Thursday Options Outlook: WPI, ADSK, DNA, NITE, LEN, CTRP, FRX, IDCC

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Includes: ADSK, AGN, CTRP, FRX, IDCC, KCG, LEN, RHHBY
by: Interactive Brokers

Rebecca Engmann Darst contributed to this report.

Watson Pharmaceuticals (WPI) – Yesterday we seized upon a 14-fold increase in option trading volume in Watson Pharmaceuticals that had a whiff of deal jockeying to it. The company has previously moved on diffuse takeover chatter (most recently on July 21), and we noted a 77% increase in call open interest over the past month as indication of rising bullish sentiments on its prospects. Today Watson shares popped 5% higher to $29.74 amid a spike in implied volatility of 26% to 55.9% - some 2.5 times the historic reading on the stock. Speculation about Watson’s suitability as a takeover target has been lent further panache by reports that Carl Icahn may be building a position in the stock. The chatter unleashed further bullish positioning, sending overall options volume to 15 times the normal level and calls out-trading puts by nearly 20 to 1. Again, the activity here favors the upside, with brisk call buying at the August 30 and September 30 and 35 strikes – very little in the way of contrarian positioning or volatility selling against the rumor tide.

Autodesk (NASDAQ:ADSK) – Shares in Autodesk, the Nasdaq component and producer of AutoCAD design software dropped 2% to $33.59 just hours before its earnings release after the closing bell.  What grabbed our attention was a hasty increase in options trading volume to 5 times the normal level that showed fresh positioning in August 32.50 puts – sending put volume to a 5-month high. These are trading at nearly 3 times the open interest despite the imminent expiration date. Implied volatility on all Autodesk shares has risen 15% in the past week, and now at 45.2% shows option premiums reflecting about that much additional price risk over the next 30 days. Overall open interest shows a relative balance in put and call positions, a proportion that has remained fairly stable since late-April.

Genentech (DNA) – Genentech’s rejection of an $89 per share bid from Roche (OTCQX:RHHBY) as “too low” doesn’t seem to have crimped the upside in Genentech’s share price (shares are up .41% to $98.77 – almost $10 above the initial Roche bid), confirming the market’s long-held view that the first offer was low on the ball. The rejection did, however, temporarily stymie a resolution to the takeover, stretching out the time horizon for a deal to be nailed down. It’s both interesting and instructive to see how option traders are playing on the uncertainty. One option trader opted to position in the January 80/100 put spread, in a 5,000-lot transaction. Both ends traded to the middle of the market, making the direction of the trade hard to nail down with total certainty, but it seems feasible that the trader sold this put spread on back of the rejection, taking a $4.30 credit in confident anticipation a breach of $100 levels by the first of the year that will make both options expire worthless. He or she is also looking for time decay to work its magic on the spread, whittling down the value even without dramatic fireworks in its share price. For this trader, north of $100 for Genentech is just a matter of time, and he or she is willing to sit on that spread and wait it out. 

Knight Capital Group (NASDAQ:NITE) – Shares in Knight Capital Group dropped a modest .70% to $17.00 despite reporting a 42% increase in daily dollar trading volume. Defensiveness in Knight’s options quickly ensued, with an increase in its options trading volume to 8 times the normal position, with traders seeking fresh long positions at the August 17.50 (these due to expire tomorrow) and September 15 put strikes. Implied volatility on all Knight Capital options ticks in at 47.5% and has budged little despite today’s resurgent interest in put contracts – this measure of perceived price risk has come off 47% from its mid-July highs.

Lennar Corp (NYSE:LEN)   – Reports of slightly rising existing home sales in some areas of the U.S. were enough to elicit moves higher in major homebuilders and real estate indexes. Shares in Lennar Corp rose 5.7% to $11.75 on the news, bringing the share price up 25% from its mid-July lows. Early in the session we registered a doubling in options volume due to unusual activity in January 15 puts. These appear to have been bought at $5.20 apiece, requiring a break below $9.80 to break even. We can’t confirm that these are opening or closing trades, but opening long positions here would mesh well with a trend we’ve seen consistently this week of traders extending defensive positions further into late 2008/early 2009, cautiously guarding the slow redemptive climb in most of these tickers since mid-July.

Ctrip.com (NASDAQ:CTRP)  – An upside earnings surprise from this Chinese online travel site took the market by surprise early today – just last week we were reporting on unusual put volumes trading in the pre-earnings/pre-Olympics rush, but with shares up 17% at $50.65, today’s increase in options trading volume to 1.6 times the normal level is showing up in August 50 calls, extending into the September contract at strikes 50 and 55. Implied vol has come off 28% on the numbers but at 52.8% is still elevated above the 49.3% reading on the stock, suggesting the full flexion of the earnings move may not yet be completely expressed.

Forest Laboratories (NYSE:FRX)  – Forest Laboratories shares are showing flat price action at $37.74, as we observe an increase in options trading activity to 2.6 times the normal level due to out-of-the-money call volume at the November 45 strike. The volume here, bought on the offer for 80 cents, appears to have been funded with the sale of January 35 calls at $4.90, allowing the trader to take a premium on the trade and position bullishly on upside volatility ahead of Forest Labs’ October 16 earnings report.

 Interdigital Inc (NASDAQ:IDCC) –  With shares trading flat at $25.60, Interdigital – the maker of technologies for so-called 3G phones - rated on our scan of most actively traded options due to some intriguing, fresh volume at the September 30 call line, where more than 15,000 options traded. The volume here appears to have sold to the bid, suggesting a trader taking a 45-cent credit in the belief that Interdigital won’t pull away $2 above the $28 52-week high by mid-September. Note that the company is not due to report earnings until late October.