Tuesday Options Outlook: CSCO, KG, IWO, HNT, SIRO, MGM, IWD, GTXI

by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

King Pharmaceuticals (KG) - Nebulous takeover rumor appears to be driving the option activity in King Pharmaceuticals scuttle which would readily explain the 71% spike in implied volatility and increase in option trading to 44 times the normal level. Adding to the frenzy is the fact that King is due to report earnings in two days’ time, and while a spike in implied vol and increase in call volume is also consistent with pre-earnings positioning, the move from August 12.50 calls to strikes as high as 15 in the September contract are pretty synonymous with an option series feeling shockwaves from the rumor epicenter. Today’s call volume represents the heaviest such activity on record in about 11 months.

Cisco (NASDAQ:CSCO) - With stocks broadly higher ahead of anticipated Fed inaction on rates and a continued pullback in oil prices, there are still other pockets of the options market trading in anticipation of earnings reports. To that end we find shares in Cisco, due to report after the bell, whose shares are .86% higher at $22.18. While early option activity showed a heavy predilection for calls, the proportion has since normalized and we’re seeing a relative balance between calls and puts as front-month options price in about a $1.70 (7%) move on back of the numbers. Most actively traded today have been the August 24 calls, where some 12,000 lots have changed hands, selling mostly to the bid. On the other side of the sentiment line, we may be seeing some evidence of put spreaders positioning at the 20 and 21 strikes.

Sirona Dental Systems (NASDAQ:SIRO) – Shares in Sirona Dental Systems, the maker of dental equipment and x-ray machines, rose 6% to $24.32 this morning on the eve of its earnings announcement. Call volume hit a 3-month high, sending overall volume to 21 times the normal level according to our option scanners. It must be said that the market has had made short shrift (“short” being the operative word here) of Sirona’s prospects in 2008. Ahead of an earnings report tomorrow that could bring about the ninth consecutive quarter of losses, its shares have lost more than 27% for the year to date and have soundly underperformed the Russell 2000 Health Care Index. Since the first of the year, short interest in Sirona Dental Systems has nearly doubled and now at 4.7 million shares represents 31% of the float – suggesting that today’s price action may be the result of a short squeeze. Implied volatility on all Sirona Dental Systems options reads 63.8% against a historic reading of 54.2%.

MGM Mirage (NYSE:MGM) – Another possible short squeeze move was seen in shares of the MGM Mirage, the world’s second-largest gaming company and owner of 10 casinos on the Vegas strip. Shares have dumped nearly 61% in value this year, while short interest has swelled 81% since late May alone. But is there a light at the end of the tunnel for this beaten-down sector so emblematic of throwaway cash? Some might liken it to the proverbial crapshoot. Today’s 6.8% boost for shares to $33.12 came despite a reported 69% drop in Q2 profit after the company’s CFO forecast the current quarter as “the trough” for the market. Today’s 26,000-lot option volume was heavily involved in what looked like a 7,500-lot long collar to protect a long position in the stock, rather than a short. Here it looks like a trader bought 7,500 lots in December 20 puts for $1.25 and sold a like number of 45-strike calls for $1.70.

iShares Russell 2000 Growth Index (NYSEARCA:IWO) – A 1.6% increase for shares to $77.42 corresponded with an near-trebling in option trading volume earlier this morning, due to a 5,000-lot straddle at the August 77 line. This straddle traded to the middle of the market at a combined premium of $2.75. A seller would pocket this amount in expectation of shares remaining at current levels through August 15, while a buyer would look for a break below $74.25 or above $79.75 in this index, whose components include Alexion, Comstock Energy and Energy Conversion Devices.

HealthNet (NYSE:HNT) This morning’s earnings miss sent shares down 11.5% to $25.03 – and actually sent implied volatility briefly higher by about 9% before leveling off to 47.7% (versus 57.3% historic). An increase in trading volume to 6 times the normal level showed traders buying August and September calls at the 25 strike, and possibly using calendar call spreads between the October 25 and January 30 lines.

GTX (NASDAQ:GTXI) – Shares in GTX, the maker of hormone-based therapies for prostate cancer and other conditions, rose 2.6% to $18.20. The gain came despite reporting wider Q2 losses due to R&D expenditures because the extent of the loss was less acute than street analysts had anticipated. In options action we recorded an increase in volume to nearly 8 times the normal level as implied volatility at 48% continued to show an elevation above the 45% historic reading. Earlier this morning it looked like a trader took advantage of a perceived mispricing of volatility between September and November, selling 3200 lots of September 17.50 calls for $1.50 and buying a similar number of 32.50 calls for $2.50, expecting to take advantage of more rapid time decay in the nearer-term calls. A 3200-lot sale of August 17.50 calls for 75 cents may also have been used as a funding mechanism for this trade.

iShares Russell 1000 Value Index (NYSEARCA:IWD) – Options in the iShares Russell 1000 Value Index grabbed our attention against a 1.6% gain for shares to $68.60, as it looks like a trader opted to close out a position in August 65 puts for 20 cents. Depending on the direction of the trade when this position was opened back on July 11 (at $2.50), it was either a very winning or quite baleful transaction for this trader – because both transactions traded to the middle of the market it’s hard to tell for sure. A long buyer back on July 11 would have been positioning for a significant pullback in large-cap stocks in July and August. A look at the historical price action on the index shows that it dipped only very briefly to the $64 level during the dark days of July 14-15 and then recovered very quickly, trading well above the $65 level ever since. Undeterred, it appears this trader may have opted to enter a new long position in February 67 puts at $4.20 apiece – a premium that requires a 9% drop from current price levels by mid-February to break even.

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