Monday Options Outlook: SGP, MRK, AZN, AMGN, CELG, BBH, BAC, KRE, XLF

Rebecca Engmann Darst co-authored this article.

Schering-Plough (SGP) – Shares are down 11.2% to $19.04 after the company announced that it would postpone its results until after the bell pending the release of new data surrounding its drug Vytorin. Implied volatility shot up 62% to 75.9% on the session (interestingly, we have not seen a comparable spike in implied vol in Vytorin partner Merck, which also postponed its earnings until after the bell). Schering-Plough options are moving at 3.3 times the normal level at present reporting with puts outtrading calls by a factor of 1.6. August puts at the 17.50 and 20 strikes are trading on elevated implied volatilities and at pricier premiums, while calls at the 22.50 strike have traded nearly 11,000 times, having lost 64.7% of their value so far this morning. Most of the volume at the August 20 and 22.50 strikes shows traders buying this strikes, possibly in tandem with long volatility positions with the 15 and 17.50 strikes, which also evince buying pressure today.

Merck (MRK) – As we indicated above, despite Merck’s involvement in the Vytorin saga and its similar move to postpone quarterly earnings until after the bell, both the downside and the implied volatility setup is far more subdued in Merck as compared to Schering-Plough. Shares are down 3.5% at present at $36.36, and implied volatility on all of its options ticks in at 37.2% - that’s about a 12% gain from the close on Friday, but still well below the extreme gains we’re seeing in Schering-Plough this morning. Front-month options suggest about a $3 move for Merck shares between now and August 15, which we can reasonably interpret to mean an 8% move on back of the earnings. The action here appears more resolutely contrarian given the share price action, with virtually all of the open interest in August 37.50 calls being actively deployed today and trading mostly to buyers. Volume at the 32.50 and 35 put strikes is selling mainly to the bid.

AstraZeneca (AZN) – Options on the American depositary receipts of global pharma giant AstraZeneca picked up to 4 times the normal level after analysts at J.P. Morgan offered bullish prospects for its July 31 earnings report, forecasting positive benefits from foreign exchange, an ongoing corporate restructuring, and positive sales guidance. With shares up .95% to $45.67, the activity appeared to spur new positioning in August 45 calls at $1.85 apiece, which require a break of at least $46.85 to prove profitable for the trader.

Amgen (AMGN) – Shares in Amgen are up 1.8% to $53.51 heading into the noon hour. The ticker qualified for our scan of top-50 option movers by volume due to what may have been a trader deploying a diagonal calendar put spread, selling 15,000 puts at the September 52.50 strike for $2.12 and buying October 45 puts for 85 cents. The trader in this case is taking advantage of relatively higher implied volatility in the September contract, which he or she expects to decay in value more rapidly than the October 45 put. Amgen shares are up 25% since June 12. Implied volatility at 35% compares to a historic reading of 23.5% on the underlying stock.

Celgene (CELG) – Celgene which is due to report earnings on Thursday – likewise ranked among the top-50 movers by volume early in the session on Monday. Shares rose 1.5% to $71.95 as we noticed what looked like a 3,000-lot credit spread trade in the August contract between strikes 60 and 70. In this instance, the trader sold the 70-strike puts for $2.20 and bought the lower-strike puts for 45 cents, taking a $1.75 credit and hedging the short put position to boot. The trader in this case is hopeful that both positions will expire worthless by August 15, which they’ll do by remaining well above the $70 strike through Celgene’s earnings report later this week. Celgene shares are up 55.7% for the year to date.

Biotech HOLDRs Trust (BBH) – Shares in the Biotech HOLDRs Trust, a closed-end fund whose components include the likes of Gilead (a big options mover on Friday) are up nearly 7% today at $191.05. The increase in option trading volume we’re observing to nearly 5 times the normal level shows a fairly even balance between puts and calls, but notable trades include what may be call spread activity in the October contract between strikes 180 and 195.

Bank of America (BAC) – Shares are up 12.2% to $30.84 and with earnings now out of the way, anxieties in the options market have been quelled enough to allow implied volatility to shrink back about 31%. Puts are trading with a slight privilege over calls by a factor of 1.2, as front-month positions at the 30 strike and below have been depleted of 70-80% of their value due to the spike higher for shares. Call-side premiums up about 200% at the 30 strike and above, and we’re seeing heavy volume at these strikes as well.

Financial Select Sector SPDR (XLF) – Shares are 3.3% higher at $21.35 as calls trade 2.4 times as often as puts on a volume of more than 123,000 lots. Early in the session we noticed possible call spread activity in the August contract between strikes 18 and 20, while further evidence of rising trader confidence in a slow recovery for large-cap financials has been observed in heavy call-buying at the September 22.50 strike.

KBW Regional Banking ETF (KRE) – Shares are up 2.8% to $29.50, and with more than 120,000 options trading in the first market hour, the regional banking ETF is one of the absolute top movers of the morning – and is even trading at 19.5 times its own daily average. The heavy volume in ratio put spreads between strikes 22.50 and 25 in the September contract may relate to heavy volume at these very same strikes that went through on Friday – i.e., traders may have closed out these positions on back of the less-pessimistic numbers from super-regional Bank of America.

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