Friday Options Outlook (Update): SOLF, TIN, MYGN, MSFT, DNA, DRYS, HRS, DO, JCG, HHH

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Includes: DO, DRYS, HHH, HQCL, HRS, JCG, MSFT, MYGN, RHHBY, TIN
by: Interactive Brokers

Solarfun Power Holdings Co. (SOLF)  – The week in option trading is wrapping up much as it began – with tenacious volatility in the Chinese solar power stocks. Making waves today is Solarfun Power Holdings Co. where shares are up 15.5% to $21.34 and implied volatility at nearly 135% virtually eclipses the 85% historic reading. The company, which is due to report earnings next week, has lost more than a third of its share price so far this year as short interest has ballooned to more than 15 million shares – more than a quarter of the shares outstanding as of late January. The fact that twice as many calls are trading as puts may be indicative of some short covering in the market, as even the May 20 calls have traded primarily to buyers on volume twice the open interest today. Activity in the June contract has shown heavy buying interest in 22.50 calls, with a similar tendency to buy puts (albeit on lesser volume) at the same strike for $5.20. Traded together, this long-volatility position costs $7.80 – more than a third of the current share price – testifying to the astonishing level of turbulence that option traders are pricing into this company ahead of next Wednesday’s earnings. 

Temple-Inland (TIN) – Options in paper and packaging maker Temple-Inland continue to compel upside wagers. One day after our market scanners detected trading activity consistent with takeover rumor positioning, shares are up 2.3% to $14.85 and its options are trading at more than 18 times the normal level. Whereas yesterday’s action showed heavy localization in late-summer and autumn calls, traders this afternoon are confidently buying June 15 calls for 90 cents apiece in a move suggesting sustained upside for the share price. Those August and November calls at the out-of-the-money $20 strike also drew a steady trickle of traders, and the fact that most of these contracts continue to be bought on the offer suggests that yesterday’s takeover rumors may not have been just a flash in the pan.

Myriad Genetics (MYGN) – Filed under highly aberrant volatility options we find options in Myriad Genetics, a biotech concentrated in Alzheimer’s disease and hereditary cancers. Earlier this month the company reported a narrower-than-expected Q3 loss due to increased cancer drug sales, but its implied volatility reading has retained an almost preternatural elevation at nearly 3 times the historic reading. This may be tied to anticipation over results of clinical trials for its Alzheimer’s drug r-flurbiprofen. With nearly 40,000 options trading today, Myriad is one of the most active tickers on our platform, with an unusual level of put-buying at out-of-the-money strikes, specifically at the 35 line in the August contract and at the 40 line in November.

Microsoft (NASDAQ:MSFT) – With abundant attention already devoted to option activity in Yahoo given this week’s aggressive proxy action by Carl Icahn, we wondered if the drama might reinvigorate the upside speculation in Microsoft. Shares are 1.4% lower at $30.02, still above the critical $30 level as the May contract slips into expiration, and with nearly 60,000 options trading in the first 2 hours of the market, it ranks among the most active tickers on our platform. As for the bullish implications of Yahoo’s share price drama for Microsoft, option traders are paring their expectations, gladly selling June 30 puts and buying 30 calls for 95 cents, albeit in what looks like long call spread activity involving the sale of 32 strike calls for 23 cents. This certainly dampens any euphoric upside in the wake of a Yahoo shareholder-upbraiding. Alternately, we observed heavy buying in July puts at the 27.50, 29 and 30 strikes, suggesting downside pressure on Microsoft’s share price coinciding with Yahoo’s shareholder meeting on July 3.

Genentech (DNA) – Shares in Genentech rose 1.5% to $69.86 on news that its cancer drugs Avastin and Herceptin showed encouraging results in clinical trials when used with other drugs. The aim is to expand the use both drugs – which are already approved for use in breast, colon, and lung cancers – for more tumor types and at earlier stages of the disease. A 28% comedown in implied volatility depleted premiums on June options, yet traders appear willing to sell into that phenomenon, with calls and puts at the June 70 line selling to the bid despite discounted price levels. Calls at the 75 and 80 strikes, and puts at the 65 and 75 strikes also sold, suggesting the options market anticipating relatively rangebound activity before Genentech’s next earnings cycle. Today’s 45,000-strong option volume matches up to around 10% of the total open interest – twice of which is held in call positions.

Dryships (NASDAQ:DRYS) – Dry-bulk shipper Dryships spackled gains on this final day of the May option contract with a 3.2% rise in shares to $110.00 before the noon hour. With nearly 37,000 options in active trading ahead of the noon hour, Dryships ranks among the most active options on our platform, as the implied volatility reading on all Dryships options shows the market pricing in 18% more price risk than is the historic norm for the underlying stock. Volume in excess of open interest continues to move in the May contract at the 110 calls and puts, attracting buyers and sellers hoping to capture premium on mercurial price movements on expiration day. As is apparent from the pent-up implied volatility reading, the big move for Dryships will come next week, with the company due to report earnings after the bell on Monday, following a week that brought new all-time highs in the Baltic Dry Index. The price of the June $110 straddle currently ticks in at $20.40, again showing an 18% possible move on back of the numbers reflected in current options prices. More than 3 times as many calls are trading as puts today.

Harris Corp. (NYSE:HRS) – Early session deal talk appears to be driving the action in Harris Corp., the maker of radio frequency and other communication solutions for the defense sector. This morning it was reported by Radio World that Harris Corp might be keen to sell itself, and that military contractor General Dynamics - maker of aerospace, combat and marine systems - might be looking to boost synergies of its own by buying them out. Implied volatility on all Harris Corp. options rose 44% on the news to 50% as shares advanced 6% to $63.76. Option volume soared 6 times the normal level, with calls outmoving puts by nearly 14 to 1. June calls are most active, with brisk volume trading to buyers and sellers in excess of open interest at the 60 and 65 strikes – the latter strike swelling 300% in value to $3.00. Harris Corp. shares are already within $3 of their 52-week high, and option traders hold more than 3 times as many calls as puts.

Diamond Offshore Drillers (NYSE:DO) – Shares in the offshore driller rose 2.5% to $138.70, trending with the broader oil services sector as crude prices brushed record highs once again. With options trading at nearly twice the normal level, we observed unusual activity in the September contract, with what appeared to be a 1,000-lot short collar at the 125 put line and 155 call line. If our observations are correct, the trader sold the 125 puts at $6.60 to cover most of the cost of the 155 calls at $6.90, protecting a short position in the stock that would come under pressure from today’s upside share price movement.

J. Crew Group (JCG) – Trading against a 3.5% decline in its share price to $48.13, J. Crew options are moving at 3.4 times the normal level, with sporadic call activity showing an indication to sell deep-in-the-money calls at the June 42.50 strike for $6.50, while calls at the September 50 line were bought for $4.70 and December 60 calls were sold for $2.60.

Internet HOLDRs Trust (NYSE:HHH) – This week’s acquisition of online media company CNET Networks by CBS and the prospect of a feet-to-the-fire proxy fight at Yahoo by activist shareholder Carl Icahn may have induced one option trader to position bullishly in the Internet HOLDRS Trust, of which Yahoo and CNET are both components. The 30-fold increase in option trading we observed occurred at the June 60 call line, where the 75 cent price tag drew a 5,000-lot fresh position. Assuming the position was bought, the trader would be angling for a return to the $60 price level for an ETF that last visited those levels in late December.

Rebecca Engmann Darst contributed to this report.