Options Scan On Thursday: Unusual Call Activities For Nationstar Mortgage And Illumina

Includes: ILMN, NSM
by: Nick Chiu

Mixed economic numbers were reported on Thursday. The Commerce Department revised its estimate for third-quarter U.S. GDP growth to 3.1%, up from the prior estimate of 2.7%. However, the initial claims number of 361k was higher than the market expectation of 345k and the continuing claims number was also higher with 3225K, as compared to the market estimate of 3192k. The Philadelphia Fed number of 8.1 was higher than market expectation of -1.3. The existing home sales number was higher than expectation, but the leading indicators number of -0.2% was lower than the market expectation of 0.2%.

The market made back some of its loss yesterday. S&P led the gain with 0.55% gain, followed by Dow Jones' 0.45% increase. NASDAQ recovered 0.20% at closing. SPY, DIA, and QQQ were all still above its 50-day MA. All sectors were up on Thursday and financial sector led the gain with 1.04% advance and healthcare sector lagged with 0.05% gain.

The market is currently driven by greed, with Fear & Greed Index at 66. As reported by CBOE, the total put/call ratio for Thursday was 0.86, and the index put/call ratio was 1.11. The equity put/call ratio was 0.64, and the CBOE volatility index (VIX)) put/call ratio was 0.59. In the following, top 2 stocks had been identified through our daily options scanning process, with the scanning criteria where the daily call volume ratio was above 4.00 (4x of the average call volume) with a call volume above 10,000.

Name (Ticker)

Call Volume

Average Call Volume

Daily Volume Ratio

Nationstar Mortgage Holdings Inc. (NYSE:NSM)




Illumina, Inc. (NASDAQ:ILMN)




Source: Schaeffer's Research

Nationstar Mortgage Holdings:

NSM provides residential mortgage services throughout the United States. Nationstar Mortgage services approximately one million loans with an aggregate unpaid principal balance of $198 billion as of September 30, 2012. The Company's clients include national and regional banks, government organizations, securitization trusts, private investment funds and other owners of residential mortgage loans and securities.

On Nov. 6, NSM reported Q3, 2012 record net income of $55.1 million, or $0.61 per share and raised fiscal 2012 adjusted EBITA guidance to $400-plus million.

NSM has an enterprise value of $6.66B and a market cap of $2.85B. The current book value is $7.75 per share, mrq, and the Company has a total cash of $601.98M, mrq. NSM is currently generating revenue of 597.90M with a diluted EPS of $1.60, ttm. The profit margin is 26.16%, and the operating margin is 24.80%.

NSM closed at $31.99 with 4.95% gain on Thursday. NSM had a late surge after 2:20PM. The volume of 1.54M was 18.46% higher than the 30-day average volume of 1.30M. NSM had been trading in the range of $13.00-$37.20 in the past 52 weeks. The MACD indicator (12, 26, 9) is showing a bullish sign and the MACD difference diverged yesterday. RSI (14) is showing a strong bullish lean at 63.00. NSM closed above its 50-day MA of $30.29 on Thursday with next resistance at $36.97, its R1 pivot point, as seen from the chart below.

(Click to enlarge)

Source: StockCharts.com

The most active call for NSM was July 19, 2013 call at the strike price of $40.00 and $45.00 with the same volume of 10,126. $40 call had an open interest of 3,286 with the implied volatility of 56.2. The chance of breakeven is 18.46. $45 call had an open interest of 35 with the implied volatility of 54.5. The chance of breakeven is 13.08. The historical volatility for NSM is 28.64 for 1 month, 57.88 for 3 months, and 50.23 for 6 months. It is logical to assume both 10,126 contracts for $40/$45 call were opened by the same trader for the call spread. However, the writer is not able to determine which side (bullish or bearish) is being setup. Investors can put NSM on to watch list to see how it plays out.

Illumina, Inc.

ILMN is a developer and manufacturer of life science tools and integrated systems for the analysis of genetic variation and function. ILMN focuses on the development and distribution of instruments and related consumables for genetic analysis. The Company operates within two core segments: microarrays (40% of sales) and DNA sequencing (60%). As the market leader within both categories, ILMN has become a one-stop shop for genetic research.

ILMN jumped today on unconfirmed reports that Swiss drug maker, Roche Holding AG, may be discussing to purchase ILMN at a substantially sweetened price of $66.00 per share or $8.1 billion. ILMN had rallied more than 80% since the start of 2012 on speculation that the provider of DNA sequencing technology may be acquired.

ILMN closed at $56.22 with 7.77% gain on Thursday. The volume of 9.07M was 6.53x of the 30-day average volume of 1.39M. ILMN had been trading in the range of $26.52-$57.00. The MACD (12, 26, 9) indicator had turned bullish on Thursday, and the RSI (14) is in the over-bought territory at 70.28. ILMN tested its R1 resistance at $56.07 on Thursday and closed above it. The next resistance is $58.44, the R2 resistance pivot point, and the major support is $50.07, its 50-day MA, as seen from the chart below.

(Click to enlarge)

Source: StockCharts.com

The most active call was Dec. 21, 2012 call at the strike price of $55.00 with a volume of 2,517 and an open interest of 4,375. The implied volatility is 48.5, and the chance of breakeven is 42.82. The historical volatility for ILMN is 28.37 for 1 month, 29.01 for 3 months, and 47.46 for 1 year. For traders who are betting on the acquisition deal, a credit bull spread can be reviewed as it will reduce the effect of increasing implied volatility and the time decay issue.

Note: All numbers/prices are quoted from the closing of December 20, 2012 with the data provided from Barron's, MorningStar, Schaeffer's Investment Research, Inc., Google Finance, and Yahoo! Finance. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.