Monday's Options Report: NCC, MSFT, COP, IACI, EWH, ZRAN, MFN, HLIT, TXN

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Includes: COP, EWH, HLIT, IAC, MSFT, NCC, PAAS, TXN, ZRAN
by: Interactive Brokers

Smarting from Google, traders boost bullish bets on Microsoft, and see little risk to Texas Instruments calls as pre-earnings vol looks soft.

National City (NCC) – Today’s move by the Ohio-based regional bank and subprime lender to slash its dividend and carve off a $7 billion stake in the company to a consortium of investors after a punishing $171 million Q1 loss sent implied volatility (a measure of the potential unknowns that could incite price movement in a stock to the upside or downside) down by some 41%. But down too went National City’s share price, with the stock losing more than a quarter of its value to read $6.13 (a new 52-week low) over the noon hour. Option traders have already put the equivalent of more than a third of National City’s open interest in play, with heavy call-selling at the May 6 strike at 55 cents. Options at the 7 and 8 strikes have also been shed readily today, despite these positions losing 80-90% of their value today. Traffic at the May 6 strike has been largely 2-way, with the price of the position at 40 cents.

Microsoft (NASDAQ:MSFT) – Shares in the software monolith posted a 1.2% rise this morning to remain respectably above the $30 line at $30.38 today. Implied volatility is already heating up ahead of its bellwether earnings report on Thursday, at 36% it’s elevated by 30% above the historic reading. The fact that more than twice as many calls are trading as puts provides a casual indication of the mood of optimism among investors ahead of its earnings – so too does the level of buying observed in May calls at strikes of 30 and up. Volume exceeding open interest was observed in the 33 and 34 strikes, with the 19-cent premium on that uppermost strike reflecting just a 12% likelihood that Microsoft can breach the $34 line on back of its earnings. Slim odds to some, but perhaps a bargain bonanza to those smarting from the Google experience on Friday.

ConocoPhillips (NYSE:COP) – With oil prices venturing yet higher into priceland’s terra incognita today, it’s no surprise to see ConocoPhilips, the country’s third-largest crude producer, rate among the most active option families on our platform. While the company is due to release earnings on Thursday, there’s been little dent in its implied volatility reading, and even its share price is showing minimal reactivity with a .08% gain to $83.96. What caught our attention was a glut of activity in the January ’09 calls which looks to us like a call spread between strikes 100 and 110. If this is indeed the case, the trader in question would have bought calls at the 100 strike for $3.05, funded in part by the sale of 110 calls for $1.25. The resulting transaction would open with a debit of $1.80 that still calls for ConocoPhillips shares to breach the $101.80 mark by January of next year. A look at its price action over the past decade shows the July 2007 high of $90.17 still well intact…some traders may be thinking in other terms.

IAC/Interactive Corp. (IACI) – Implied volatility is heating up in options of IAC, the owner/operator of a number of online brands including Ask.com, Match.com, Lending Tree and Ticketmaster. This measure of anticipated share price movement, a key component in options pricing, rose by more than 14% this morning and now shows option traders pricing in some 48% more price risk to IAC shares over the coming month than they have shown historically. The catalyst here would seem to be next week’s earnings announcement, with options already trading at 7 and a half times the normal level as shares post a 2% decline to $20.86. Front-month, at-the-money put buying appears to be the preferred strategy for traders today, with the May 20 strike being bought heavily at 80 cents per contract.

iShares MSCI Hong Kong Index (EWH)Shares in this closed-end fund, indexed to the performance of the Hong Kong stock exchange, are trading flat today at $18.73. The fact that the 29% implied volatility reading gaps well below the 34% reading would seem ostensibly to indicate a mood of uneventfulness among option traders. So it was particularly noteworthy to notice an 11-fold increase in option trading that materialized at the June 23 line. We can deduce that the out-of-the-money call side of this equation was bought for 5 cents, while the in-the-money puts traded to the middle of the market for $4.25. If this was in fact a long straddle, the trader would be positioning shrewdly for a volatile break below current levels, or to the upside past $27.30.

Zoran Corporation (NASDAQ:ZRAN) – Shares in Zoran, the maker of chips for DVD/DVR and digital camera technologies, lost more than 4% of their value to read $12.36 over the noon hour. Today’s decline puts Zoran within a dollar of its 52-week low as implied volatility indicates 20% more turbulence to come ahead of its earnings announcement today. The 12.50 front-month straddle shows current prices reflecting a possible $1.60 price move (12% of the current share price), and it’s on the call side of this line that most option traders are staking their bets today, with heavy buying in the front month at 60 cents apiece in an interesting contrarian play. Two-way traffic at the same strike in the June and September calls helped send call volume to nearly 5 times the normal level, overall volume to more than 15 times the normal level, and the equivalent of nearly 70% of Zoran’s open interest in play.

Texas Instruments (NYSE:TXN) – Shares in Texas Instruments, the tech giant whose chips are said to inhabit one-half of the world’s old-school cellular phones, are trading nearly 3% higher at $30.45 just hours before its earnings report. TI, which already issued a profit warning one month ago, took another hit last Thursday on soft numbers from its key client Nokia (NYSE:NOK). The sense of anticlimax already baked into its shares is apparent by the relative softness of its implied volatility, which at 34% is roughly neck and neck with the historic reading. Positive analyst attention in the run-up to its numbers has sent call buyers into the fray, with May 30 calls trading both ways for $1.28, but buyers dominating the volume in May 32.50 calls. These positions, whose price indicates a less than 1-in-4 chance at a $2.50 upside move on back of the numbers, have nonetheless attracted buyers on a magnitude of twice the open interest.

Harmonic Inc. (HLIT) – Implied volatility in Harmonic, the maker of IP-based video delivery solutions for cable, satellite and wireless operators, rose more than 16% today as shares declined 3.4% to $8.14, within a dollar of the 52-week low. The obvious unease in the market appears correlated to Harmonic’s earnings announcement, due out Wednesday, and while Harmonic has pulled out positive earnings surprises for the past two consecutive quarters, the anticipation here looks anything but upbeat. An increase in option trading volume to more than 33 times the normal level showed heavy long positions in front-month puts, on volume exceeding the total number of open option positions in Harmonic Inc. Traders today have piled into May puts at the 10 strike for $2.00 and the 7.50 puts for 35 cents apiece. Prior to today, Harmonic’s modest 5,000-lot open interest was composed overwhelming of bullish call positions.

Minefinders Corp. (MFN) – Implied volatility in Minefinders, the mining and exploration company perhaps best known for its involvement with the Dolores gold and silver mine in Mexico, rose more than 20% in afternoon trading. Shares were down 1.3% to $11.79 this afternoon, and with the option market currently bracing for 67% more risk to Minefinders shares over the next month than they have shown historically, some traders took a more forward-looking view of the company’s shot at a new 52-week high. Calls at the November 12.50 strike are trading at more than twice the open interest today. The current $2.90 price tag on this position would require a break above $15.40, some 9% above the incumbent 52-week high.

Rebecca Engmann Darst contributed to this report.