Friday Options Update: JPM, MDCO, HBC, DIA, IBM, SMH, NCC, RHD, AEO, SMH, IR

by: Interactive Brokers

JP Morgan Chase (NYSE:JPM) – Following on from a morning in which the threat of ruinous writedowns, which has hung like a Sword of Damocles over most financial issues in recent weeks, zeroed in on HSBC, afternoon trading brought a surge in implied volatility and put volume in JP Morgan Chase. The measure of perceived risk to the valuation of JP Morgan Chase shares rose nearly 16% in afternoon trading, and now at 59.3% stands at its most elevated since March 17. There is a very clear streak among option traders to buy puts protecting against further share price declines, with heavy July put buying at strikes 30, 32.50, 35 and 37.50, extending into the August contract at deep out-of-the-money strikes as low as 25 (interestingly, we did see some evidence of July traders betting on relative stability in JP Morgan’s share price via long call spreads at the 35 and 37.50). Open interest at these strikes was virtually nonexistent before this afternoon, but puts are nonetheless being bought heavily, and on very inflated premiums, and despite very low deltas.  JP Morgan Chase shares are down 4.5% at $34.68.

Medicines Company (MDCO) – Another mover in afternoon trading – and a conspicuous one, given that its shares are trading higher - is Medicines Company, up 2% to $19.64.  This is the second session this week that Medicines Company options have traded on unusually heavy volume (it was also a component of “Hot by Options Volume” on Wednesday), and the catalyst appears to be the House of Representatives passage of a patent term extension law. This law, if passed by the Senate and signed by the President, could help the Medicines Company obtain extended patent protection for its drug Angiomax. While there’s still a long road to legislative redemption for the bill, option traders sent volume to nearly 11 times the normal level as implied volatility has risen nearly 45% to 72%. We saw some inclination among traders to take profit in July 20 calls, after the value of this position rose 177% on news of the House passage, while calls conveying the right to buy Medicines Company shares for $22.50 by July 18 were bought heavily on volume triple the open interest. Open interest shows more than 3 times as many calls open as puts in the Medicines Company. 

HSBC (HBC) – Even without a specific rumor yarn to spin, it looks like option traders are looking for a downside jag in Europe’s largest bank, HSBC.  The company is in the midst of a would-be buyout of Korea Exchange Bank. American depositary receipts on the bank are 1.5% lower at $76.73, but with implied volatility at 34% more than twice the historic reading on the stock, we registered an increase in option trading volume about 10 times the normal reading, situated heavily in September puts, which have been heavily bought at the 70 and 75 strikes. The September 70 strike, trading at $2.20 at present, requires a break below $67.80 to break even, another 13% downside from current levels and within $1.50 of its 52-week low. Fresh volume at the same strikes is being observed in the August contracts, with the $1.70 premium on the lower strike requiring less downside on the breakeven – but one month less with which to incur it.  

Diamonds Trust Series I  (NYSEARCA:DIA) – Dow stocks continued to sink into quicksand today on back of record-high oil prices and no respite for the financials. With the Dow down 104 points by mid-afternoon, shares in the ETF indexed to its components registered a 1% decline to $113.43. Option trading volume of 246,727-lots qualified it for our scan of most active option contracts early in the session. Earlier today we had observed that some of the Dow Diamonds option trading action seemed surprising, given the tenor of the news flow and the aftermath of yesterday’s slump. Traders at that time appeared willing to sell puts at the 113 and 115 strikes in the series expiring July 19, accompanied by buying interest in 113-strike calls at $3.20.

IBM  (NYSE:IBM) – Are traders positioning for an earnings miss from IBM when it reports on July 18…? Implied volatility on all options in IBM stands at a two-month high today – having risen nearly 20% over the past three days – against a 1.4% decline in share price to $119.53. Now coming in at 30%, the implied volatility reading, when stacked up against the 18.7% historic volatility on IBM stock, shows option premiums factoring in 62% added potential risk to IBM shares over the next 30 days. With more than 74,000 options trading at present dispatch, IBM qualified for our scan of top-50 most actively traded contracts, and the action here is trading more than twice as often to puts as to calls. Activity in IBM seems to confirm a demand for long-volatility positioning ahead of the earnings. For this we submit heavy buying interest in July put strikes at 115 and 120.  Buying pressure is seen in August 110 puts as well as 130 calls on disparate volumes, which may suggest long volatility trades occurring at those strikes. 

