Wednesday Options Outlook: EP, FTO, XLE, YHOO, FRX, EWZ, ETH, ACN

Rebecca Engmann Darst co-authored this article.

El Paso (EP) – A fit of call buying in the October 17-strike calls of El Paso, the owner of North America’s largest interstate natural gas pipeline system, sent overall volume to some 32 times the normal level and drove its implied volatility up nearly 50% today. Shares in the company have shown muted upside, up .71% to $15.53. The market appears relatively stumped as to the reason for the sudden and fairly staunch interest – perhaps it’s a gesture of solidarity with the Republican National Convention? The order flow is occurring extraordinarily piecemeal which could suggest large-scale retail volume – no large blocks to report that might suggest an institutional trader getting in on the mix. While most of the volume has been bought at 70 cents, we’ve noted some selling as well at 70 and 75 cents apiece – which could indicate a revolving door of two-way intraday volume.

Frontier Oil (FTO) – Call-buyers are also setting the agenda in Frontier Oil, the Rocky Mountain and Plains States oil refiner. Today’s southward bent to oil futures brought light sweet relief to Frontier, sending shares up 6% to $18.48 and making at least partial reparations against the 55% decline in its share price since the first of the year. Calls are outtrading puts by nearly 92 to 1 today as we observe hefty buying interest in September 20 calls – these trading at nearly triple the open interest at 65 cents per contract – and the 22.50 calls. The rush to buy calls drove implied volatility in all Frontier Oil options some 16% higher to 75.3%, a sharp elevation above the 64.7% historic reading for Frontier shares.

Energy Select Sector SPDR (XLE) – Shares in the Energy Select Sector SPDR, the closed-end fund that tracks major oil and energy companies, pulled back another . 85% to $69.95 after yesterday’s active and broad selloff in commodity stocks which followed the lesser winds of Hurricane Gustav and possible unwinds connected to the demise of the commodities-heavy Ospraie Fund. A few trades of note here this morning – including some counterintuitive selling in September 70 puts on a volume of some 21,500 lots at $1.72 per contract – we wonder if this may represent the trimming of a position put on back on August 19, the last date for which very heavy volume at this strike was recorded. The at-the-money $70 line was a battleground in the December contract as well, where it looks like a 5,000-lot straddle was deployed – both sides trading to the middle of the market for a combined premium of $10.70. A buyer of this straddle is willing to fork over 15% of the current share price to protect against a new rally past $80.70 or down below $59.30 (setting a convincing new low), while a seller expects the price of the energy sector basket to stay put.

iShares MSCI Brazil (EWZ) – Shares in the iShares MSCI Brazil equity fund declined .76% to $69.58. Implied volatility shows a moderate but stable elevation of 40.8% against the 35.7% historic reading in the stock. The action here suggested traders playing on further declines or volatility in the heavily commodity-exposed Brazilian basket by year’s end. In a pair of trades, a trader first traded a 3,000-lot conversion at the December 70 line, selling calls for $6.40 and buying puts at $5.80. A 5,000-lot transaction involving the same strikes 5 minutes later traded to the middle of the market.

Yahoo! (YHOO) – Relatively stable price action in Yahoo! (shares are up about 1% at $18.96, trending with the broader Nasdaq index) may have elicited a trader to position bearishly on the stock heading into October. The action encouraged an 8,000-lot transaction in which a trader appeared to sell the 25/27.50 October call spread for a 9-cent credit, which would have skimmed ever-so-little off the price of a $2.09-per contract long position in October 20 puts. Operating under the somewhat brazen assumption that these are opening positions, the trader is looking for a drop at least below $18 by mid-October. We should add that Yahoo earnings are due out the day before the expiration of the October contract on October 17.

Forest Laboratories (FRX) – Shares fell 14.7% to $30.83, resting beneath the 52-week low, after a drug in development for the treatment of COPD (smoker’s lung) together with Spain’s Almirall showed less promising results in clinical studies. There was an immediate effect on Forest Labs’ implied volatility in the form of a spike of just under 20% to 45.2% - comparing this up against Forest’s historic volatility shows the options market suddenly pricing in 68% more risk to its share price than previously. Traders have largely chosen to play this through the November contract, first with a 2,000-lot short call spread between strikes 35 and 40. The trader in this case took an 86-cent credit in the expectation that Forest Labs’ shares won’t recover past the value of the lower strike – bearing in mind that the company closed at $36.27 indeed, that’s a fairly staid assessment of its rebound power. In apparently unrelated volume, we also observed buying interest in November 30 calls, which would indicate some traders putting a mid-term floor on any downside.

Ethan Allen Furniture (ETH) – It takes a well-upholstered posterior to withstand the knocks that a lackluster home market has inflicted on shares of Ethan Allen Furniture. A drop in quarterly profit guidance for the firm, well in advance of its October 24 report, sent shares down 5.8% to $25.61, about $3.50 above its 52-week high, as traders rushed to establish fresh put positions at the October 22.50 line, sending overall volume to 28 times the normal level. Put positions have become as the trusty recliner to many option traders, with put positions outnumbering calls by 3 to 1, a lofty proportion that has remained largely stable for most of this year.

Accenture (ACN) – Shares in consulting firm Accenture dropped 6% to $39.40 today on no apparent news catalyst – this in a share that has held up fairly well this year with a gain of 10% so far. The suddenness of the share price move lent vigor to trading in its options, which are moving at about 9 times the usual level today. We’re observing a brisk two-way traffic in September and October puts at the 40 strike, both of these contracts trading in excess of open interest. Contrarians seemed content to express their views using longer-dated options, as was the case for one trader who bought a 5,000-lot position in January ’10 40-strike calls for $6.60. The premium here suggests at least another 18% upside from current levels between now and the inaugural month of the next decade – no rush getting there.

Comments

[gon4beer:]

Option activity in EP was due to Jeff Clark's (of Stansbury Research) recommendation yesterday morning; "Buy the El Paso Energy October 17 calls (EPJR) up to $0.70." Other EP calls were also suggested. Jeff's track record is pretty darn good and he has a LOT of followers, including this author.

2008 Sep 04 08:29 AM