Friday's Options Report: CFC, NMX, CPRT, AIG, CSCO, INTU, SWIM, MNST, JAVA, MSFT

Countrywide Financial (CFC) – Shares in Countrywide Financial, which has been largely quiet since ducking for cover under the protective wing of Bank of America (BAC), were lobbed a merciless Friday afternoon stink bomb on a surprise rating downgrade to “junk” status by Standard & Poor’s. The revision in its credit status followed an April 30 filing by Bank of America stating that no decision had been reached as to the extent to which it would “redeem, assume, or guarantee” any of Country’s estimated $97.2 billion in debt. Along with a hefty surge in the price of credit-default protection, Countrywide’s option implied volatility surged 50% to 75% on the sudden perceived price risk. Three times as many defensive put positions as calls were trading as of Friday afternoon, this on a total volume of 57,663 contracts, with heavy put buying in the May and June contracts at strikes as low as 4 and 5. Puts conveying the right to sell Countrywide shares for $3 apiece by October were traded to equal numbers of buyers and sellers on volume of 9,000 lots – more than 9 times the open interest.

Nymex (NMX) – Meanwhile, options in Nymex Holdings, the energy market on the verge of a buyout by CME Group, registered a more than 8-fold increase in trading volume as shares rose 1.1% to $96.42. Yesterday the company reported a record 27% increase in Q1 profits on strength of high oil prices. While implied volatility at 28.4% rests comfortably below the 32.2% historic reading, today’s volume – which matches up to nearly a fourth of its open interest – is centered at the May 105 line. If bought or sold together, this 9,900 lot position would represent a volatility play wagering on or against fluctuation in the underlying share price. Given that the strike is so far from the money, we wonder if it’s a conversion play tied to an underlying position in the stock.

Copart (CPRT) – Options in Copart, an online auction site that remarkets damaged and recovered stolen cars, are trading on unusual volume today despite a very measured 1.3% move in its share price to $41.23. The 40-fold increase in option trading activity registered by our market scanner occurs as implied volatility indicates traders pricing in more than 25% more price risk to Copart shares over the next month than they have shown historically. Some readers may recall Copart’s recent recovery from a disastrous 10% one-day slump in the month of March on some soft quarterly numbers and a lackluster sales forecast. Despite this, its shares have recouped more than $6 in price, and it looks like today’s option volume portends little downside hazard for the rest of the year. Puts at the January ’90 $40 put strike traded to the middle of the market for $3.50, while calls at the $50 strike were sold for $1.50. Given the wide berth between share prices, we think this looks like a classic collar, with the puts being and the calls being sold for a net debit of $2.00 against an underlying stock position. The sold call in this case represents a covered call of sorts, as it is the price at which the trader would be happily to unhand Copart shares at an enhanced yield.

Cisco (CSCO) – Cisco shares are treading water, up .11% at $26.71 ahead of Tuesday’s earnings. But an early 11.5% jag higher in implied volatility and option volume of more than 278,000 contracts this afternoon suggest rising heat in anticipation of volatile price action. Following yesterday’s surprising numbers out of fellow hardware maker Sun Microsystems, we wondered if it was this that incited an early rush among traders to buy puts at the May 27 strike for 95 cents. June calls were heavily trafficked, however, at strikes 25, 26 and 27. The price of the May $27 straddle currently reflects a $2.66 price move – 9% - on back of the earnings.

American International (AIG) – Option implied volatility in American International Group is showing a marginal elevation ahead of the insurer’s earnings report next Thursday. At 46% it appears that option traders are banking on 15% more price risk to AIG shares over the company month than has already been shown historically – elevated to be sure, but well off the restive highs that have characterized AIG options for much of the spring. Front month options are currently pricing in a $4.11 move (8%) on back of the numbers. Shares are 1.6 % higher today at $48.96 – and despite the imminence of the earnings announcement, it was a 24,400-lot put spread in the August contract that captured our attention. It appears here that a trader bought the August 45 puts at $2.57 per contract together in tandem with the sale of 55 puts at $7.50, creating a $4.93 credit for the transaction. This position, while it’s constructed using puts, is in fact a bullish bet on AIG’s share price prospects for the summer – the trader hopes that the spread between the strike prices will narrow as AIG’s share price rises, making both contracts worthless by the time of expiration, and allowing the trader to pocket that $4.93 credit as the maximum profit on the transaction. The fact that the trader used a credit spread with puts, rather than simply selling the 55 puts outright, speaks to a degree of temperateness about the prospects for its share price.

Intuit (INTU) - Shares in Intuit, the maker of TurboTax and Quicken consumer finance software, rose an un-dramatic .75% to $28.10 today following news that its Q3 earnings numbers will be out on May 20, coinciding with the June option contract rather than the May. In April the company announced a 17% increase in sales of DIY tax prep software ahead of the April 15 IRS filing deadline. The bump higher in option volume that landed Intuit on our “Hot by Option” volume involved the equivalent of 19% of its its open interest in play, much of it fresh in the May 30 calls, which were sold for 10 cents apiece, some perhaps together with puts at the 27.50 strike for 40 cents. If traded together, this could be a play on the disparity between historic and implied volatility. With implied volatility showing a 16% elevation above the 28% reading, some traders may look to sell volatility in the May contract in the expectation that Intuit shares will show little ebb and flow ahead of late-May numbers.

