Monday Options Outlook: XHB, LLL, EWT, ELN, HA, GM, K, LIZ, CPO

Rebecca Engmann Darst co-authored this article.

SPDR Homebuilder’s ETF (XHB) – Option traders have cottoned to out-of-the-money calls to an unusual degree in the SPDR Homebuilder’s ETF. Shares in the closed-end fund are down 2.5% at $17.57, one fresh week after news of a record low in the National Association of Home Builders Housing Market Index, a key gauge of industry confidence. The NAHB’s chief economist is thus far maintaining his outlook for a Q3 bottom in home sales. Bear in mind also that this ETF includes do-it-yourself retail names like Lowe’s with a peripheral exposure to homebuilders. Implied volatility at 54.6% shows a marked elevation to the 35.3% historic reading, and we note here that of the 53,000 lots actively traded according to our platform today, well half of this volume is situated in fresh positioning in July 20 calls at 25 cents apiece. Given the strike price involved, we surmise that this call volume may be a hedge bought by a trader short the underlying shares of the ETF and looking to protect that position against an unexpected recovery bounce over the next few weeks.

L-3 Communications Holdings (LLL) - Options in defense contractor L-3 Communications Holdings, the maker of surveillance and reconnaissance equipment for avionic and marine use, are trading at 5 times the normal level today against flat-to-lower action in the share price (shares are .22% higher at $94.61). With the company not due to report earnings until July 24, L-3 options activity suggests some sort of rumor-driven activity making the rounds, given the abrupt 19% spike in implied volatility to 27.6% (interestingly, there’s little patch-through into the share price) Today’s volume is occurring in out-of-the-money front-month calls at strikes 100 and 105, which have all attracted heavy buying interest by traders speculating on as much as 10% upside over the next month. L-3 shares have traded as high as $115 over the past 52 weeks.

iShares MSCI Taiwan Index (EWT) – A wild ride for Taipei stocks overnight ended with shares closing off intrasession lows thanks to a wave of bargain hunting and suspected government buying. The gut-twisting swings of the session patched through in option trading here in the U.S., where implied volatility on options of the iShares MSCI Taiwan Index, a replicant of the Taipei composite index, rose nearly 31% earlier today before receding sharply. Shares in the closed-end fund are currently .34% higher at $14.63, and it looks like a trader may have taken advantage of that early-session spike to sell the December 14/16 strangle for a combined premium of $1.80, playing against the possibility of a break outside those strike prices by December 19.

Elan Corp (ELN) –Shares in Alzheimer’s drug developer Elan Corp advanced 3.7% to $34.18 after analysts at Goldman Sachs added the Dublin-based biotech to its “conviction buy” list. With more than 59,000 options trading more than twice as frequently to calls as to puts today, the patina is very bullish early in the session, with option traders possibly taking positions at the ATM front-month straddle ($35 line) ahead of Myriad’s phase-3 test results. Volume at the July 40 strike traded to buyers and sellers. Implied volatility on all Elan Corp options showed evidence of bullish aftershocks today, up some 20.5% on the session to read 69.3%. Compare this to the 50% historic volatility registered on the underlying stock and you can see the additional price risk that option traders are ascribing to this mercurial drug stock via option premiums over the next 30 days. Overall, calls and puts remain fairly evenly split in Elan Corp.

Hawaiian Holdings (HA) – Shares in Hawaiian Holdings, the parent company of Hawaiian Airlines, pulled back 1% to $6.98 today. Earlier this month the company raised its fuel surcharge by $20 each way for flights between the Hawaiian islands and the mainland United States, in a bid to stave off deleterious effects of higher fuel costs. The company had previously raised its round-trip airfares. A 12-fold increase in option trading volume detected by our market scanners showed traders possibly taking a large chunk of the open interest in July 5.0 calls off the table for $2.00, and parlaying new positions into call spreads in the January contract between strikes 5.00 and 7.50. In this fairly textbook long call spread play, the trader’s 7,000-lot position began by buying 5.0-strike calls for $2.75 against the sale of calls at the 7.50 strike for $1.37. The resulting $1.38 debit means the trade first breaks even for the trader above $6.38, but the sale of the 7.50 calls means the trader is wagering on a fairly narrow range for Hawaiian Airlines shares heading into January, and shows little confidence in a sustained break past $7.00.

General Motors (GM) – General Motors – Shares in the automaker declined another 4.3% to $13.20 as a mood of bearish bathos continues to unfurl in its options. Implied volatility at 90.7% compares to a 48.3% historic reading, and with nearly 60,000 options trading ahead of the noon hour, puts are outmoving calls by 1.6. Besides generally heavy activity at the July 12.50 put strike, we observed buying at the same strike in the August series, and it also appears that a 5,000 lot put spread went through in January ’09 puts at strikes 5 and 15, though we have no information on the directionality of this volume at present dispatch.

Kellogg’s (K) – Inflationary fears continue to pan out in defensive activity in food stocks. Out-of-the-money put activity in cereal maker Kellogg’s caught our attention early in the session, occurring as it did against flattish price action in Kellogg’s stock (shares are down .14% at $50.93). Fresh buying in January 40-strike puts sent overall volume to 6 times the normal level. Note that Kellogg’s last traded below $40 in April 2004.

Liz Claiborne (LIZ)– Shares in Liz Claiborne, the eponymous women’s wear brand and holding company for Kate Spate and Juicy Couture upmarket labels, declined 5% to $15.19, matching the prior 52-week low, following news that the women’s wear label was the only investment grade company to be downgraded to junk status by Standard & Poor’s in the past month. The decline in share price sent the value of July 17.50 puts 25% higher, and it appears that an assertive option trader seized upon the opportunity to close out a 7500-lot position here for $2.18 (most of the open interest was accumulated in May when the same position was trading for 55-70 cents per contract, and roll it to the October 15 strike for $1.30. Option traders hold more than twice as many puts as calls in Liz Claiborne.

Corn Products International (CPO) – News of its acquisition by fertilizer maker Bunge sent shares 23% higher to $52.71 – the all-share deal values Corn Products International shares at $56. Option volume quickly accelerated to 3.5 times the normal level, with fresh volume in out-of-the-money October calls at strikes 60 and 65. Interestingly, it appears that most of the volume at these strikes was bought on the offer, meaning that traders are positioning for as much as 28% more upside for the newly acquired company by mid-autumn.