Wednesday Options Update: CHK, MER, RIGL, MYL, HRS, IR, LIZ

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Includes: CHK, HRS, IR, KATE, MER, MYL, RIGL
by: Interactive Brokers

Rebecca Engmann Darst contributed to this report.

Chesapeake Energy (NYSE:CHK) – We have an update to report on that intriguing call-spread activity to report this morning out of oil and natural gas extractor Chesapeake Energy, whose shares rose 2% to $45.79 following mixed oil inventory data. Chesapeake shares are more than $23 off their high of July 2, and the direction of a 20,000-lot call spread entered this morning could provide key insight into the market's expectation of its future direction. We've received confirmation that the call spread in question was bought, rather than sold, at a debit of $1.85, while the 14,000 lots report in 40-strike puts were sold for $2.30. This trade was entered in connection with a stock transaction, but could indicate bullish expectations for the share price following on from the recent pullback. A look at open interest shows option traders still hold more than twice as many calls as puts in Chesapeake.   

Merrill Lynch (MER) – We haven't heard much from Merrill Lynch since last Monday's momentous writedown announcement – and maybe the company prefers it that way. Shares have gained 15% since that time. But this morning's move from well-known Ladenburg Thalmann analyst Richard Bove to cut his price target on the stock from $30 to $25 in the belief that the company faces a longer-term struggle to regain profitability has some option traders positioning today for a new test below $25 in the coming months. One trader used a 7,400-lot put spread in the September contract between strikes 20 and 25 to express this belief, buying the 25's for $1.45 and funding the purchase with the sale of 20-strike puts for 45 cents. The resulting $1.00 debit must be made back with a decline for Merrill shares below $24 by mid-September.

Rigel Pharmaceuticals (NASDAQ:RIGL) – Shares in Rigel Pharmaceuticals, the maker of small-molecule drugs for asthma and cancer, dropped 4% to $22.98 on a wider-than-expected loss for the second quarter. Its options activity caught our attention for a couple of reasons – first was the fact that its implied volatility reading actually rose 45% to 93.9% after the numbers were out, rather than pulling back. This compares to a historic volatility reading of 57.7% and tells us that option traders are looking for more than twice as much price risk over the next 30 days. Option traders are playing this via a couple of strategies – first through fresh positioning in August 20 strike puts, many of which have been sold in possible contrarian positioning against the current share price action. Elsewhere we saw a 1,000 lot position go through in September 22.50 calls for $2.20 – though the direction of this trade cannot be confirmed. All of the volume here helped send Rigel's overall option volume to nearly 9 times the normal level. It's possible that option traders believe there's some clinical trial information that could move the stock more than the earnings did. Market observers may recall that back in mid-December, Rigel shares more than doubled in a single session following promising phase-II clinical trial results for its rheumatoid arthritis drug. It's possible that  Shares have come down about  $10 since that time, and in the interim the company has also seen an 83% rise in short positions on the stock. Short positions now represent about 19% of the float. Option traders, meanwhile, hold nearly 3 times as many call positions as puts on the stock.

Mylan Inc (NASDAQ:MYL) – The country's largest maker of generic drugs, Mylan Inc, also reported a Q2 net loss, but better-than-expected sales figures helped send the stock 5% higher to $13.82. On the options front, we're seeing contracts to buy and sell Mylan shares trade at 10 times the normal level, due in large part to a trader resorting to a calendar call spread at the close-to-the-money 15 strike in October and January. If this were a conventional call spread, the trader would have sold the October 15's and put the 75 cent premium toward the $1.41 purchase price of the January calls. The trader here would be looking to benefit from the more rapid time decay of the nearer-term contract, assuming Mylan shares show little to no propensity for large movement.

Harris Corp. (NYSE:HRS)  - Volatility sellers appear to have targeted options in military communication equipment maker Harris Corp. Harris shares (and its call open interest) rose dramatically this past spring on speculation that the company might be an acquisition target, rumors so detailed that its CEO publicly dispelled them in early June.  The public disavowals appear to have worked – Harris Corp shares are down nearly 25% since May 30. Today's increase in options trading volume to nearly 13 times the normal level shows at least one trader wagering on no dark horses in the M&A stakes at least into the first part of next year. The trader here appears to have sold a February 45/55 strangle, taking in the $6.69 combined premium in the expectation that shares will remain bound between those strike prices by mid-February. Given that Harris Corp's implied volatility reading (38.2%) is ticking in lower than its historic reading (39.6%), the trader may have opted for the February contract in order to benefit from greater time value, which tends to equal higher premiums. Harris Corp shares are 1% higher at $49.18 today – the current valuation represents 14.4 times its earnings.  

Ingersoll-Rand (NYSE:IR) – We recorded another sizable sold strangle in industrial supplier Ingersoll-Rand, this one big enough to send option trading volume to 7 times the normal level. The trader in this case appears to have sold a 10,000-lot strangle in the December between the 35 and 37.50 strikes for a combined premium of $5.23. Shares in the company are down almost 20% for the year-to-date and the current share price represents only about an 11% premium to the 52-week low. The seller of this strangle expects the Ingersoll-Rand's share price to remain at these relatively depressed levels for the duration of the year.

Liz Claiborne (LIZ)  –  Shares in the women's wear maker are 1.1% lower at $13.46 as we register an increase in options trading volume to nearly 30 times the normal level, a full week ahead of the company's earnings announcement. We're recording heavy volume, apparently in excess of open interest, at the October 15 put line, as well as at the 12.50 strike. Implied volatility at 67% shows a substantial elevation above the 59% historic reading on the stock.