Monday's Options Report: XLF, WM, YHOO, XRX, ESLR, MLM

Rebecca Engmann Darst contributed to this report

Option activity shows longer-term confidence in XLF…and doth Yahoo
protest too much?

Financial Select (XLF) – Bank and brokerage stocks had plenty to beat the drum about this morning, following news that Washington Mutual (WM) could be on the receiving end of a $5 billion investment by a private equity firm. Further cementing the hale and hearty mood was a report that bond market yields are at last reflecting confidence that interest rates are bottoming - closing a so-called "credibility gap" with the assurances of Fed Chairman Ben Bernanke - and that a return to stable growth is indeed within view. Shares in the Financial Select Sector SPDR rose 2.2% to $26.94, with nearly 3 times as many calls trading as puts among the 143,000-plus options in play today. While some traders sought to take profit on April 27 calls, which rose 50% in value overnight, the desire to secure exposure to summertime upside was unmistakable. Of note here was keen buying interest in June calls at the 31 strike for 42 cents apiece, a strike implying a return to December levels by June. We also observed heavy buying in September 33 calls for 50 cents apiece, with the $6.50 upside here implying a return to price levels not seen in the XLF since Halloween 2007.

Washington Mutual (WM) – While the tone to XLF option trading today has so far shown a real willingness among traders to extend a confident market view into a mid-term time frame, we were struck by a certain degree of second-guessing in options of the country's largest savings and loan, Washington Mutual. After all, it was WaMu whose 35% gain to $13.74 today on the promise of a $5 billion private equity investment got the ball rolling on financial stocks today. With some 218,000 options in play over the noon hour, it's one of the most active tickers on our platform in early market action. Somewhat surprisingly, puts are out-moving calls by a factor of 1.5, with heavy volume in April puts at strikes of 11 and below. Puts at the May 10 strike were freshly bought today on a total volume of more than 31,600 lots, despite the fact that the delta reading on this strike reflects only about a 15% chance of profitability.

Yahoo (YHOO) – We're sure we're not the only ones who let slip an audible expletive upon hearing Friday's after-the-bell news that Microsoft was considering revising its $30-per-share bid for reluctant takeover target Yahoo to reflect deteriorating market conditions. While we braced for a slide in Yahoo shares this morning due to the company's defiance, the downside thus far has been limited to a 1.5% decline to $27.94 – still well below the level of the bid on the table as the market takes Yahoo to task for its contrariness. Implied volatility in Yahoo shares stands at 1.5 times the normal level – this is a very pronounced elevation, indicating about 150% more price risk to Yahoo shares than they have shown historically. This may explain the level of selling interest we've observed on both the put and call sides of the 27.50 mark – some traders may be willing to pocket the $2.00 premium in the belief that implied volatility will come down sharply once Yahoo's fate is resolved. The fact that no other buyers have stepped forward has surely helped to limit the number of possible plot twists in that regard. April calls at the 30 strike have attracted a large number of buyers, and the fact that the implied volatility reading on the 30 strike at 50.8% is higher than that of the 27.50 strike could suggest confidence that a final settling price will come out closer to Microsoft's original offer than not.

Xerox (XRX) – Option activity in printer maker Xerox picked up to 15 times the normal level against a negligible .66% decline in its share price to $15.00. Puts - which traders buy in a bid to seek protection from an anticipated decline in the underlying share price or to speculate on the same - are trading on their heaviest volume in at least 52 weeks. Implied volatility, which measures the perceived future risk of a stock's volatility, rose more than 12% this morning, with the reading now reflecting 21% greater possible fluctuation to its share price over the next month than has already been historically documented. Traders appear to be buying these puts in the April contract at strikes 15 and 16, with the lower strike attracting buyers into the May contract. Today's total active volume in Xerox shares adds up to more than a fifth of its total open interest. Of this total open interest, investors hold nearly twice as many calls as puts, a proportion that has remained relatively static over the past year – making today's glut of long positioning particularly noteworthy. Xerox is due to report earnings on April 18, coinciding with the expiration of the April options contract.

Evergreen Solar (ESLR) – Solar-cell names commanded market interest for a second consecutive session today after Evergreen Solar shares rose 6.2% to $11.36 on news that it plans to double production capacity at its Harvard, Massachusetts plant. The news was widely perceived as a vaunted feather in the political cap of Governor Deval Patrick, who has been keen to boost Massachusetts' profile at the vanguard of alternative energy. Option volume more than quintupled on the news, with calls out-moving puts by a factor of 6 to 1. Implied volatility has come in at a substantial elevation above the historic reading for the past month, now at nearly 90% showing about a third more price risk to Evergreen shares over the next month than they have already documented. While April calls at the 12.50 and 15 strikes have shown brisk activity among buyers and sellers, the bias in the May contract is clearly skewed to the long side at the 12.50 strike. Evergreen shares have traded as high as $18.85 over the past 52 weeks.

Martin Marietta (MLM) – Shares in Martin Marietta Aggregates, the nation's largest producer of construction aggregates like gravel, sand, asphalt and concrete – rose 2.7% to $111.09 today on no apparent news catalyst. Late last week the company was at the losing end of an Indiana State Supreme Court ruling in favor of city officials in the town of Carmel to regulate Martin Marietta's mining activities. The company's shares have already slid some 17% so far this year, but it would appear that traders today may be seeking to position in advance of upside for the company via call spread activity in the January '09 contract. Consider that a buyer of Martin Marietta's at-the-money January 110 call strike must part with $17.30 – 15% of today's share price owing to the enhanced time value – just to lock in the right to buy the company's shares at current levels by January. By selling a like number of out-of-the-money calls at the January 140 strike, the trader could deduct $7.00 from the initial cost of the trade, thus limiting the amount of necessary share price appreciation in order to profit from the trade. The trader in this case is still looking for $10.30 more upside by January just to break even - a bold bet given recent press at Dow component Caterpillar, the construction equipment maker, which is grappling with low domestic demand for its machines and may have to raises price to defray higher commodity costs. The volume involved in these strikes today was sufficient to send total option in Martin Marietta to 17 times the normal level.

Comments

[rockman1:]

Martin Marrietta Is by no means the largest producer of aggregates in the U.S.

2008 Apr 07 08:26 PM