Tuesday's Options Report: GOOG, TSRA, XLF, HD, HOLX, CRDN, USU, AIG

Rebecca Engmann Darst co-authored this article.

(GOOG) – Riddled indeed would a good many option market observers be if you’d told them just weeks ago that by late February, shares in gargantuan search engine Google would be down 34% for the year, while its laggardly rival Yahoo! would be 20% up. But that it is indeed the case today, as Google shares have taken a 7% swan dive to $451.95, brushing levels not seen in nearly a year. The move comes after Bloomberg News reported that UBS had cut its share price and profit estimates for the company owing to a 12% drop in ad views. With more than 95,000 options trading in the first 90 minutes of the market, early volume shows heavy put buying in the March contract at strikes 440, 460 and 470, with calls at strikes 470, 480, 490 and 500 trading with comparably frequency to buyers and sellers. Implied volatility snaked nearly 16% higher on today’s share price decline and now stands at more than 43%.

(USU) - Option volume in Usec Inc., which supplies enriched uranium fuel for nuclear power plants, nearly quintupled today following a 26.5% decline in its share price to $6.79 –a new 52-week low. Yesterday the company divulged that plans to build a second uranium enrichment facility could run some 50% over budget due to labor and commodity price pressure. While Usec has gained positive focus given its catbird-seat position in the US nuclear power space – a sector that is widely believed to be on the verge of an expansion in coming years – there’s no escaping its acute vulnerability to commodity costs, pressure from which has already eroded its value down from $25.65 to below $7 in the space of a year. Following news that its latest expansionary endeavor is already in the budgetary red, option traders are taking an immediate defensive posture, sending implied volatility 15% higher to 75.4%. Traders appeared keen to sell calls at the March and April 7.50 strikes, while puts at strikes as low as 5.00 in the same months were mostly bought.

(TSRA) –Shares in Tessera Technologies, the maker of so-called “chip-scale packaging” for semiconductors, slid more than 25% in early trading to $27.30 on no specific news catalyst. Days ago it was announced that Silicon Valley-based Tessera would ask the International Trade Commission to consider claims that Qualcomm, Motorola, ATI Technologies and other companies infringed upon its patented chip-packaging technology. The share price drop sent implied volatility in Tessera options up more than 54% to 85.3% - one and half times the historic reading – while options volume soared to 10 times the normal level. This appears largely concentrated in fresh buying in March puts at strikes of 25 and 30. Heading into today, open interest in Tessera had favored the bullish calls by a factor of 1.5.

(XLF) – Shares in the financial sector ETF are flat-to-lower at $27.18 today as the market shrugs off yesterday’s assurances out of the municipal bond space. While the 69,000-plus options trading in the first 90 minutes of the market show 1.5 puts trading for every call, we saw what appears to be bear market collar activity in the June contract. In this case it looks like the trader sold June 23 puts for 68 cents to fund the purchase of calls at the 31 strike for 66 cents, opening the transaction with a two-penny credit in a strategy used to protect a short position in the underlying stock.

(HD) –Shares in DIY-giant Home Depot edged .59% higher to $28.96 this morning despite reporting a decline in Q4 profits and guidance shortfall. Highlights from the 36,000-plus options trading in the first 90 minutes of the market include heavy selling in March 27.50 puts – this despite the fact that the value of the position came off some 35% overnight. Some of this may be involved in straddle selling with the 27.50 call, a strategy that would net the seller $2.15 in premium in anticipation of a comedown in volatility in the approaching weeks. Calls at the March 30 level, meanwhile, were bought for 40 cents apiece.

(HOLX) –Hologic Inc. – Shares in the maker of x-ray diagnostic imaging systems for breast cancer and osteoporosis gained 3% in early trading to $61.74. Option volume quickly accelerated to nearly 3 times the normal level, with 4 times as many calls trading as puts. This volume largely involved buying at the March 65, 70 and 75 strikes, implying a break past the standing 52-week high of $72.88 (set in the early days of January ’08) in the coming weeks. A look at the division of puts and calls in open interest corroborates that bullish view, with twice as many open call positions as puts.

(CRDN) – Ceradyne – Shares in Ceradyne, whose advanced technical ceramics are used in lightweight body armor by the US military, dropped 25% in early trading to $35.31, plummeting below the standing 52-week low after Ceradyne’s Q4 earnings fell short of street estimates. The company also pared its 2008 sales and earnings guidance due to the delay of a key government contract. Option volume quickly accelerated to more than twice the normal level, with a more than 200% increase in put volume. Most of this volume is concentrated in March 35 puts, where a brisk two-way market exists owing to the 1900% surge in premium price. Option traders still hold more than twice as many call positions as puts in Ceradyne.

(AIG) – Option traders are gearing up for Thursday earnings from American International Group. Just one day after one of its former executives was convicted on fraud charges stemming from a 2000 conspiracy to mislead AIG investors of the company’s financial health, option traders are concentrating their attention at the March 50 line. As shares trade flat-to-lower at $50.33, the price of the at-the-money straddle at $4.60 implies a 9% up-or-down price move on back of the earnings release, and it’s here that traders are staking volatility-bullish plays today. Heavy volume in May calls at strikes of 50, 55 and 70 – this latter strike selling mostly to the bid – has helped to push call volume to nearly twice that of puts.

Comments

[CevicheFundPartners LP]

TSRA toasted today - 35% - these guys sue people and that's their business model - not our type of stock. I pitched this as a short on my internship @ a top buy side shop last summer and every PM there was in love with the story. Quick haircut in < 6 months.