Investools (SWIM) - An earnings miss and subsequent analyst downgrade behind the investing site Thinkorswim elicited a 29% drop in the company’s share price, thudding below the prior 52-week low to read $8.87. Implied volatility soared by 31.5% to 77.7% early in the session, and the option market put 19 times as many contracts in circulation as normal. While the front month action showed a clear inclination to position defensively through puts at the 10 strike, we observed a couple of interesting plays further out in the calendar that suggest a turbulent road ahead for the company. Calls at the January ’10 $5.00 strike were sold, it appears for $6.30 – fully 80% of the current share price – while traders have sought long positions in puts at the January ’09 7.50 strike for $1.40, and the same strike in the calls for $2.20.

Monster Worldwide (MNST) – Yesterday’s reported 43% drop in Q1 profits (a loss attributed to softer sales of help-wanted ads) was mitigated somewhat by less-dire-than-expected decline in payrolls, suggesting that yesterday’s downside may have been overdone. Shares recouped 3.3% of their value to read $26.40, while option volume rose to 5.5 times the normal level, split largely evenly between puts and calls. Heavy traffic at the May 25 call line at $2.40 apiece compares to high volume in June puts at the 22.50 and 25 strikes, the former strike trading in excess of prior open interest. Shares in Monster Worldwide are down nearly 15% for the year to date.

Sun Microsystems (JAVA) – A surprise earnings miss at Sun, the maker of servers, computer workstations and storage, elicited a near-23% drop in its share price to $12.60, a 52-week low. Option implied volatility has remained elevated at 39.5% - some 30% above the historic volatility reading as the market continues to seek equilibrium for its share price. Options are trading at 14 times the normal level, with a not-altogether surprise move among traders to take profit in May 16 puts, given the 482% hike in value for that position. Buyers of puts have concentrated on lower strikes in the May contract, primarily 13 and 16.

Microsoft (MSFT) – Finally, another share couched in anticipation this afternoon is Microsoft, down .75% to $29.17 as the market awaits its next missive in the Yahoo takeover imbroglio. With more than 184,000 options trading, the bias is to calls by a factor of 3 to 1, with two-way traffic active at the May 30 strike. Calls at the June 31 strike were bought heavily earlier today.

Rebecca Engmann Darst contributed to this report.

Comments

[User 187558]

The articles as a whole are interesting and the information is good. My thoughts are enough is said to think about but the question is, what the hell is it saying?

[Hamilton]

He's basically saying theres an investor consesus based on Calls/ Puts/ Straddles. On select stock prices and volatility.

[Chungst]

To User 187558, for options traders (and stock investors alike), the writer is giving "color" as to why these stocks and options had such high level of activity on a relative and absolute basis, respectively. We will never know the complete reasons why suddenly so many options were traded for XYZ stock, but being aware that such movement has taken place gives us readers an opportunity to see the writer's explanation of why these trades were being made based on the particular options bought and sold. That is to say I don't necessary agree with the writer's assertions, but I appreciate the "color" and the update on these sizeable moves.

For SWIM, it recently announced that the SEC began an inquiry. In its form 8-k filing, SWIM stated:
"The Company is cooperating with a non-public, informal inquiry by the U.S. Securities and Exchange Commission ("SEC") relating to representations by certain presenters in certain portions of their presentations at some of the Company's seminars. The Company has been cooperating with and intends to continue to cooperate with the SEC. Because it is ongoing, the Company cannot predict the outcome of this informal inquiry at this time, and, as a result, no conclusion can be reached as to what impact, if any, this inquiry may have on the Company or its operations."

From my personal experience (at a paid seminar) -- SWIM put on a "full court press" (this is my opinion) to get people to buy more expensive courses -- their PHD course had a list price as much as $35,362 but was being discounted to $23,999 at the seminar good for two people. The upsell was unbelievable (again, my opinion) and continued one more time even after the formal seminar was over! It was supposed to be a 2-day seminar on learning their famed "3-green arrow system" and boy, did the instructor talk about options and 'complex' option-strategies (like an iron condor, a four-legged trade, that were beyond the scope of the basic stock course) and asserted numerous questionable investment strategies / results. I am not surprise by the SEC inquiry especially since SWIM members constantly "brag" (again, my opinion) how they can make "4% a month" on SWIM's dedicated message boards for paid subscribers. I understand GIPS and have worked in performance attribution so I know how difficult it is for a portfolio or a composite to each at a rate of 4% a month.

This was a self-inflicted injury for SWIM. Notwithstanding my aforementioned comments, SWIM does have a real franchise like "Toolbox" and "Prophet" with recurring income streams and a highly ranked options firms called ThinkorSwim that is gaining accounts. In fact, SWIM reported a profit for its recent fiscal quarter.

Cheers.