to fresh volume in the September contract at the 2.50 call strike. Interestingly, while open interest up to today numbered 2,802 lots (today’s volume, by comparison, totaled 2,145 contracts in the first hour of trading), open interest shows that 3.5 calls are open for every put.  Implied volatility spiked some 18% on the session and now reads 148%.

VIX – This morning’s decline in December new-home sales provided no succor to traders looking for signs of a bottom in the housing market. Despite this new lurch toward economic slowdown, and without fresh clarity on expected rate action from the cloistered Fed, volatility as measured in the Volatility Index came off a bit, down .48% to read 28.94. Early market action showed traders still keen to sell volatility in the index, with calls at the 27.50 and $32.50 attracting most selling attention as prices on those positions were discounted around 12% on the session.