Friday's Options Report: MSFT, Terso, HAL, Wellcare, EWJ, & IVV

by: Interactive Brokers

MSFT –Banner sales for Windows Vista in the third quarter of this year spelled bumper profits for world’s leading software maker Microsoft. Shares in the company, which are otherwise fairly nonplussed by bullish tech news, were lifted 11% to set a 6-year high, sending options to 3 times the average volume. With shares up 11% to $35.54., more than twice as many calls are moving as puts, with a surge in call-side premiums contributing to what looks like profit-taking in the November 32.50 calls – its premiums are up 275% on the session. Evidence of what looks like a new era of liquidity in Microsoft options is apparent in November call strikes as high of 37.50, and in the January contract, where buyers and sellers have swapped calls at strikes as high as 40.

TSO – Tesoro – Options in oil explorer Tesoro are moving at more than 3 times their usual level today, as shares gain 11% to $63.59 following the announcement of a $1.4 billion tender offer from billionaire investor Kirk Kerkorian’s Tracinda Corp. The offer, which values Tesoro shares at $64 apiece, would add an additional 16% to the 4% holding Kerkorian already holds. With premiums higher on the surge in share prices, we were interested to see traders flock to sell November 65 calls at prices 283% higher than yesterday. These calls sold on a volume of 12,000 lots – nearly 3 times the prior open interest. Buying interest was seen in the January calls at strikes of 65 and 75, implying a massive move higher for Tesoro shares in January. The share is currently trading at within a buck and change of its 52-week high.

HAL – Halliburton shares are 0.8% higher this morning at $41.35 and just a shade below the 52-week high at $41.95 11 days ago. A large amount of calls appear to have been bought in Friday’s session at the 45 strike where 52,000 lots have gone through at a premium of close to 0.33. That gives a buyer the right to buy stock before expiration in November at a fixed price of $45 while the trade would make money at prices above $45.33.

Halliburton’s shares slid last weekend shortly after crude oil recoiled from a record high above $90 per barrel. At the time the fear surrounding the price spike was enough to pull the rug from beneath investors’ feet sending the Dow careening by almost 400-points in a single session. Implied volatility on Halliburton’s options surged in sympathy, to 40% but has eased back since. Today’s unusual options buying coupled with a move higher towards uncharted territory for the share price has raised market makers blood level and volatility is once again heading higher. At 33.2% implied options volatility once again exceeds that registered by the shares, which show a 31.8% reading of historic volatility. The desire to get long Halliburton could be once again motivated by a surging price of oil, which again printed a record high today at the same time as the dollar index traded a new record low. It seems that a week is a long time in investing given the pattern of events just one week ago. Perhaps it’s the fact that strong earnings results were seen to shore up investor appetite for stocks this week. A week ago, more financial sector bloodletting was the cause for concerns over a global meltdown. This week investors are more accepting of the dollar and crude oil relationship, and feel comfortable that next Wednesday the Fed will ease rates again. It could just be the case that this investor is making a bet that lower interest rates and higher crude oil prices can coexist and that this will be good for oil services stocks.

WCG - Wellcare Health Plans Inc - Options are moving at more than 3 times the average volume against a more than 26% slide for shares to $31.27, this after yesterday’s 60 % drop following an FBI raid on its headquarters. Details are sparse about the Fed swoop on Wellcare, which provides managed care services for government-sponsored health care programs Medicare and Medicaid. Early speculation has centered on possible fraud activity. The slide in share prices has sent put-side premiums sharply higher, though the brunt of the volume is occurring in December calls. It appears that a trader made good on yesterday’s $5.10 shorting of December 60 puts, buying them back today for $2.90 to close out the deal. Implied volatility at 195% compares with the 255% fluctuation its shares have actually shown.

HUM - Negative publicity for managed health care sector in the wake of the Wellcare scandal appears to have spilled over to Humana (HUM), whose shares are down 4% to $73.81. Options are trading at nearly 8 times the average volume, with heavy volume at the November 70 puts, where premiums are up 180% on the day. It appears that traders bought these puts for around $2 in anticipation of a slide below $70 in the near term. It doesn’t appear that it’ll take much of a knock to send Humana’s shares below that level – it broke the $70 after climbing admirably from a 52-week basement in August.

EWJ - Option volume in the iShares MSCI Japan Index Fund (EWJ) climbed to 5 times the average level after it appears that a trader may have taken advantage of a 1.3% climb in share price to $14.09 to close out a sizable 30,000-lot position in the January 15 calls. The climb in share price in US trading followed the first session gain for Nikkei stocks in three days. Given the volume and open interest on this strike, it appears that today’s sale of calls closed out positions bought last Friday and yesterday at prices of $0.17 and $0.15. The modest rise in share price for the EWJ gave these calls a 33% boost to $0.20.

IVV - Today’s marginal move higher for the S&P resulted in a largely flat performance for the IVV, the ETF tied to the bluechip index’s performance. With the underlying share price at $152.39, it appears that a trader positioned for downside for the S&P next spring by buying put spreads in the March contract, selling the 152 strike at about $6.40 apiece to finance the purchase of puts at the 153 strike for $6.60.