Wednesday Options Outlook: CHK, YHOO, QID, SNDK, ARM, HOV

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Includes: AABA, CHK, HOV, MTOR, QID-OLD, WDC
by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

Chesapeake Energy Corp (NYSE:CHK) – Chesapeake Energy Corp staged an aggressive 6.7% advance to $71.85 after announcing a joint venture in the Haynesville Shale area with Plains Exploration valued at $3 billion. The market has placed great store in any promising news out of the Haynesville Shale field, and recent activity reports have been bullish not just for Chesapeake share price action and call activity, but for other companies (such as PetroHawk) with a presence in the region. Today’s news pushed Chesapeake call volume to a new 52-week high before the noon hour – besting the record set back on June 19 and making Chesapeake one of our top-volume movers. Call volume at the July 70 and 75 calls showed traders looking to cash out of positions at the lower strike after the value of this position rose as much as 121% overnight, but the action in 75 calls consisted primarily of buyers, well in excess of open interest. A 20,000-lot long position at the July 55 put line was also conspicuous. Speculative call activity extended into the August contract with strikes 75, 80 and 85 all trading in excess of open interest.

Yahoo! (YHOO) – Yahoo! Shares staged a 6% gain to $21.45 on a report appearing in the Wall Street Journal that Microsoft (NASDAQ:MSFT) may look to rekindle its takeover bid, and that it may be looking to pursue a breakup of the company that would leave Microsoft to feast on Yahoo’s search operations while another media company would absorb the rest of the company. The Journal posed this scenario as a means of placating CEO Steve Ballmer’s thirst for growth in search operations, and activist shareholder Carl Icahn’s indignant demands for more value for Yahoo shareholders – both motives which would seem to sandwich Yahoo’s management and board between men of (an uncommonly allied) action. Implied volatility on all Yahoo options is showing a 67.5% reading against 51.6% historic volatility on Yahoo stock. With that disparity in mind, we observed what appeared to be a 61,000-lot straddle at the October 27.50 strike, which appeared to have sold to the bid at a combined premium of $7.29, the trader in this case availing himself of the buzz around Yahoo and attendant elevated implied volatility in hopes that time decay and anticlimactic share price action will do the rest of the work for him, eroding the value of the position (ideally to nothing, if Yahoo shares are trading at $27.50 exactly) so that it can be closed for a profit. Front-month call activity at the 25 strike traded to buyers and sellers at 29 cents per contract, denoting only about a 15% chance of Yahoo shares continuing their advance past the $25 mark over the next two weeks.

CBOE Volatility Index VIX – Midday moves lower for major U.S. stocks followed dispiriting revelations from the ADP employment index, which showed the largest loss of private-sector jobs last month in almost six years. The grind lower in the S&P continued, sending index volatility as measured in the CBOE Volatility Index higher by 3.2% to 24.41. Many market observers have wondered with consternation over the absence of a substantial spike higher in the VIX that might help the market pin a timeline on a turnaround in the S&P, and it must be said that out-of-the-money VIX action predicting such a spike has been little help given that stocks are grinding lower, rather than out-and-out collapsing. That said, we can see that open interest in July VIX calls at strikes 25, 27.50 and 30 have all risen by 21% this week. Open interest at the 32.50 strike is up by nearly 25%. Today’s action, meanwhile, shows traders making two-way bets on the VIX in July calls at strikes of 25 to 30, with what may be call ladder action in the August contract at strikes 20, 25 and 30.

Ultrashort QQQ Proshares (NYSEARCA:QID-OLD) – For a further read on the contrarian sentiment, we took a look at the option activity in the Ultrashort QQQ Proshares, a closed-end fund whose share price action and option positioning are inversely correlated to the Nasdaq index. Shares are 1.78% higher at $44.49, and with more than 38,000 active options it qualified ahead of the noon hour for our scan of top-50 movers based on volume. We registered interesting activity involving a 10,200-lot play at the in-the-money 41 call strike, where it appears that a trader sold the lots in July contract for $3.30 and bought them in August for $4.50. While this might be the rollover of an existing position from July into August – the volume here falls within the bounds of open interest in the July contract, but while most of the positions here accumulated on June 23, we could not match the volume here to a specific trade on that date. Or, the trader may be running a long calendar spread, selling the July 41 strike and buying the August 41 strike, expecting time decay to erode the value of the July call more quickly than the August position so that the position can be closed for a profit. It should be noted that even a short-term decline in the value of the QID might work to this trader’s advantage – at least in the short-term – by eroding the intrinsic value of the front-month call he has shorted.

SanDisk (SNDK) – Flash chip maker SanDisk recovered nearly 7% to $18.84 after ThinkPanmure analyst Vijay Rakesh issued a note forecasting possible price stabilization for NAND flash chips due to healthy demand from Apple. Bear in mind that just yesterday the company set a fresh 52-week low on speculation that it may be considering layoffs, and has withered under an almost unrelenting assault of negative analyst attention in recent weeks. In fact, Sandisk shares are down more than a third since June 1. Early option activity shows calls outmoving puts by more than 5 to 1 as implied volatility ticks in at a two-month high of 68.6%, and while the front month shows traders readily taking both sides of bullish bets by buying and selling calls at strikes 17.50 and 20, but a large, 11,500-lot position also traded to the middle of the market at the out-of-the-money October 25 strike. While a seller would be playing against a significant rise in Sandisk’s share price by autumn and taking in the 94-cent premium as a credit, a buyer might be reckoning on recovery for Sandisk to price levels it was last showing – interestingly enough – in early June.

ArvinMeritor (ARM) –Despite an extraordinarily chancy outlook for U.S. automakers and their suppliers, Michigan-based ArvinMeritor, which makes steel wheels and axles for trucks and automobiles, guided higher-than-expected Q3 sales thanks to increased demand from military clients and buoyant international sales. Shares rose 5.4% to $13.01 and we registered an increase in option trading volume to 4 times the normal level. This appeared in heavy and fresh put volume at the November 15 strike, which traded for $3.60 per contract. Implied volatility at 78% stacks up to a historic reading of 61% on ArvinMeritor stock, which is about $4 off its 52-week low – still having traded as high as $23.25 over the past 52 weeks.

Hovnanian (NYSE:HOV) Shares are .36% higher at $5.66, but an increase in option trading volume to 2.5 times the normal level appeared in the November contract, where it looks like either a 2,000-lot long strangle or long collar was entered between the November 5 puts and 7.50 calls. An additional 2,000 lot trade at the January 5.00 put strike was bought on the offer for $1.30, suggesting a break below the 52-week low of $4.25 by November. Implied volatility on all Hovnanian options shows a 103% reading compared to 90% historic volatility recorded for Hovnanian stock.