Thursday Options Update: UST, BAC, CAG, MAS, TEX, NUAN, NRG, CLX

Rebecca Engmann Darst contributed to this report.

UST (UST) – Shares in UST Inc. (otherwise known as US Tobacco), the parent company of Copenhagen and Skoal tobaccos, shot more than 2% higher to $55.28 after the company withdrew its presentation at a Lehman Brothers Consumer Conference – giving rise to speculation that it might be entertaining a takeover bid. UST last moved on speculation earlier this year that Altria might be a suitor. Almost immediately we saw an absolutely seismic 45% jump in implied volatility as options volume swelled to 48 times the normal level. As is typical of a stock moving on rumors of the “art of the deal” persuasion, this is heavily ensconced in call buying at the September and October 60 lines, sending overall call volume to more than 8 times that of calls. A break of the $60 would set a fresh 52-week high for UST shares – current premiums suggest about a 21% shot at that level by the next expiration go-round on September 19.

Bank of America (BAC) – Broader financials are taking a beating today amid a 200-plus-point drop in the Dow. For a quick read on renewed bearish sentiment heading into the fall, consider the activity today in Bank of America. Shares are down more than 4% at $31.55, and the 100,000-plus options in active deployment today are trading twice as often to puts as to calls. One sizable block trade in excess of 25,000 lots took place in November 25 puts, bought for about $1.20 apiece. While open interest has accumulated there fairly steadily post-July 15 (after the price of the position dropped from more than $7 to under $2), today represents the heaviest day of trading in this contract we have on record – suggesting that this might be a fresh long position from a trader looking for a 25% leg to the downside for Bank of America shares by late-fall. 

ConAgra (CAG) – One day after ConAgra cut its quarterly guidance on rising input costs and was swiftly rejoindered with a series of analyst downgrades, its share price decline has petered out and now reads .41% lower at $19.55. A trader appears to have seized upon the die-down in ruckus to enter a belated 20,000-lot position at the December 20 line. With both sides trading to the middle of the market, we can’t confirm whether this is straddle or conversion activity – premiums paid suggest that both sides of this position may have been sold, a position that would carry with it a premium of $2.40, representing the maximum profit to be gained on this trade if ConAgra shares close at $20 on December 19.         

Masco (MAS) – Shares in Masco, the parent company of Delta Faucets and KraftMaid Cabinetry, are showing a 2.5% downtick to $19.18 amid persistent housing-sector doldrums. Despite the dour sentiment, shares in Masco have waged a tough-as-nails 42% battle back from July 15 lows, and it looks like a trader may have taken the opportunity presented by lower call-side premiums to bet on a slow continuation of the recovery theme. This at least looks like the takeaway from a 12,500-lot position bought in January 25 calls today, which sent overall option volume to an elevated level today. We should note that the premium paid for those January 25 calls (60 cents) would put Masco shares within a 55-cent range of its 52-week high ($26.15) – unseemly speculation for a company with such unmitigated exposure to the housing market.

Terex Corp (TEX)    – In decidedly less contrarian action, we saw shares in Terex Corp, the world’s third-largest maker of construction equipment, tank 19% to $38.63. This occurred after the company slashed its year-end sales and profit guidance, a move preceded by similar action in the mining equipment stocks yesterday. Options volume quickly swelled to more than 8 times the normal level, with a 2-to-1 predominance in defensive put plays sending implied volatility up 20.2% to 58.3%.

Nuance Communications (NUAN) – Options in Nuance Communications, the maker of voice-recognition software, flicked our scan of relative volume gainers with a five-fold increase in trading activity that masked heavy call buying in October 17.50 and January 20 strikes even as shares sustained a 4.3% drop to $14.74. Implied volatility on all Nuance options has risen some 23% in the space of a week, and now at 51.5% is substantially elevated above the 40.3% average on the stock. Open interest shows a strong prejudice in favor of call positions, these contracts to buy Nuance stock outnumbering contracts to sell by more than 3 to 1 for most of 2008.

NRG (NRG)–The initiation of a long 5,000-lot strangle in the September contract between strikes 32.50 and 37.50 shows one trader appearing to bet on a break out of independent power production NRG’s $6 trading range of the past month. The position, opened for a 55-cent debit, covers the trader in the event of a break above $38.05 or below $31.95, and represented twice the normal level of daily volume shown in NRG shares overall. Shares in NRG are flat at $35.13 today, and with implied volatility (33.8%) rating well below the 44.5% historic reading on the stock, today’s trader may have found this long volatility position a bargain.

Clorox (CLX) -  Elsewhere in takeover scuttle news, Clorox showed an early session increase in options trading volume to more than 9 times the normal level. The impact of the bullish rumors is apparent from the 21-to-1 skew to calls and a 15% spike in implied volatility to 25.8%. With shares up 1.2% to $61.74, demand is clustered at the September 65 and October 65 call strikes.