Thursday Options Outlook: FL, THQI, FTO, IYR, DBC, GME, XLF, XLE, ESLR

(FTO) – For a second consecutive session, options in refiner Frontier Oil are moving on elevated volume against very bullish action in the underlying stock. Shares are up 8% to $30.17, with contracts awarding the option to buy and sell its shares in the future moving at nearly 4 times the normal level. June calls continue to attract buyers at the 30 and 35 strikes, as the options market prices in a slightly less than 1-in-4 chance that Frontier can break past $35 by June 20. A glut of call buying in the oil refiner yesterday despite record-high oil prices suggested takeover speculation of the sort that has shadowed Frontier before – previously with Valero, lately with Suncor. We wonder if Frontier's refining capabilities in the area of heavy Canadian sands oil may have tipped off this latest round of deal speculation, as record-high oil prices make labor-intensive sands oil suddenly more attractive to harvest from a cost vantage point – and few beyond Frontier with the capacity to handle this variety.

(DBC) – Powershares DB Commodity Index – A 14,000-lot put spread in the July contract sent shares in this invsgtment fund, which is correlated to a basket of commodities including light, sweet crude, aluminum, gold, corn and wheat, sent total option volume to 6.4 times the normal level today. This occurred against minimal share price action, with a .24% decline for shares on the day to $42.25. Both implicated strikes, the July 41 and 44 lines, traded to the middle of the market, making directionality difficult for us to ascertain at this point. A credit spread would involve the sale of the higher-strike put and purchase of lower-strike put for a $1.60 credit that the trader would take in hopes of the spread narrowing and both expiring worthless. A long position in this strike would involve the reverse action – i.e., selling the lower strike put to fund part of the higher-strike put for a $1.60 debit that would break even for the trader with shares in the ETF at $42.40.

(IYR) – iShares DJ US Real Estate - Flat share price movement out of the gate for this closed-end fund, whose components include commercial REIT's, real estate management, and financing names such as Vornado Realty Trust, CB Richard Ellis Group, Duke Realty, and Annaly Capital Management, didn't inhibit one trader from staking what looks like a bearish position on the fund's performance. With shares at $68.68 this morning, the doubling in option trading volume detected by our market scanners was situated in July 66 puts, where a 10,000-lot position was entered at $2.34. Shares in the ETF hit their low of $59.02 for the year back on January 18 but have recovered an admirable 16% since that time – remaining above $65 for the past month solid. A buyer of the July 66 put is looking for a decline at least past $63.66 before realizing any profit on the position.

(FL) – Disappointing guidance this morning from the country's largest publicly traded sporting goods chain, Dick's Sporting Goods, sent a shudder through the options of arch-competitor Foot Locker, which is due to report earnings after the bell. Foot Locker shares are trending flat-to-lower at $12.25 this morning, but options are trading at 5 times the normal level as implied volatility shows option traders pricing in a third more risk to Foot Locker shares over the next 30 days than they have documented over the past year. Despite this higher risk premium, traders are actively seeking long positions in June and July puts at the 12.50 strike as a bulwark against an earnings miss and prolonged share price depression.

(GME) - Earnings from GameStop, the world's largest retailer of video games reported a more than doubling in Q1 profit thanks to banner worldwide sales of the newest installment in its best-selling "Grand Theft Auto" series, and offered bullish guidance for year-end sales, touting a "widening demographic" for video-gaming. Markets reacted counter-intuitively, sending shares down 9.4% to $46.05, but it looks like option traders seized upon the slide to scoop up calls at a relative discount, sending overall volume in GameStop shares to more than 4 times the normal level. With calls trading at triple the rate of puts already this morning, the volume shows fairly straightforward buying interest in June 45 calls, while calls at the 55 strike have attracted buyers and sellers.

(THQI) – Knock-on rumors following GameStop earnings, or takeover speculation in earnest? Hard to say, but the option activity in THQ Inc. – the country's third-largest maker of video games - suggest bullish rumors on the rise, sending shares 2.7% higher to $19.69. A concomitant 14.5% rise in implied volatility to 42.8% suggests even more share price turbulence priced into the mix for this maker of video games under the Nickelodeon and Marvel Comics names. The bullish action in its share price and options may come as some surprise to market observers who recall THQ's stunning earnings miss on May 6, on back of higher production and marketing costs. THQ Inc. shares have lost nearly 30% of their value so far this year. Still, in what looks like rumor-driven activity today we find its options trading at more than 22 times the normal level, and calls out-trading puts by 13 to 1, as traders seek fresh long positions in June calls at the 20 and 22.50 strikes, with interest in the 20 strike extending into the July contract and attracting buyers and sellers.

(XLF) – Financial Select Sector SPDR - Financial issues are showing hardy resilience this morning despite what could have been a potent potable of bad news in the form of new brokerage downgrades (this time on concerns over bad hedging) as well as worries aired by esteemed analyst Dick Bove that the value of many financial companies' market assets will decline thanks to inflationary flare-ups. Shares in the ETF that tracks major financial tickers are up .92% to $25.11, and its options are trading heavily on a sum volume of 195,000 lots. One hour into the session we observed traders sell June 25 calls for 79 cents apiece. Elsewhere it appeared that a 5,000-lot put spread went through in the September contract at strikes 23 and 26, with the trader possibly selling the lower-strike put at $1.16 and buying the 26 put for $2.53 in a gesture of defense against further erosion from current levels.

(ESLR) –Shares in Evergreen Solar, the maker of photovoltaic modules and solar cells rocketed 19% higher to $10.84 on news that it had secured a $750 million sales contract with Germany's Ralos Vertriebs GmbH. News of the contract lent validation to the market's hankering to speculate wildly on upside for solar companies, which are one of a handful of sectors to demonstrate any real alternative to traditional petroleum-driven stocks. Accordingly, with more than 28,000 lots trading in the first 90 minutes of the market, we saw 3 times as many calls trade as puts. That said, many traders have opted to sell calls into the upward surge in share price, aided by an early-session 27% spike in implied volatility to more than 93%.

(XLE) –Adherents to the oil bubble theory – or at least those looking for some near-term relief to crisis-level oil prices – found some fellow travelers in the XLE option pits today. Shares in the energy-correlated ETF are down .13% to $88.87, and with more than 52,500 options trading in the first 90 minutes of the market its options are unusually active today. Of note here was heavy long interest in July 89 puts, which were bought for $3.15 this morning on a play that first becomes profitable for the buyer with a decline below $85.85. A 5,500-lot put spread appears to have been deployed in the July contract at strikes 76 and 84, with the trader selling the 33-cent puts at the lower strike to offset some of the $1.70 cost of the 84-strike puts, resulting in a $1.37 debit that would break even for the buyer with a decline below $82.63. In all, puts on the XLE are outmoving calls by nearly 6 to 1.

Rebecca Engmann Darst co-authored this article.

Comments

[crimfunk:]

love the action on FTO, this stock is breaking out of a range bound base with a P&F double top breakout target $41. Adding on any weakness.

2008 May 22 09:16 PM