Monday's Options Report: ABK, XLF, WB, GTXI, QCOM, NTAP, DNA, TTWO

Rebecca Engmann Darst co-authored this article.

(ABK) – Friday’s news of a possible swoop in by leading banks to save troubled bond insurer Ambac was credited with a broad late-session recovery for stocks and a boost in Ambac call positions. Shares in Ambac are trading a modest 1% higher at $10.82 this morning, but with no confirmation as yet on the scope and specifics of the deal, it looks like option traders are positioning long volatility via the 10/12.50 strangle. In this case, the trader would pay a $3.15 premium – more than a quarter of the current share price – to profit from a break above $15.65 or below $6.85. Open interest in Ambac shows 1.5 calls openf for every put.

(XLF) –Shares in the financial sector ETF dipped 1.8% to $26.69 this morning as traders played the waiting game on a possible bailout of municipal bond insurer Ambac – news that a bailout was in the offing sparked a late-session recovery for stocks on Friday. Interestingly, the 190,000 contracts trading on our platform this morning show 5 times as many calls trading as puts, much of this at the April 28 strike. Traders here paid 95-98 cents for the right to purchase XLF shares for $28 in April, thus implying a return to early February levels this spring.

(WB) – Wachovia – Shares in the financial services giant – one of a number said to be involved in the Ambac bailout plan - are down 1.2% to $33.89 this morning. This current share price representing 10 times the company’s earnings, the next round of which are due on April 16. Shares in Wachovia have traded as high as $55.65 over the past 52 weeks, an erosion that shows in its 75.9% historic reading. Interestingly, while this morning’s volume appeared to coincide with that April earnings-correlated contract, the position involved about 25,000 lots in a short strangle position. In this strategy, the trader would pay a $4.05 premium in the expectation of Wachovia shares remaining within the range delineated by the two strike prices in the strangle. This is a strategy often deployed when volatility is high and the trader expects it to level off sharply heading into expiration.

(GTXI) – Shares of drugmaker GTx bounded 40% higher this morning to $18.07 after the company reported that an experimental drug in its pipeline met treatment objectives in late-stage clinical trials involving patients with advanced prostate cancer. The drug, toremifene citrate, is used to treat hormonal side effects of a common prostate cancer therapy. While total option volume surged to more than 12 times the normal level, and calls are out-moving puts by 7 to 1, it appears that much of this traffic is involved in front-month call selling at the 17.50 and 20 strikes, implying a sharp pullback in GTx shares once the frenzy of the clinical trial announcement abates. Further evidence of contrarian positioning was seen in the April contract, where it looks like traders went short call spreads between strikes 15 and 22.50. In this case, the trader would have sold the 15 calls for $3.70 and bought the 22.50 calls for $1.30, initiating the trade with a $2.40 credit that yields a break-even at $17.40. Ideally, the trader is hoping that both options expire worthless.

(QCOM) –Shares in microchip maker Qualcomm are trading 1.1% higher at $43.98 after the company joined its longtime legal adversary, mobile phone giant Nokia in agreeing to turn down the heat on some ongoing patent-infringement claims while awaiting the resolution of contract case in Delaware. The most striking play we observed on back of this development was collar activity in the July contract, involving 20,000 lots at each strike. The trader in this case would be playing against an existing long position in Qualcomm stock, buying the July 32.50 put for 74 cents and selling the 50 calls for $1.64. In order to break even in this case, the trader needs to see Qualcomm stock trading a $43.10 by expiration.

(NTAP) –Shares in network storage maker Network Appliance advanced 3.4% this morning to $22.87 as even in the first 2 hours of the market, calls traded at their highest level since November. In addition to heavy front-month traffic in March calls strikes of 22.50, 25 and 27.50, we observed selling pressure on March 25 puts at $2.50, and fresh long positions in April 22.50 at $1.80 apiece. Nearly 30% of today’s volume appears centered at this strike, which conveys the right to buy Network Appliance shares for $22.50 by April’s expiration. We can as yet see no news catalyst for the development, which has sent overall option volume to 4 times the normal level.

(DNA) – The FDA’s much-fraught approval on Friday of Genentech’s Avastin for the treatment of breast cancer sent shares hurtling 9% higher to $78.23, with options volume more than tripling on back of the announcement. Option traders appear to be taking profit in March 80 calls, which have more than doubled in value from Friday’s 45-cent premium to $1.10 today. Doubling in premiums was also observed today at the 70 call strike, which is where much of Friday’s volume was centered. Traders bought and sold those calls at $4.10 on Friday, and evidence that the buyers were on the right side of the trade is seen in today’s $8.40 price-tag on the position. Some optimists even bought into calls at the June 90 strike, implying a 4% break above the 52-week high heading into June.

(TTWO) – Take Two Interactive – This morning’s unsolicited, $26-per-share takeover bid by Electronic Arts sent shares almost 52% higher to $26.37, blasting past its previous 52-week high, while option traders put 1 of every 5 of its contracts in play, amounting to 4 times the normal level of volume observed in this ticker. This played out in heavy call buying in the March contract at strikes of 20 and higher. With speculation percolating as to how high the haggling may go in Take Two, we observed fresh long positions in the June contract at the 27.50 strike for $1.40. This would suggest that some option traders believe that the opportunity to buy Take Two at an 11% premium to EA’s offering price in the month of June is a bargain.