Friday's Options Report: C, WM, CCJ, LNG, PDLI, LTD

Rebecca Engmann Darst contributed to this report

C – Citigroup Inc. While the focus is on General Electric today and although that fact hasn’t deflected pressure away from the financial sector, we find Citigroup’s share price rally curious. Options traders are busy also with some 66,000 contracts in play, and despite the 1.5% share price rise to $24.06, it’s largely puts that are on the move today. In the April contract traders appear to have sold 22.5 and 25.0 strike puts indicating confidence in a continued recovery in the share price, while the 20.0 puts were purchased by way of risk control in the event that the trade sours. The same pattern was evident in the May contract where 22.5 puts were sold as a credit against the purchase of purchases in the lower 20.0 strike price. Activity in the May calls focused on buying the 22.5/ 25.0 call spread, which indicates traders’ reluctance to get overly bullish on the prospects for Citi.

WM – Washington Mutual Inc. A 2.2% decline in its shares price confirmed the bearish tone set by the volume of put options in play Friday, which outpaced call options by a factor of three. With its share price at $11.20, investors bought bearish puts in the April puts with strikes ranging from 9.0 through 12.5. Negative commentary from Goldman Sachs (GS), where an analyst tripled a loss forecast for the savings and loan company, hurt sentiment. However, it could be that investors are trying to look through today’s pessimism and are selling puts in the April contract at the 11.0 strike forcing the share price to pick-up off its lows. It appears that both the 9.0 and 10.0 strikes in the May series are also trading to the bid confirming that there’s life beyond forthcoming earnings.

CCJ – Cameco Corp. Options on this miner were once again trading at stand-out volume on our screens today, with 15,000 contracts trading largely on the call side. Open interest currently stands at just 162,000 yielding almost one-in-ten of the open interest in play. Interest was apparent to sell nearby April calls above the current share price of $37.35 with sellers taking in premiums of 70 cents and 25 cents on what they clearly see as a low risk probability that shares will rise at least 7% before expiration next week. With implied volatility on the 40 calls at 68% and at a lofty 91% on the 45 strike, option sellers are taking full advantage of volatile times.

LNG – Cheniere Energy is an above-average volume mover today in some quirky trading. Its shares are 9.5% at $16.80, while an investor appears to have sold 7,000 puts in the September contract at a premium of 50 cents. This might make sense if an investor is trying to take advantage of today’s share price decline to boost premium intake from the sale. However, in the January series a relatively sizable credit put spread was placed involving the sale of the 20 strike puts at 5.0 against the purchase of 10 puts at 1.0. The trades weren’t precisely matched with more 20 puts trading over the lower strike. The investor takes a 4.0 initial credit and is hoping for a share price recovery using a backstop of the lower strike puts in the event of weakness in the stock.

PDLI – PDL Biopharma Inc. The company appears to have made some cosmetic cash changes to its structure by way of a special cash dividend. The apparent aim is to make the structure more appealing to a potential buyer, which is why its shares are trading 15.5% higher at $13.50 today. The company has two principal strengths which might appeal to a buyer in the life-threatening disease field in which it is specialist. Both its research operations and royalty revenue streams might solicit interest in the company, which has prodded call buying in the August 15.0 calls at 45 cents and the 20 calls at a lousy nickel. Both trades appear to be a cheap way to play further upside in the company, where options traders are marking implied volatility at 40%, which is low relative to the historic volatility on the underlying share price. Shares have a 52-week high above $28 per share.

LTD – Limited Brands Inc. Retailers have seen shares fall in response to weakening consumer confidence measures. Since November, Limited Brand’s shares have been caught in a range covering $20.97 to $14.41. The low point, incidentally, represents approximately 50% of the company’s market value in July, just to give you a sense of the power of the recent decline. Two noteworthy options trades emerged today in this company. In the April contract the at-the-money 17.5 straddle appears to have been sold for a premium of 85 cents. The seller takes the credit if shares remain where they are today by next Friday’s expiration. That credit erodes towards the lower breakeven price at $16.65 and towards the upper breakeven at $18.35. More noteworthy was a 15,000 lot straddle at the same strike in the May contract. Although the options traded to the middle of the market, we’re guessing that a seller initiated the action in order to take advantage of the fact that earnings are not due until after the options expire, while simultaneously benefiting from 41% implied volatility. The premium of $1.85 implies that a seller would retain credit within a range of $19.35 to $15.65 and although that’s within the recent four-month range, a lot of water has gone under the bridge since then allowing volatility to drift lower.

VIX – CBOE Volatility index. Despite the near 150-point slump in the Dow, options traders don’t seem overly concerned and have pushed the fear gauge only modestly higher to 22.75. This is a far-cry from traders taking the view that the news out of GE is the onset of a new wave of bad economic news. The VIX remains closer to the bottom of the recent range with volume in today’s options market showing a slight bias to the call side.

Comments

[gordon:]

Hedgefund options scammers have a new game, since the SEC is perpetually out to lunch. Witness heavy call buying in TIE, float a buyout rumor, 1 day ahead of Alcoa earnings, which was a guaranteed miss, retail gets sucked in, the "Boyz" UNLOAD their calls, a bagholder's delight.
Witness CCJ, same thing, even though there is NO WAY CHINA BUYS even part of the Canadian -protected mine, Parliament would intervene,have to approve it.hese same options scammers, (scumers?) are already unloading their calls. CNBC Fast Money pimps are in this scam, using public airwaves for personal gain.

2008 Apr 12 01:02 PM