Thursday's Options Report: HBC, CSCO, RIMM, MSFT, ANN, CREE, AKAM, NWA, AET

Rebecca Engmann Darst co-authored this article.

(ANN) - Years ago it was sung of another chipper young professional with a penchant for snappy clothes, “Who can take a nothing day and make it all seem worthwhile?” Today it might well have been said of womenswear maker Ann Taylor. Fashion sense or sixth sense, we’re not sure, not but option traders had an unusual premonitory purview of the January sales outlook for this clothing chain. Ahead of this morning’s dire chain-store sales figures for the holiday hangover month, we’d noticed a tendency in option traders to seek protection from downside through at-the-money puts – we saw it in options of the Gap as well as in J.Crew. But not so in feisty Ann Taylor – traders here shrewdly entered fresh longs in February 25 calls at 55 cents apiece. When this morning’s same-store sales for Ann Taylor came out flat, rather than the 3.2% decline estimated by the analyst crowd – the February 25 calls climbed in value to 90 cents and yesterday’s traders promptly cashed out. So why is Ann Taylor continuing to confound the broader trend in the retail clothing space? The company recently announced plans to close some 117 stores nationwide and cut 13% of its administrative staff in a bid to save $50 million over the next 3 years. The market may just be warm to the idea that Ann Taylor is further along in doing what’s needed to execute in the current stagnant market environment. A look at open interest shows open call positions outrank open puts by a factor of 1.3 – a decent sign of confidence in the can-do women’s chain can get it done.

(HBC) – HSBC Holdings ADR – In soberer macroeconomic news, ECB chief Jean-Claude Trichet’s moment of unvarnished truth on the rising threat to Eurozone growth left a noticeable imprint in European financial stocks. American depositary receipts of HSBC, the continent’s largest bank by market value, dusted off in early US trading before taking another 1% leg lower to $71.03. But HSBC options are commanding 2.4 times the normal level of activity, with what looks like bear put spread activity in the June contract between strikes 60 and 70. The trader in this case sold the 60 puts at $2.15 against the purchase of puts at the 70 strike at $6.10. In order to break even in this transaction, the trader is looking for a drop in HSBC shares below $66.05 – that’s 6% below the 52-week low it set back on January 22. There are a couple of catalysts that might trigger that kind of downside – subprime-related doldrums for European banks would do it. So too might a takeover of Societe Generale. HSBC shares will see their next big mover in connection with earnings on March 3.

(CREE) – Shares in Cree Inc., the maker of light-emitting diode chips for cellular phone backlighting and computers, rose nearly 2% to $30.14, outperforming the broader tech sector on no apparent news catalyst. The company registered more than $10 million in insider sales of its shares last week. It appears that a trader took advantage of the move up in share price to close out a position at the February 30 line that may have been entered back on December 27. On that day, Cree shares staged an unbridled 8% gain on back of a research report suggesting that LED technology might be considered an energy-efficient and environmentally sound means of powering homes. Back on December 27, the price of the February 30 straddle could have been shorted for $7.20 by a trader skeptical of much more volatile price action in Cree shares. Today, with shares trading about $2 higher, the same position could be closed out at $2.65 – yielding a $4.55 profit per contract. Today’s closeout of the position sent option volume in Cree to nearly 4 times the normal level.

(CSCO) – Cisco – Many option traders yesterday steeled themselves against exactly the kind of turbulent price reaction that Cisco shares went on to exhibit on back of their sales guidance for the coming quarter. Straight talk from CEO John Chambers about a slowdown in January orders sent Cisco shares and the broader tech sector sharply lower – shares in the company are currently 1.6% lower at $22.70. With some 317,000 options trading, Cisco is one of the most heavily trafficked option families on our platform today. Today, as yesterday, volume looks heavily situated in the February 22.50/25 strangle, which is trading to buyers and sellers, with further volatility selling in 22.50 calls.

(RIMM) – Research in Motion – Shares are .75% higher at $84.15, shrugging off early speculation that the Blackberry maker might be an early casualty of Cisco’s dismal earnings outlook. Traders appear to be playing the volatility aspect of this resilience – or rather, defiance - in RIM shares, positioning long the 80/85 strangle. The position, which costs about $5.18 today, supposes a break outside the range of the strike prices, plus or minus the premium paid – in this case, a break below $74.82 or $90.18.

(NWA) – Northwest Airlines – Reports of meaningful progression in ongoing merger talks between Delta and Northwest has given rise to speculation that a deal could be announced as early as next week. Shares were buoyed early by the news before reversing .32% lower at $18.41 over the noon hour. But call activity at the March 17.50 strike has sent option activity to 2.4 times the normal level. Oddly, these 17.50 calls are trading to the middle of the market at $2.55 – possibly representing the closeout of positions opened on November 26 as conjecture on March M&A action in the airline space began to gather. The contracts were worth $3.00 back in late November, however, making us wonder why a trader wouldn’t hang on to these in-the-money calls a little longer rather than closing out at a loss.

(AET) – Aetna - Options in the country’s third-largest health insurer are trading at nearly 4 times the normal level today. Shares in the company are down 2.% at $51.93 despite reporting a net rise in Q4 earnings and new enrollments. The 20,500 active contracts are trading twice as often to puts as to calls, with most of the activity centered in February 50 puts. Open interest at this strike more than tripled this week.

(AKAM) – Shares in Akamai Technologies, whose content delivery systems and streaming video download components are used by the likes of Apple, jumped more than 7% to $32 over the noon hour, after its Q4 sales and profits exceeded street estimates. Implied volatility quickly pared back more than 25% on the news – with option premiums currently reflecting about 25% less price risk to Akamai shares than they have shown previously. Akamai went through a recent bount of share price volatility on market rumors that all or part of its partnership agreement with Apple might be in jeopardy. There was little evidence of such concerns today, with traders seeking instead to buy February $35 calls for $0.35 apiece – more than a third of today’s active volume was centered in that bullish contract. The February 30 straddle also sold off heavily along with the comedown in implied volatility.

(MSFT) –Microsoft - Shares are .70% lower at $28.32 as reports spread that would-be takeover target Yahoo! is stepping up talks with Google in a bid to maneuver around a Microsoft takeover. In option trading, more than 63,000 contracts changed hands in the first market hour, trading nearly 4 times as often to calls as to puts. Early market action showed traders selling February 29 calls, with call spread activity in the March contract between $27.50 and $30, a debit spread play that for $1.11 makes money for the trader after a break of $28.61.