Thursday's Options Report: XLF, ABX, BIDU, YHOO, WCG, MDCO, NTAP, CMCSA

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Includes: AABA, ABX, BIDU, CMCSA, MDCO, NTAP, WCG, XLF
by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

(NYSEARCA:XLF) –Testimony on Capitol Hill from Fed chairman Ben Bernanke on the state of the U.S. economy, combined with rude losses at Europe’s largest bank, UBS, gave the financial sector quite a sour cud to chew on today. This morning’s record loss at UBS included $871 billion in writedowns on credit protection from monoline insurers, offering an unappetizing glimpse of what the next phase of fever and ague on financial companies’ balance sheets could bring. Ben Bernanke, meanwhile, characterized the U.S. growth outlook as simply “sluggish,” with possible continued deterioration in housing and labor markets that gave investors no joy to hear. Shares in the Financial Select Sector SPDR are down 1.3% to $26.79 in response, and the fact that two and half times as many puts are trading as calls immediately suggests a wave of dour pessimism gripping markets today. Much of this may be due to the unwinding of positions in February puts, but it should be noted that the heavy volumes in February 26 and 27 puts are trading primarily to buyers. Puts at the lower strike traded earlier this morning for 7-8 cents, but have since appreciated 50% in value since Bernanke’s comments, as the market now prices in about a 1-in-4 chance that XLF will close below $26 tomorrow. March volume showed traders ready to buy cheap calls at the 29 and 32 strikes.

(NYSE:ABX) – This week’s retreat in gold prices has sent shares in metals and mining stocks correspondingly lower. Shares in the world’s largest gold producer, Barrick Gold Corp., are nursing a 1% decline to $48.24. With the company due to report earnings next Thursday we expect to see a pickup in interest in the March contracts heading into the report, but the fact that today’s volume in Barrick hit its highest level in at least a year was due to fresh position in $55 calls in the January ’09 contract. These lots traded for $6.10 – a long position implying a break of at least $61.10 at the start of next year. Barrick shares posted a multiyear high of $54 late last month and have come off those wuthering heights over the past two weeks.

(NASDAQ:BIDU) –Shares in China’s most heavily trafficked Internet search engine, Baidu.com, powered 3.5% higher to $270.17 this morning. Earlier today the company reported a 79% rise in Q4 profit as Baidu consolidated its lead over market rivals Sohu.com and Yahoo!. Option traders today may be taking profit in strangles entered in anticipation of the earnings release, along with heavy traffic in February calls at strikes 280, 290 and 300. Option premiums have put a glass ceiling of sorts on the anticipated upside for Baidu, with the 35-cent price of the February 300 call implying just a 4% chance that shares can hit that target – Baidu’s average price of the past 6 months – by tomorrow.

(YHOO) – Yahoo! – Shares are .20% lower at $29.82 as the search engine continues to taunt and tantalize traders with talk of white-knight suitors with the wherewithal to outflank and outbid Microsoft. With buzz tapering off after yesterday’s suggestion that Rupert Murdoch’s News Corp might make a bid, option traders appear increasingly wary that any new deal is going to offer much of a premium to Microsoft’s original bid. April 32.50 calls sold off heavily at 92 cents per contract, open interest having more than tripled at this bullish strike after Yahoo’s initial rebuff of Microsoft’s bid. Calls at the April 30 strike traded to the middle of the market at $2.26. All of this contributed to sending call volume to quintuple the level of interest in puts.

(NYSE:WCG) - Options in the health insurance segment moved heavily yesterday on news of a New York State Attorney General probe into health insurer practices, and the degree to which companies may be colluding to limit reimbursements to policy holders. Today shares in another health care provider, WellCare Health Plans, which provides managed care for government-sponsored Medicaid and Medicare recipients, are moving on more bullish chatter. Shares are up 7.4% to $52.19 and its options are trading at 3.5 times the normal level, ostensibly on takeover speculation of a highly unspecific sort. While the interest in buying out-of-the-money calls at strikes 55, 60, 65 amd 70 is consistent with option activity in a would-be takeover target, we note that implied volatility – a measure of the market’s expectation for precipitous price action in a given stock – has remained flat on the news and at 85% is actually a couple of points below the level of fluctuation the market has already seen from the likes of WellPoint over the past 12 months. Shares in the health care provider have regathered 22.9% of their value for the year to date, following a stunning blow in October 2007 when Federal agents raided the company’s Florida headquarters as part of a fraud investigation. Perhaps soothed by the company’s resilience, option traders hold 1.5 times more call positions than puts in WellCare.

(NASDAQ:MDCO) – The Medicines Company – Yesterday’s elevated option volume in the maker of Angiomax injectable coagulant appeared to be earnings-related, with a narrower-than-expected drop in Q4 earnings and positive earnings guidance for 2008 coalescing with a broader market rally to send shares 5% higher. We noticed at the time that implied volatility remained elevated at some 1.2 times the historic reading – a strong hint that option investors didn’t believe the full force of the earnings release had been expressed in its share price. Today we find options in The Medicines Company once again commanding 14 times the normal level of volume as shares trade just a sliver higher at $20.90. Implied volatility continues to show about 17% more price risk to its shares over the next month than has been documented historically, with heavy traffic in March and April 20 calls and fresh positions in April 20 puts. If traders are going long the April 20 puts, it’s a startling contrarian move following this morning’s analyst upgrade of the company’s stock.

(NASDAQ:NTAP) –Network Appliance – An analyst downgrade of Network Appliance today follows Wednesday’s profit warning on back of a “dramatic slowdown” in U.S. tech spending. Shares are down 3.6% to $22.20 and options are trading at 2.5 times the normal level, with what looks like profit taking in March puts at the 22.50 and 25 strikes.

(NASDAQ:CMCSA) – Comcast Cl A – Shares in the nation’s largest cable operator gained 7.3% to $19.13, bolstered by news of a 54% increase in Q4 profits and assurances from the company’s CEO that it will boost its dividend, ramp up share repurchases, and steer clear of costly new acquisitions. Option volume more than tripled on the news, with heavy buying in March 20 calls, selling in April 17.50 calls for $2.30 apiece and buying of 17.50 puts.

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