Wednesday's Options Report: PHM, TOL, NOC, FNM, FRE, XLB, ADSK, JEF, NSM

Rebecca Engmann Darst co-authored this article.

(PHM) – It used to be that any grain of sober truth out of the homebuilders occasioned a virtual landslide in share prices and a dive into put protection by option traders. Yet some of the action we’re seeing in leading homebuilders seems to contradict the song-and-dance that has prevailed lo these many months. Yesterday, Pulte Homes, the country’s third-biggest homebuilder, said in an SEC filing that it expects its pretax loss positions to persist through 2008. But a glass-half-full perspective was expressed the same day on CNBC, where billionaire real-estate investor Sam Zell projected the beginning for a recovery in housing this spring. Shares in Pulte Homes had gained 3.4% to $16.00 over the noon hour, with the jump in share price accompanied by a surge in option volume to 4 and a half times the normal level. Heavy buying interest in March 15 calls at around $1.60 is a good indication that option traders aren’t expecting prices to scamper to the downside over the next few weeks. Further out, the action looks positively, guardedly bullish. For evidence of that, consider the action in Pulte Homes in the October contract, where it looks as though a trader felt comfortable enough to short the October 7.50 puts for 80 cents on a volume of 5,000 lots, while putting on a collar at the 15 put and 25 call in order to protect anticipated gains in a long position in Pulte stock. The long put position at $15 is put on to shield gains in the stock over the coming months, while the accompanying sale of the covered call means the trader is willing to part with Pulte at the price of the call strike.

(TOL) – An identical strategy was observed in options of Toll Brothers, the country’s largest luxury home builder, whose shares climbed 4% to $24.06. Earlier today the company reported a $96 million Q1 loss, but drew positive feedback from analysts on its strong balance sheet and free cash flow. In addition to heavy traffic at the March 25 calls - which attracted buyers and sellers as the prices of the position gained 50% in value on this 4^th consecutive day of gains for the stock – it appears that the collar strategy was deployed in the September contract. Here, the trader bought the protective 22.50 put for $3.20 in conjunction with the sale of a covered call at the 35 strike for 65 cents. This upper strike – the price at which the Toll Brothers stockholder would be willing to divest the shares – is fuly 12% above the standing 52-week high in Toll Brothers. It is worth noting in the case of both Toll Brothers and Pulte Homes that the prevailing attitude remains largely defensive, with 1.4 times as many open positions as calls in both tickers.

(NOC) – Pressure has been building for a break above the standing 52-week high in the country’s third-largest defense company, Northrup Grumman. News is due any day now out of the Pentagon as to a decision on a $40 billion contract to supply next-generation aerial refueling tankers for the U.S. Air Force, and the choice is down to Boeing and Northrup Grumman. Last week our market scanners seized upon heavy buying in April 85 calls in the company, but today, its shares stand 2.7% higher at $81.66 and once again, we’re seeing outsized movement in its options with a quadrupling in volume compared to normal levels. Implied volatility at 21.8% actually comes in below the historic 26.5% reading – an indication that current premiums are factoring in less price risk to Northrup Grumman shares than they have shown historically. A trader may have taken advantage of this lower-volatility environment for premiums by going long the March 80 straddle for about $4.00. This position generates profit for the trader with a break to the downside below $76 or up above $84 – within spitting distance of the $84.84 52-week high. The fact that calls one strike higher at the 85 mark are also being bought heavily on volume twice the open interest suggests that this risk is to the upside.

(FNM) –Shares in Fannie Mae staged a dramatic reversal after trading sharply lower in the premarket on back of its $3.6 billion reported loss for Q4. The reverse came around 10:40 after news emerged of a statement by the Office of Federal Housing Enterprise Oversight that Fannie Mae and its fellow home loan provider Freddie Mac would see their portfolio limits removed on Friday. With shares now 8.6% higher at $29.32, nearly a quarter of the active volume in Fannie Mae options appears concentrated in March 30 calls, which are trading to buyers and sellers. The $1.85 premium on this position is 77% higher than was the case yesterday as traders bid up the price on back of Fannie Mae’s chameleonic share price action.

(FRE) - Shares in Freddie Mac followed Fannie higher after the OFHEO report, and with shares up 6% to $26.71 we’re observing 80,000-plus options change hands in early trading. March 20 and 22.50 puts are still finding buyers as premiums have come off about 40%. Calls at the April 25 mark have also been bought heavily at around $3.30, a position which first becomes profitable for the buyer with a break past $28.30.

(XLB) – Materials Select Sector SPDR – Intriguing contrarian action in the commodity-rich ETF, whose components include Freeport-McMoRan Copper, Dow Chemical, Newmont Mining and Monsanto. Shares are up .71% today – in step with gains throughout the commodity complex on back of the weak dollar. What’s more interesting is that the upside move has elicited a rush among traders to buy March puts at strikes of 40 and 41. While the current price of the underlying share - $42.80 – is about a dollar off its 52-week high, today’s action shows some traders bracing for a retreat in its value over the coming weeks and want to protect gains on back of this most recent bout of dollar softness. The fact that 4 times as many put positions as calls are held in this ETF suggests that puts are a popular hedge among traders with long positions elsewhere in the sector.

(ADSK) – Autodesk – An earnings miss due to slowing order flow and more overhead was costly for the maker of AutoCAD drafting software. Shares dropped 14% to $33.60 in early trading, while option volume shows a 5-fold increase from normal levels. It appears that option traders called this release correctly, accumulating positions yesterday in March 37.50 puts for $1.10, which explains the wave of profit taking we’re seeing today as the position more than tripled in value to $1.10.

(JEF) –Jefferies Group Inc. – Early morning option activity in this full-service investment bank showed an early 23% spike in implied volatility to 56% (that level has since come off slightly), while the heaviest volume in call buying in 10 months sent overall option volume to almost 10 times the normal level. Shares, meanwhile, are 2% higher at $19.00. We’re hearing incipient reports of takeover chatter, which could explain the interest in March 20 and 22.50 calls, which are being bought heavily at prices of 55 cents and 60 cents respectively. A break of $20 would restore Jefferies to early-February levels, breached to the downside after a respectable late-January recovery. Jefferies shares are down nearly 18% for the year to date.

(NSM) – National Semiconductor – One week ahead of earnings, shares of National Semiconductor are trading 1.6% higher at $17.85 and its options are trading at 3 times the normal level. Given today’s upside share price movement we were particularly piqued to observe heavy buying interest in March 17.50 puts for 80 cents apiece. The volume suggests that NSM shares may plumb the 52-week low of $16.74 in connection with earnings. Shares in NSM are down 22.7% for the year to date, staging a more or less uninterrupted decline that started on December 7. Option traders, however, hold twice as many call positions as puts.

Comments

[Fat Arby]

thanks
helpful to know

how's the re insurance group doing?