Thursday Options Outlook: HUN, CHK, XTO, SD, MOT, BAC, RY, HBI

Rebecca Engmann Darst co-authored this article.

Huntsman Corp (HUN) - Merger arbitrage has long suspected that the would-be marriage of chemical maker Huntsman Corp and Hexion Specialty Chemical was not to be – and today, confirmation came as news emerged that Hexion was suing to cancel the $10.6 billion buyout owing to an increase in Huntsman’s net debt and a decrease in earnings since the merger was arranged last year. Huntsman shares folded 39% lower to $12.80, and at present dispatch its options are trading at 6 times the normal level. Heaviest activity is observed at the June 12.50 call line trading to buyers and sellers. Traders may be selling premium in August 22.50 puts, these deep in the money positions suddenly 171% dearer and moving on volume equal to nearly half the 13,000-strong open interest.

Chesapeake (CHK) – Bullish share price action in shale oil operators remains a factor in Thursday’s trading session, but as evidenced by options action in two companies in the space – option traders are finally taking the other side of the shale play. Shares in Chesapeake, a popular object for option speculators in recent weeks, tacked on another .30% gain to $66.13, putting a bit of frosting on a layer-cake of 52-week highs. With more than 65,000 options trading in the first market hour, calls are outmoving puts by more than 4 to 1, but we are finally seeing real evidence of traders taking a contrarian tack on Chesapeake via bearish credit spreads using calls. While the directionality of volume in the July contract at strikes 65 and 70 makes it hard to ascertain that this is the case as early as the July contract, it does appear that the October 65 calls were sold for $8.50 and the 70-strike calls were bought at $6.35, creating at $2.15 debit for a trader who realizes this as the full profit potential of the trade if both calls expire worthless by October.

XTO Energy (XTO) –– Shares in XTO Energy, a company with a pronounced presence in the storied Barnett Shale area, showed similar directionality, up .81% to $72.19 and just a smidgeon below that ticker’s 52-week high. Besides heavy buying in July 75 calls, however, we did observe similar contrarian spread activity, albeit in the August contract. Here it looks like a 3,877 bearish credit spread went through at strikes 70 and 75, with a trader selling the lower strike at $6.94 and buying the higher strike at $4.64 for a $2.30 credit that would appear to wager on a pull below the lower strike. Implied volatility on all XTO options ticks in at 44% - elevated against the 38.7% historic reading.

SandRidge Energy (SD) – In a related play, options in Oklahoma-based natural gas company SandRidge Energy (whose CEO actually co-founded Chesapeake) are moving at 16 times the normal volume despite a 5.4% pullback for shares in that company to $64.81. Shares in SandRidge have been on an unmitigated tear this year, up 78% for the year to date, and today’s option activity looks like a brazen play on continued upside. Some 30,000 lots traded in deep out-of-the-money September 80 calls, bought on the offer at $2 – a price reflecting a less than 1-in-4 chance of landing profitably by September. It should be noted that the sheer size of this transaction equals more than half the total open interest in SandRidge.

Motorola (MOT)–Shares in handset maker Motorola made like a dropped call this morning, losing 6.5% of their value to $8.04, blistering below the prior 52-week low after one of its suplliers., Foxconn International Holdings, intimated that the company was still struggling with its handset business. Implied volatility on all Motorola options spiked almost 25% in response, as option traders sent volume to more than 3 times the normal level. Trading was appropriately defensive, with two-way volume in June 8 calls but heavy buying in the same strike on the put side. Activity in the July contract showed an inclination to buy puts at the 7 and 8 lines.

Bank of America (BAC) – Insalubrity in the financial space continued today, despite modest gains for U.S. stocks. Implied volatility in options to buy and sell shares of Bank of America rose once again today as shares retreated another 4% to $27.14, adding distance between its current valuation and a prior 52-week low. Implied volatility continues to ratchet higher, up 17% today, on investor unease over its absorption of Countrywide Financial, given what mortgage exposures have done to a whole host of regional bank shares in recent sessions. With options traders now pricing in almost twice as much risk to Bank of America shares as they have shown historically, the correspondingly higher put-side premiums haven’t dissuaded buyers of protection. With some 168,000 options trading as of the noon hour, we observed heavy buying pressure at the August 30 put line, where some 30,000 lots were bought on the offer. The right to sell Bank of America shares for $30 by August 15 costs $4.15 today – more than 27% costlier than yesterday – requiring a break below $25.85 just to come out square. That’s another 4% off current levels.

Royal Bank of Canada (RY) – Hefty fresh put-side positioning sent overall option volume in the Royal Bank of Canada to more than 10 times the normal level. Shares in the bank are down 1.2% from yesterday closing level at $47.62. The push in put volume occurred at the October 45 line, where some 5,000 lots traded at $2.35 per contract. A long position at this strike implies a break below March 17 lows for the Canadian bank, which appears to be making like its U.S./U.K. brethren and aiming for the downside.

Hanesbrands Inc. (HBI) – Options in Hanesbrands Inc., the company behind Hanes Underwear as well as the Playtex, Bali, Just My Size, and Wonderbra undergarment franchises, are trading at more than 25 times the normal level against a 7.4% share price slump to $48.64. Implied volatility rose 22.5% on the share price decline, ranking among the day’s top-50 volatility gainers. Earlier this month Hanesbrands received a fairly emphatic analyst recommendation with an upgrade from “Neutral” to “Strong Buy” at CL King. Today’s volume appears to show traders dealing in credit put spreads in the October contract, buying the 30 strike puts for $3.00 against the sale of 35-strike puts for $5.70.

Comments

[Old Flyer]

Re BAC don't know closing price but at mid-day based on last sale BAC dividend was 9.4% and the market price was still falling.Within the last 10 days or so a senior officer volunteered that the dividend was "safe" at least to the next declaration.If he is right--and he had better be or there will be 10,000 more or less shareholder suits filed--then the stock is wildly undervalued.Is the Counrty Wide aquisition the problem that causes the insane inbalance between market price and dividend rate?If--IF--managemen... appraisal of the deal is right the aquisition is a coup and will enormously add to the bank's customer base and to it's profits and a contrary market view will just be another example of how hysteria can distort reason.I have absolutely no qualifications to predict the market nor to give investment advice,that said I think BAC may well be an historic buy.Yes I do own a substantial amount of BAC and have for years and will continue to be a holder with no present intention to sell.This baby is either going to make me cry or make me rich.