Tuesday's Options Report: INTU, ADBE, AIG, YHOO, XOM, OC

Rebecca Engmann Darst co-authored this article.

(INTU) – Shares in software company Intuit Inc., the maker of Quicken and TurboTax personal finance and accounting software are .79% higher this morning at $30.62. The company is due to report Q2 numbers on Thursday, and it appears that traders are positioning long volatility via the at-the-money in anticipation of vigorous share-price movement post release. The combined premium of the straddle at $2.55 becomes profitable for the long trader with a break above $32.55 or below $27.55 – that’s about an 8% up-or-down price move. Intuit earnings have surprised to the downside the past two outings, but its share price has proven relatively nonreactive. Today’s straddle volume – sufficient to send option volume beyond 17 times the normal level – implies some traders believe this isn’t going to be the case this time around. In the first week of this year, Intuit shares followed those of other major tax preparers lower on reports that the Internal Revenue Service might seek to bar refund loans or audit insurance services to consumers on grounds that they posed inducements to tax fraud. Intuit has openly opposed the measure.

(ADBE) – Call volume in Adobe, the maker of PhotoShop, Acrobat and Flash software, hit a 3-month high today as shares the company powered 2% higher to $35.38. We can see no apparent news catalyst for the increase in volume, nearly half of which was involved in heavy buying at the March $42.50 strike. The 10-cent premium on this position reflects barely an 8% probability of its coming into profitability by March 20 – even more provocative is the notion that the current 43% implied volatility reading on Adobe options shows the market expecting less likelihood of an upside swing of that magnitude (a 20% upside swing, to be precise) than it has already shown.

(XOM) – Shares in the world’s biggest oil company Exxon, rose 2.5% to $87.56, urged on by a move higher in crude oil futures and concerns over the outcome of a dispute between Exxon and Venezuelan state-owned energy company Petroleos de Venezuela SA (PDVSA). Exxon has filed suit against PDVSA, leading to a $12 billion injunction against the Venezuelan company, over how much money Exxon should receive for one of four ongoing oil projects it had running in th Orinoco River Basin. The project was ultimately nationalized by the Chavez government in Venezuela. In option action the day belongs to sellers of premium, notably in the July 85 calls, where many of today’s sellers are pocketing $8 for contracts that were bought for $6.60 on January 28. The tendency to sell also extended to July puts at 80 and 85 strikes, despite premiums coming off some 20% at those strikes.

(AIG) –American International Group - Shares in the world’s largest insurer by assets opened Tuesday with a 1.7% gain to $46.90 after an article in Barron’s claimed that last Monday’s insurance auditor disclosure may have been “too draconian” and characterized its current depressed share price as a “screaming value.” The article may have provided the impetus for a trader to take off some of a position in January ’09 40 puts for $4.30-$4.40, absorbing a loss from the asking price of $5.70 1 week ago. Traders also appear to be closing out positions in front-month puts at strikes of 40 and 45 – in general, twice as many puts are trading as calls this morning on a total volume of 57,000 lots in the first hour of trading.

(YHOO) – Yahoo! – Microsoft CEO Bill Gates took a coolly dismissive tack today in stating that the software giant had offered “a fair price” for ailing Yahoo and didn’t intend to quibble over price with the company, bolstering suppositions that Microsoft will resort to a proxy fight to push through its $31-per-share bid for Yahoo. With some 51,000 options trading in the first 90 minutes of the market, more than twice as many calls are trading as puts in Yahoo, with heavy buying and selling at the March 30 line. Premiums at this strike have come off nearly 40% this morning owing to the drop in underlying. Two-way traffic is also occurring in 32.50 calls, while the 35 calls are selling off a just a nickel apiece – reflecting just a 3% probability of this strike landing in the money by expiration.

(OC) –Shares in Owens-Corning, the maker of insulation and roofing materials, are 1.1% higher at $19.36 roughly 8 days before earnings are due out. Today’s increase in option trading volume to 6.5 times the normal level is due in large part to some conspicuous volume in May 25 calls. Virtually all of today’s 3,690 active lots were sold in this strike for 10 cents apiece – an astonishing decline in value since most of the open interest here accumulated in mid-December when the asking price was $1.65. It’s interesting to contemplate what the motivation could be for closing out a position at that kind of loss, given that Owens-Corning is a share that has traded as high as $36.47 over the past 52 weeks, and given that nearly twice as many call positions are open as puts.