Tuesday's Options Report: CFC, Starbucks, ISIS, CVS, BUD, DFS

by: Interactive Brokers

(CFC) – Embattled mortgage lender Countrywide made headlines this morning after it emerged in a Pennsylvania courtroom that the company had apparently “recreated” or “fabricated” documents pertaining to a Pennsylvania client (now plaintiff) who sought bankruptcy protection to save her home from foreclosure. The case, which was detailed on The New York Times website, has invited fresh scrutiny of the company’s business practices. Shares in Countrywide are down 14% this morning at $6.57 – the latest in a string of increasingly ignominious downside milestones - and with 118,400 options trading, it’s one of the most active tickers on our market scanner. Implied volatility took a 30% uphill hike to 174.8% as traders appear to be positioning for more volatility – not less – in Countrywide’s battered share price. Twice as many puts are trading as calls, with some 21,500 lots mostly bought in the July 7.50 puts – a level 3 times the existing open interest. We also observed what appeared to be strangle buying in the January contract between the 5.0 and 7.50 strikes, a position which costs $0.95 today but protects the trader in the event of a test of the $4 level to the downside or around $8.45 to the upside.

(NASDAQ:SBUX) – Options in Starbucks are moving on a double-whammy of news catalysts this morning. Shares are 9.3% higher at present dispatch, trading at $20.09, following news after the bell that the company’s founder and chairman Howard Schultz will return as chief-executive after an 8-year hiatus. Starbucks shares had spent much of yesterday hovering just above the $18 level – its standing 52-week low – on news that McDonald’s plans to roll-out a less-precious version of specialty coffee drinks, capitalizing on an increasing mass-marketization of these European-style beverages to the java-swilling masses. With 118,500 contracts in play before the noon hour, Starbucks is one of the most actively traded tickers to appear on our market scanners, with puts outpacing calls by a factor of 1.6. The mood here appears to show a defensive posture among traders, perhaps looking to hedge their bets as Starbucks looks to give the horns to the golden arches. This was reflected not just in the persistent high level of implied volatility, which at a hopped-up 46.7% is 1.5 times the 29.9% historic reading, but also in fresh put buying in the February and April contracts at the 17.50 strike.

(ISIS) – Options in Isis Pharmaceuticals, a drug maker focused on RNA-based (antisense) therapies for the strategic treatment of illness, are trading at 20 times the normal level today. Today’s activity represents the most frenzied in at least a year, as shares surge 30% to $19.05, blowing past the standing 52-week high. Late yesterday at the JPMorgan Healthcare Conference, biotech Genzyme announced that it had struck a deal with Isis to license its experimental cholesterol drug, mipomersen, an antisense drug which is currently in late-stage clinical trials. The injectable drug is to be targeted to patients with a family history of high cholesterol, and who have not been responsive to other therapies. Option traders put 6 times as many calls in play as puts, with January 20 calls trading on volume of more than 17,000 lots, twice the open interest, and mostly selling to the bid. The same phenomenon – fresh writing – was observed at the same strike in the February contract, and may be indicative of shareholders looking to enhance their yield by pocketing premiums at those strikes – the $2.00 price per contract in the January 20 call represents a 1100% appreciation from yesterday, while the $1.00 premium in the February call is up 900% on the session. A trader in this case would be either be reasonably certain that the froth around Isis shares will subside in the coming sessions, resulting in the call expiring worthless, or happy to pocket the premium if the call is exercised, owing to the underlying share position.

(NYSE:CVS) – Another ticker moving on news from the JP MorganChase healthcare conference, options in the nation’s biggest pharmacy chain, CVS showed bold volume after chairman and CEO Tom Ryan, speaking to conference attendees, characterized last week’s selloff in drug-store stocks following softer-than-expected December same-store sales as an “overreaction.” Ryan also described the drugstore chain as “more resilient” than other retailers to an economic slowdown, noting that sales of discretionary, non-pharmacy products represent barely 3% of their total earnings. We immediately saw an acceleration in option trading volume to 5 times the normal level as shares traded flat at $38.25. Of interest here was a huge-volume transaction – some 106,000 lots – shorted in the February 40 calls, a level twice the existing open interest. Our immediate observation is that this sizable transaction could be covered call writing by a holder of underlying shares, positioning for a non-event ahead of CVS earnings on January 31. Calls otherwise outnumber puts in the open interest stakes by a factor of 1.3.

(NYSE:BUD) - One of the chestnuts of the looming U.S. economic slowdown is the defensive proverb (last spoken on CNBC) admonishing traders to seek defensive exposure to “Cokes, Smokes, and Drugs.” In that environment, one would assume that with home values down, a weaker dollar, low job growth, what better time to crack open a Bud? Shares in Anheuser-Busch, the world’s second-largest brewer, reported a 3.4% increasein U.S. shipments to wholesalers, specifically its craft and imported labels such as Aussie classic Beck’s and Belgian brew Stella Artois. The current share price of $54.01 – a .24% decline on the session, interestingly - is within 50 cents of its 52-week high. Meanwhile, options volume surged early in trading, accompanied by a near-10% gain in share price to 27.3%. The positioning shows 9 times as many puts in play as calls, which is a curiosity given the bullish fundamentals. Volume in the March 50 puts may have been the result of traders making closing purchases for $0.90 of positions shorted at around $3.00 earlier in the fall. Action in the February puts at strikes of 50 and 55 was made up of fresh longs, which would protect the buyer against a decline in its share price into the spring.

(NYSE:DFS) – Options in credit card Discover Financial Services were an early mover on our market scanners, with contracts trading a 2.6 times the average level as its shares decline 3.4% to $13.89, hovering just above the standing 52-week low for a stock that has shown a more or less unabated decline since its spinoff from Morgan Stanley last year. Earlier today, an analyst note pointed to tougher U.S. economic conditions in the coming as a likely profit-poacher for major U.S. credit card issuers. Option traders responded by appearing to sell off January 15 calls, and entering fresh strangle positions in the April contract between the 12.50 and 15 strikes, anticipating volatile price action for Discover come springtime.

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