Semiconductor HOLDRs Trust (SMH) – One after a broadly lackluster day for chip stocks on back of the RIM earnings shortfall, option activity in the Semiconductor HOLDRs Trust is showing unusually elevated activity with a decided skew to puts. Shares in the trust – whose components include chip heavyweights Intel (NASDAQ:INTC), Texas Instruments (NYSE:TXN) and Applied Materials (NASDAQ:AMAT) – are showing a 1.3% decline to $29.60 as put contracts outnumber calls by some 13 to 1. A huge chunk of volume appeared in the August 27.50 puts, trading to the middle of the market at 61 cents, a breakeven that implies a decline to within 50 cents of the $26.31 52-week low by August 15. July puts were also heavily active, though we noted what appeared to be an 8,000-lot credit spread in the July put at strikes 30 and 33, with the trader selling the upper strike for $3.37 and buying the lower for $1.16. The $2.21 credit on this spread is the maximum potential profit, carrying with it a breakeven of $30.79. The trader wants the spread to narrow with a rise in share price coupled with the eroding effects of implied volatility. Implied volatility on all SMH options stands at 31.6%, four percentage points off the highs recorded in mid-April.  

National City Corp (NCC) – In other news out of the financials, shares in National City Corp shed 3 % of their value to read $4.67 by mid-afternoon. The near-quadrupling in option activity we observed today was almost completely wrapped up in two sets of volume. August 4.00 calls traded freshly to the middle of the market at 45 cents apiece, while puts at the same strike in the October contract also appear to have been sold.

RH Donnelley (RHD) – One day after Goldman “Don’t-Shoot-the-Messengers” Sachs issued its rapid-fire report of killjoy downgrades – a report than kick-started a selloff culminating in the lowest close for the Dow Jones Industrials in two years – we’re seeing delayed reaction in the options of another company fingered for downside by a Goldman Sachs analyst. Shares in R.H. Donnelley Corp, the maker of yellow pages phone directories, dropped 1.4% to $2.87 after the investment bank curbed its ad sales outlook for the company. On the option front we recorded an increase in trading volume to more than 156 times the normal level, owing to a fresh 29,700-lot position in August 2.50 puts that’s as thick as an R.H. Donnelley door-stopper.  The volume traded to the middle of the market at 18 cents, giving a buyer the right to sell R.H. Donnelley options for $2.50 by August 15 – or a seller the obligation to acquire them. The last time we observed volume on this scale in R.H. Donnelley was back on November 15 – when the company was trading at $45 per share – and even *that* was a 42% discount from its 52-week high. Implied volatility on R.H. Donnelley options is, as one might imagine very elevated at 99% against a historic reading of 78%.

American Eagle Outfitters (AEO) – Shares in American Eagle Outfitters, the purveyor of sturdy co-ed fashions, taildived 15% to $13.54 in afternoon trading. Yesterday it was announced that the company’s president and chief merchandising officer had left the company. Options activity quickly surged to 8.5 times the normal level with heavy action in front-month calls at the 15 and 17.50 strikes, most of this trading to the middle of the market, those we did note parsimonious, but fresh buying interest August calls at 12.50 strike.  Implied volatility on all American Eagle options showed an early 10% gain, but has since come off a bit, though ringing in at 53.6% it’s still a significant elevation above the 45.5% historic reading on the stock.

Ingersoll-Rand (IR)  – But the news wasn’t all Polly Peril today:  An early gain for Ingersoll-Rand shares to $37.11 followed speculation out of Bloomberg that this week’s Kodak share buyback (an announcement that was extraordinarily bullish for its share price) could elicit similar action from the likes of Merck and Ingersoll-Rand. Option trading appears to be following in that vein, with an increase in trading volume to 2.6 times the normal level, with what appears to be straddle activity at the August 37.50 line (a position that costs $4.40 today – 11% of the stock price) accompanied by buying interest in August 40 calls at $1.10. Implied volatility at 37.7% compares to a historic reading of 29.9%, attesting to higher risk premium being factored into its option prices at present.

Rebecca Engmann Darst contributed to this report.