Tuesday Options Outlook: XLE, LEH, NSM, DRIV, MVL, RIGL, QCOM

Rebecca Engmann Darst co-authored this article.

Energy Select Sector SPDR (XLE) – Shares in this closed-end fund, which is indexed to the performance of leading oil companies, are trading flat at $86.45, despite musings from billionaire hedgie George Soros that there appeared to be no “imminent” correction in a run-up on oil and other commodity prices that has “some of the earmarks of a bubble.” Soros attributed some – but not all – of the heat in oil prices to commodity index trading by institutional investors. Despite the relative lack of immediate response in the sector ETF, we note that implied volatility at 31% continues to show a dramatic elevation above the 22% historic reading, further fanning a divergence that began in late-April and continued through the momentous pass at $135-per-barrel oil a couple of weeks back. Option traders may have sought to hedge against a long position elsewhere in the oil sector by buying put protection against a drop below $86 before June 21 – this could explain the 10,000 lots bought at this strike. A volatility-bullish appeared to go through in the June contract expiring at the end of the month, with a trader deploying a short put butterfly strategy, buying 20,000 lots at the June 83 strike for $2.23 and selling 10,000 lots at the 84 strike for $2.23 and against at the 86 strike for $3.15, initiating the trade with a 4-cent credit per contract that presumes a rally either past the 86 level or a correction below the 84 level by the end of the month. In any event, the trader in this case isn’t looking for the relative flatness of price action in the XLE to stick around for long.

Lehman Brothers (LEH) - Lehman shares were stung by early session reports that the company may be strong-armed by the ceaseless and multi-pronged credit crunch into new capital-raising efforts. With shares down 5% at $32.20, implied volatility at 103% is nearly double the 57% historic volatility shown by Lehman stock over the past year, marking the first break of the 100% implied vol reading since the immediate wake of the Bear Stearns collapse in late-March. With Lehman first due to unmask its numbers during the week of June 16, there’s a good chance we’ll see implied volatility on Lehman options make another serious pass at those wuthering heights of March. Meantime, with more than 110,000 Lehman options trading before noon, it’s one of the most heavily trafficked tickers on our platform, and puts continue to hold sway over the market, outmoving calls by a factor of 1.6. We are tempted to attribute early call-buying at the June 34 strike, exceeding open interest, to protective action by short-sellers on the stock. Elsewhere, the front month action heavily favors out-of-the-money puts, with heavy buying interest continuing at the June 17.50 line, where open interest has increased 6 times over these past 5 session to more than 13,000 lots. Buyers continue to be drawn to this position despite barely a 5% chance of it landing profitably (accordingly to current option prices) by June 20.

National Semiconductor (NSM) – Shares are 4.6% higher at $21.78 ahead of earnings this afternoon, and for a second consecutive session, call volume in National Semi breached the 20,000 mark for a second consecutive session – a feat that until yesterday it had not done at all over the previous 52 weeks. Since that time, call volume has tripled and the equivalent of more than 70% of National Semiconductor’s open interest is in play. Optimism over the imminent numbers may be girded by recent murmurings (voiced in Barron’s Magazine last week) that the company might make a fine catch for Texas Instruments. The unusually buoyant mood has lifted total option volume to nearly 6 times the normal level at this early hour, with fresh call buying at the June 22.50 strike (nearly a third of today’s volume so far is centered in this bullish strike), with long interest extending into the July contract at the $20 strike. Implied volatility on all National Semi options suggests more than a third additional price risk being priced into the options over the next month than the historical record might otherwise justify – the price of the closest-to-the-money June straddle at $2.10 suggests as much as a 9% move on back of the numbers alone.

Digital River (DRIV) – Option traders appear confident of the upside prospects of Digital River, the online software-delivery company that manages half of all digital downloads for the software market. Late last week the company was tipped by RBC for an upward price target revision from $43 to $47, news that may have had a deferred effect in the form of today’s 3% gain in share price to $40.77. The six-fold increase in option trading volume detected by our scanners represented well over a quarter of the open interest in Digital River, trading overwhelmingly to call-buyers at the June 45 call strike, where the 7,000-strong volume compares to open interest of just over 1,100 lots heading into today. Whether there are juicier rumors moving this stock is hard to say, but Digital River shares have shown a marked receptiveness to the impact of upgrades - a similar move by BMO last fall sent shares to a 52-week high of more than $53. Right now, option prices suggest a scant 16% chance of Digital River shares making a $5 climb by June 20, but that hasn’t deterred the call buyers.

Marvel Entertainment (MVL) - Still coasting on the success of its “Iron Man” franchise and fresh on news that the company would replace Commerce Group in the S&P 400 MidCap Index we find shares in Marvel advancing 3% to $34.95, loitering around the 52-week high. With such a surfeit of summer blockbuster news flowing its way these days (and with implied volatility hovering comfortably - statically – below the historic reading), it looks like some traders have seized their moment to position for an inevitable turnabout in its fortunes coinciding with the winter doldrums. This interest in January puts has prodded total option volume to 3.5 times the normal level. Early traffic showed what looked like long put spread activity going through between strikes 30 and 35, with traders defraying some of the $4.17 cost of the higher-strike puts by selling the 30’s for $2.07. Since that time, volume has also emerged 1 strike lower at the 25 strike for about 90 cents – this activity already amounting to twice the open interest at that strike. Marvel shares have traded as low as $21.23 over the past full year.

Rigel Pharmaceuticals (RIGL) – Clinical data on phase-2 results of Rigel’s pipeline non-Hodgkins’ lymphoma drug, the so-called Syk inhibitor R788, failed to find favor with traders despite showing benefit in patients suffering from diffuse large B-cell and lymphoma and small/chronic lymphocytic leukemia. Shares are down 6.5% at $22.00 at present dispatch, and an early surge in option trading to 3 and a half times the normal level showed twice as many puts moving as calls. Front-month activity favored the 22.50 put strike, while we also observed buying interest in July 20 puts for $1.10. Implied volatility at 64.3% continues to show an elevation above the 50% volatility shown by Rigel shares over the past year.

Qualcomm (QCOM) – Shares in Qualcomm edged .21% higher to $47.80 on news of a “buy” recommendation out of Goldman Sachs. With more than 29,000 options in play, it made an early appearance on our scan of most active option contracts, with more than half the active volume centered on either side of the June 47.50 line. Rather than being lots traded together, the disparate volumes at these positions show most of the calls being sold, with puts trading to buyers and sellers. This may be evidence of traders using options to protect an underlying position in a stock that’s risen 22% for the year to date, rather than bald speculation on a near-term correction. Open interest shows 1.7 call positions outstanding for every put.

Comments

[User 183217]

"short put butterfly strategy, buying 20,000 lots at the June 83 strike for $2.23 and selling 10,000 lots at the 84 strike for $2.23 and against at the 86 strike for $3.15, initiating the trade with a 4-cent credit per contract"

does "buying 20,000 lots" mean buying puts?
does "selling 10,000 lots" mean selling puts?
does "against at" mean selling 10,000 puts?
does "4-cent credit" mean $800?
how do $2.23 and $2.23 and $3.15 end up at 4 cents?