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Rebecca Engmann Darst contributed to this report.

Elan (ELN)  - “Weekus horribilis” for drugmaker Elan took hold today after its multiple-sclerosis drug Tysabri was implicated in new cases of a lethal brain infection. Coming hot on the heels of another product disappointment – underwhelming data on a much hoped-for Alzheimer’s drug in development – Elan Corp shares were stripped of 43.6% of their value $11.26. The collapse put paid to options traders who believed this week’s first selloff would find some support at the $20 level – earlier this week we observed a good number of traders selling $20 August puts in a bet that the first selloff of the week was overdone. The magnitude of today’s surprise is perhaps best articulated by its implied volatility reading, which spiked 111% to 123.3% - more than any other company today. More than 263,000 options have traded in the first half hour of the market, with a slight volume privilege to calls. As we observed earlier this week, traders are playing both sides of the selloff, with two-way traffic in excess of open interest in August calls at strikes 12.50-19 and in puts at strikes 10-15.   

Biogen Idec (BIIB) -The action was similar in Elan’s Tysabri partner Biogen Idec, whose shares are down 25% at $52.05 at present as options trade at 11 times the normal level. Earlier today we observed strangle positions going through in the front month at the 50/55 strikes. The combined premium of $3.75 would cover a buyer in the event of a recovery above $58.75 or continued collapse below $46.25, while a seller of this position would likely be taking advantage of the 51% spike in implied volatility this morning to take in a credit and wager on rangebound, depressed share price action over the next 2 weeks. In general, however, much of the heavy volume in the front month is trading to buyers as well as sellers, making it hard to get a handle on the prevailing order flow. Calls are outmoving puts by a factor of 1.7.

Alpha Natural Resources (ANR) – Reports out this morning that steel giant ArcelorMittal may horn in on Cleveland Cliffs’ (CLF) rocky acquisition of coal miner Alpha Natural Resources didn’t hurt shares in the coveted takeover target. Shares rose 6.3% to $105.21 and options volume of more than 23,500 qualified the company for our scan of top-50 most-traded companies ahead of the noon hour. Early action suggested traders positioning in long strangles at the 100/105 lines, a position that for a combined premium of $9.90 would cover the buyer in the event of a breakdown below $90.10 or above $114.90 – redolent of the heady sparks that could fly in a bidding war. Fresh positioning in the September 105 calls showed these contracts trading to buyers and sellers at $10.00 per contract.

Oracle (ORCL) – With a fair amount of merger speculation moving options in the technology and biotech spheres this week, we continue to be fascinated with the manner in which option traders buy and sell volatility in companies active in the M&A space. To that end we point to action in Oracle’s March contract, which occurred against fairly humdrum price action, a .37% decline from yesterday’s levels to $21.45. In a raft of opening positions, a trader unloaded March puts at the 17 strike (trading at 65 cents per contract), the 19 strike (trading at $1.15), the 20 strike (trading at $1.45) and the 22 strike (trading at $2.35), and crossed the sentiment divide to sell March calls at the 24 strike for $1.35. A couple of scenarios may be going on here – the most prosaic being that the customer simply believes that March volatility is overpriced and is simply writing these puts in a bid to close them out cheaper later. Alternatively, he or she may be speculating that Oracle might be taken over for $20-24 in cash – or even hedging against a position aimed at Oracle being the acquirer (as they usually are these days) in a large transaction. We take pains to note here that there are no specific rumors regarding Oracle in this capacity, and we are careful not to propagate anything suggesting the contrary; the March activity is interesting nonetheless. 

Marriott International (MAR) – Dog days for the U.S. consumer have dogged hotel chain Marriott International relentlessly this season. Shares in the company (whose options have tended to show tremendous susceptibility to takeover chatter) are have lost $10 in value since May. Today, a boost in option trading volume to 3 times the normal level showed a trader electing not to play the contrarian (or the M&A game, for that matter), instead positioning for downside well in advance of the company’s next earnings cycle (numbers are due out on October 3). The fact that shares are trading 3.2% higher at $26.74 and implied volatility at 48.2% is well below the 57.9% historic reading likely added inducement for the trader to position defensively today. This was done via a 6,000-lot put spread in the October contract between strikes 20 and 25, a position added for a debit of $1.50, and requiring a decline to $23.50 – 11% off current levels – before the position begins to make money. This could imply a new break below the 52-week low of $22.29 before all is said and done.    

Agilent Technologies (A) – Unusual options action in Agilent Technologies, the maker of testing and measurement equipment for science and industry, suggests some traders looking for new break of the 52-week high in connection with its August 14 earnings or before. Options are trading at 4 times the normal level at present as shares register a decline of .64% to $35.83. Implied volatility at 34.5% comes in right in the middle of the 52-week range for Agilent but is elevated above the 24.8% historic reading on the stock. It appears here that a trader seized upon the marginal pullback in share price to buy a sizable position in 40-strike calls for 12 cents apiece. The price level here reflects about a 9% probability of the position landing in the money by August 15. Agilent shares last traded at the $40 level in mid-July 2007. 

International Paper (IP) – Options in cardboard and corrugated products maker International Paper continue to tear up the rug today with shares up another 5% to $29.07 – capping off a week in which its shares have racked up a full $6 to the upside on better-than-expected. Yesterday its call volume shattered a new 52-week high and today we find its options trading at more than triple the normal level due to some fresh positioning in January 30 calls. This time around, it appears that the trader sold most of these options at about $2.10 apiece – taking in premium to take advantage of the rich time value of the position, and perhaps anticipating a correction in share price heading into January.

HSBC Holdings (HBC)  –  With Europe’s largest bank, HSBC Holdings, due to report interim earnings on Monday, option traders’ interest continues to focus on the September 70/80 put spread – a position that attracted volume earlier in the week. Shares are .18% lower at $82.36 at present, but a long buyer of the 70/80 put spread would pay a $2.15 premium today for a position that first breaks even with a decline to $77.85 (5% off current levels) by September 19. The 10,000-lot position here qualified HSBC Holdings for our early-morning scan of actively traded options. 

Regional Bank Holders Trust (RKH) – Much of the tense news flow surrounding troubled regional banks has died down in recent sessions – and that’s had a sedative effect on option implied volatility in the Regional Bank Holders Trust, which has come down about 25% from its mid-July highs and now at 51.1% sits below the historical reading of 64.7% on the underlying stock. While it may be far too early for traders to be speculating on a recovery for the regional bank space, it looks like one trader used a 6,000-lot long collar in the November contract to protect hoped-for gains in an underlying stock position. This was done by buying 100-strike puts at $9.20 apiece and taking a little discount on the purchase by selling 125-strike calls for $2.90. The $6.30 price tag will protect the buyer against a drop below $100 in November, while the short upper strike will result in the underlying shares being called away – a fact that the trader may not mind, appreciating the added yield.

Source: Friday Options Update: ELN, BIIB, ANR, ORCL, MAR, A, IP, HBC, RKH