Thursday's Options Report: CLX, HOLX, MER, YHOO, HD, HES, BARE, DNR

Clorox (CLX) – Yesterday’s superlative move higher in implied volatility seemed to portend a larger-than-average move for Clorox on back of its earnings. The company has struggled in recent quarters to contain cost pressures emanating from higher commodity prices, and while its quarterly net income dropped 22%, the loss was less acute than analysts expected, mitigated by healthy international exposure and encouraging sales of its environmentally friendly home cleaning product line and the Burt’s Bees skin care franchise.

This morning’s 8.5% rise for shares to $57.52 marked just the fourth time in the past 16 earnings cycles that Clorox moved more than 5%. With 3 times as many calls trading as puts today, option traders are sidling up to the trend in share price and buying exposure to more upside – and while implied volatility has come off some 20% with the numbers now out, it’s worth noting that at 24%, option traders are still looking for 53% more fluctuation from the likes of Clorox than they have shown historically.

Hologic (HOLX) – Rare it is to see a company’s options implied volatility rise subsequent to an earnings announcement – but so it happened with Hologic, the maker of x-ray equipment, specialized in gynecological imaging solutions including mammography and osteoporosis screening. Earlier today its quarterly earnings, with 29 cents earnings per share compared to 36 cents per share street estimate, shocking shares 21% lower to a new 52-week low of $23.00. Implied volatility spiked 11% to 52.4%, suggesting that the full brunt of the downside may not have been fully digested in Hologic’s share price. The 11-fold increase in option trading we observed today indicated fresh traffic in May puts at strikes of 22.50 and 25 – the latter strike increasing in value by some 975%, thus attracting sellers of defensive premium as well as buyers of it on a volume double the prior open interest.

Merrill Lynch (MER) – A 2.6% gain to $51.14 for Merrill Lynch shares on no apparent news catalyst aroused a decidedly contrarian reaction in some quarters today. This was evidenced by fresh buying in June 50 puts, which traded for $3.65 today on volume more than double the open interest, in a sign of distrust that the brokerage can sustain this week’s move above $50 for the first time since February.

Yahoo (YHOO) –Shares in the kicking, screaming (yet oddly silent) online giant rose a meager .91% to $27.65 this morning on reports that Microsoft (MSFT) might consider raising its cash bid for Yahoo to $32 or $33 per share to pacify holdout shareholders. A case of too much is never enough? Option traders have put more than 121,000 contracts in play in the first 90 minutes of the market, with 2-way traffic on like volumes at the May 30 and 32.50 call strikes suggesting that spreads may be occurring as traders put a firm ceiling on much more upside for Yahoo. A look at the implied volatility readings on the individual contracts shows the May 30 call ticking in a 65% implied volatility, against barely 62% for the 32.50 strike – a good hint that option traders think this deal will go through closer to Microsoft’s original bid price than this morning’s cash-sweetened rumor. Implied volatility on all Yahoo options shows 84% more price risk to Yahoo shares over the coming month.

Home Depot (HD) –We wondered early in this session how the market would cotton to news out of Home Depot – broadly regarded as a kind of proxy for the state of the U.S. economy – that it would scrap plans to open 50 news U.S. retail locations already in the works and close another 15 underperformers in a bid to save cash. Would it be a taken as a sign of shrewd hard-times management or a warning that the worst is yet to come? Investors voted for the former, sending shares 4.6% higher to $30.14 – breaking above the $30 level for the first time since February 1. With nearly 24,000 options trading in the first 2 hours of the market, Home Depot is one of the most active tickers on our platform, and the fact that calls are out-trading puts by a factor of 1.7 attests to a level of confidence among option traders in Home Depot’s decision to strap on the proverbial tool belt – and tighten it. Calls at the May 30 strike rose nearly 200% in value this morning and attracted buyers on a total volume of nearly 6,500 lots. The same call strike attracted volume in the June and August contracts.

Hess Corp. (HES) – One day after Hess, the country’s fifth-largest oil company, presented the market with blowout earnings on back of sky-high demand, some option traders demurred against baldly directional positioning following this morning’s 4% pullback to $101.70 by using what may be a 13,000-lot collar in the January ’09 contract at the 90 put and 140 call strikes. Both strikes traded to the middle of the market, but a traditional collar strategy would be used to protect a position in the underlying stock (a guardedly bullish strategy) by buying a protective put at the lower strike for $8.40 and selling the higher-strike call for $5.09, keeping trade costs limited at $3.31. The total volume involved in this position sent overall option volume to 3.6 times the normal level.

Bare Escentuals (BARE) –Shares in Bare Escentuals , the West Coast-based producer of mineral-based cosmetics, are trading flat-to-higher at $22.82 as its implied volatility shows a staggering 50% elevation above the historic reading, hours ahead of its earnings report. Traders may have shown some early goodwill toward this stock on back of a New York Times report suggesting that women shoppers have deferred wardrobe spending in favor of cosmetics – causing lipsticks and smaller-ticket makeup items to serve as an inferior good in the present cash-strapped economy. We wondered if this might cause some option traders to think twice after yesterday’s massive build in May 20 puts, where open interest swelled from barely 1,100 to more than 18,600 in the space of a day. Indeed that’s where most of today’s 8.6-fold increase in option volume is localized, trading to buyers and sellers as the market considers whether to seek additional protection from a drop below $20. Bare Escentuals has dipped below $20 on two occasions in the past year - in November 2007 and then again in January 2008 – but sustaining the move would put the company at multi-year lows.

Denbury Resources (DNR) - This morning’s earnings report by Denbury Resources, the Gulf Coast oil and gas explorer which owns the largest CO2 reserves for tertiary oil recovery east of the mighty Mississippi, sent shares down nearly 8% to $28.15 this morning. While the company reported a quadrupling in profits for the quarter, the 29-cents per-share measure fell short of Wall Street’s average estimate of 38 cents, eliciting the biggest one-day drop for Denbury since January. Option traders sent volume to nearly 6 times the normal level – the equivalent of nearly a third of its open interest - and showed a remarkable willingness to throw in votes of confidence in the company’s ability to recoup. Heavy call buying was observed in the June 27.50 strike at $2.60 per contract, and again in the September contract where the 30 calls were bought for $2.65. Denbury Resources would have to recover to within 4% of its 52-week high just to break even on this position.

Rebecca Engmann Darst contributed to this report.