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Daily Options Intelligence Report

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Tech leads market while option traders play both sides of the fence

Wed, Dec 10 2008, 08:04 GMT
by Andrew Wilkinson

Interactive Brokers LLC

NSM – National Semiconductor Corp. – Tech stocks are lifting the Nasdaq and common wisdom has us believe that investors are digesting terrible results and projecting that we really must be near a bottom! We’ll let the jury decide on that one, but we can’t deny the 13.8% rise at NSM today to $11.70 as buyers ignore yesterday’s forewarning of a demand slump for chips for the maker of parts for the world’s leading handset manufacturers. You can’t blame option traders for playing such rallies defensively and that’s what we think we’re seeing in today’s trading. Friday’s expiring put options are being bought at both the 10 and 12.5 strikes where investors don’t mind paying out premiums of 25 cents and 1.25 to protect against a false dawn for NSM’s share price. Meanwhile it appears that investors are adding to bearish stakes in the January 10 strike put where 1,700 lots have traded at 45 cents.

MSFT – Microsoft Corp. – One option bull appears to be unleashing some kind of a master plan using April expiration options to play out a bullish strategy today. With underlying shares back into the twenties and trading slightly higher at $21.04, the 22 strike calls were bought 16,900 times in a single print for a premium cost of 2.44 per contract. Meanwhile it appears that the long position might have been established against the sale of 6,000 puts at the 20 strike at 2.50 and 9,200 puts at the 22.5 strike for a 3.25 premium. The investor clearly has a bull bias on Microsoft and we can’t tell whether this strategy is tied to stock in any way at this point.

JPM – JPMorgan Chase – Not sure why JPM is 4.7% lower today at $34.77 but it would appear that a large option investor is making a rather bold claim that its shares won’t rally above $40.00 ahead of Friday’s expiration of the front contract. A Bloomberg Television interview with “Ace” Greenberg, architect of the Wall Street investment banking and brokerage model that built Bear Stearns, said that the model he pioneered is defunct. The broker was swallowed by JPM in March. Open interest at the December 40 strike calls is about 33,000 lots, but this has been steadily built over recent months suggesting that many investors have accumulated bullish bets on the stock, which traded as high as $49.85 in early October. At that time those call options traded as high as $12.00 per contract. Compare that to the 50 cent premium that an investor sold some 30,000 lots for today to see how the outlook has changed for the worst. With only days to go the probability that JPM shares will land in-the-money above this strike stands at 15%. We’d take a stab in the dark and say that this is fresh positioning rather than someone taking a loss on an established position.

AKS – AK Steel Holding Corp.—Despite a 6.8% share price gain for the Ohio steelmaker to $9.65, option traders seem to favor near-term weakness as they position in puts expiring on Friday at the 10.0 strike. The 1.50 premium implies a breakeven share price at expiration of $8.50 and is padded by an implied volatility reading of 191%. More than 6,000 contracts have traded today at the strike price where existing positions number 11,440 contracts. Meanwhile, the recent company cost-cutting announcement impacted salaries of 1,500 of its 6,500 employees who will take a 5% cut. AK Steel is also encouraging retirement though incentives. Investors appear to be taking solace from the move and call option buyers targeted contracts at the January 15 strike where volume of 1,019 lots compares to open interest of twice that.

POT – Potash Corp. of Saskatchewan– Unusually sizeable option volume showed up on our market scanners earlier when 30,000 call options were traded in a block by a seller receiving a solitary penny for rights to be POT shares by January’s expiration at a fixed price of $200.00. Today Potash Corp.’s share price was 2.3% higher at $62.75 and as you’ll have worked out already - a far cry from the strike price. It appears that the 32,270 contracts of open positions belongs to this one seller who must be quitting the defunct position and grabbing premium. Chunks of calls were bought back in August and September at premiums ranging from 8.8 to 14.60 while shares in Potash were as high as $168.00. The demise of global demand has undermined earnings prospects and this position appears dead in the water.

SU – Suncor Energy Inc. – It would appear to be another bullish play in the energy sector that has our scanners flashing again today. Canada’s oil sands producer, Suncor has attracted an intriguing play in the deferred January 2010 contract. Shares at Suncor are 4.25% higher at $19.36 today and an option trader appears to have sold 5,000 puts at the 7.5 strike for a dollar premium to help fund the cost of 20,000 calls bought at the 35 strike line. The dollar offset helps reduce the 2.70 premium paid for the bullish position.

Published on  Wed, Dec 10 2008, 08:05 GMT