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Rebecca Engmann Darst contributed to this report.

Merrill Lynch (MER) – Late Friday we observed an unusual phenomenon in the implied volatility of Merrill Lynch, which seemed to move inexorably higher despite gestures from within and without the company that might otherwise be assumed to have a sedative effect on the volatility reading. Between Tuesday and Friday of last week, implied volatility in Merrill Lynch options rose 75%, 10% of which was sustained late in Friday’s session after Singapore’s Temasek took the step of issuing a formal statement to dispel speculation that it was pulling its money out of Merrill Lynch. On Friday we noted heavy put buying at the August 25 strike, which was then priced to reflect about a 1-in-3 chance of Merrill shares breaking below $25 by mid-August. Today its shares are sitting just above that $25 level with a more than 8% decline to $25.19. And implied volatility has continued to climb higher, up about 5% from Friday’s closing levels to read 111%. Twice as many puts are trading as calls today, with heavy front month action again drawn to the 25-strike puts (which have gained 33% in value today) and lower. Interest in puts extends to the 20 strike in September and the 22.50 strike in October.

Amgen (AMGN) – Options traders who positioned long of volatility in Amgen at the close on Friday may have been looking for an earnings surprise that would take the company’s share price further than the 7% saunter that was priced in as of 4pm. Those traders got quite a vitamin boost after promising data from its osteoporosis drug denosumab sent shares 12.6% higher to $60.74 – much more bang for the volatility buck than the options market had reckoned even as of 4pm on Friday. Today’s volume shows traders shedding put positions in the front-month, while the volume we’re seeing in 60-strike puts in September may be evidence of traders seeking to protect gains in a stock that is now up some $18 in the past month. While analysts at Morgan Stanley have estimated denosumab peak sales at $2-3 billion, full data on the drug won’t be released until September, giving the stock some room to correct to the downside once denosumab’s efficacy compared to existing drugs is fully weighed. Heading into Friday’s data, we had observed a doubling in the open interest of October 50 puts, which seemed to suggest some traders locking in protection against just that sort of comedown following what has turned out to be a euphoric rally round the stock.

Silver Wheaton (SLW) – Buying pressure in upside calls has driven options volume in the largest publicly traded mining company, Silver Wheaton, to 6 times the normal level today, with the equivalent of more than a third of its open interest in play. While the company is due to report earnings tomorrow, call buying has been steeped in the September 15-strike, which are trading at more than twice the normal level today at $1.45 per contract – up more than a third in value overnight. We also recorded a 39% spike in implied volatility intraday here on the eve of earnings, and the 71.4% implied reading compares to a 55.8% historic reading on Silver Wheaton stock. Shares in the company are down 12.6% for the year to date, but have averaged $15.24 over the past 6 months. A look at overall open interest shows option traders hold twice as many call positions as puts.

Vanda Pharmaceuticals (NASDAQ:VNDA) – Vanda shed more than 67% of its value to $1.10, piercing well below its price 52-week low of $2.70 after the FDA rejected its experimental schizophrenia drug, iloperidone. With options trading at 7.6 times the normal level, we weren’t terribly surprised to see a glut of volume around the now in-the-money August $2.50 put strike, which represents the lowest available strike price on the calendar. More interesting to us was the revelation that these puts were mostly bought – in other words, that traders would rather pay $1.40 (more than the value of Vanda’s share price at this writing) for the right to sell Vanda for $2.50 by August 15 than take in that premium as a credit in the belief that shares might at least recover to Friday’s closing levels in the next few weeks. Volume was also observed at the January 10 put strike, where 4,000 lots (almost the entirety of the open interest at that strike) traded to the middle of the market for $8.85.

Principal Financial Group (PFG) – Shares in insurer Principal Financial Group are trading marginally lower, down .68% at $40.97. Over the past 5 sessions we’ve seen implied volatility in its options climb ever higher, up some 28% to 61.1% in less than a week, and still a solid week away from its earnings report. The buying pressure that has sent overall option trading volume to more than 11 times the normal level appears in October 35 and 40 puts, which implies an outlook for volatile downside heading into the fall. Principal Financial Group has traded as low as $34.80 over the past 52 weeks.

Headwaters Inc. (HW) – Shares in synthetic fuels company Headwaters Inc., are showing a downtick of nearly 2% to read $10.39 on the eve of the company’s earnings. Its implied volatility, meanwhile, is coming in at a 52-week high of 79%, which when compared to the 48.8% historic volatility reading on the stock suggests the options market pricing in about 61% potential price risk over the next 30 days above and beyond what has already been charted into the stock. The prevalence of put buying at the August 10 strike suggests a largely defensive posture heading into the earnings, but call buying in the February contract at strikes 10 and 12.50 could indicate an outlook for recovery heading into the early part of next year. 

Source: Monday Options Update: MER, AMGN, SLW, VNDA, PFG, HW