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Daily Options Intelligence Report

Mead Johnson and Bristol Myers split inspires option traders

Mon, Nov 16 2009, 18:41 GMT
by Andrew Wilkinson

Interactive Brokers LLC

MJN – Mead Johnson Nutrition Co. – Over the weekend Bristol Myers Squibb decided to sell its remaining 83% stake in Mead Johnson, maker of baby formula, Enfamil. Mead Johnson shares declined by 2% to $44.35 and the additional uncertainty surrounding the issue caused options implied volatility to spike higher in early trading. On Friday the expected degree of movement on the stock stood at 36.5% before jumping today to 56.3% as investors wonder whether the company will be able to stand on its own two feet without Bristol Myers. One option trader who clearly knows the stock well enough appears to have used a short straddle combination to predict that today’s move is bogus on two fronts. Using the December contract the seller wrote around 1,500 call options at 35 cents and sold a similar number of puts at the same strike. Being deep-in-the-money put options the premium here fetched 8.00. The premium especially on the put is boosted by the direction of the share price today but mostly by the 55% leap in implied volatility. The investor thus expects the share price to rise should Bristol find a buyer and similarly expects lower volatility. Last week those puts traded at 6.60. One analyst Bristol Myers has been hunting for a buyer at $60 per share, which may indicate the value this company might add to a willing buyer.


BMY – Bristol Myers Squibb – For its part shares surged to a one-year high after it jettisoned Mead Johnson, rising 5.7% to $24.47. The progress was slow throughout the morning that some call sellers were left wanting at the November 24 strike. Early sellers were forced to rethink as they tossed out calls at 27 cents per contract only to see buyers step in shortly after 10am to pay 34 cents before things really got interesting with call options currently commanding a 65 cent premium. Some 9,800 calls changed hands at this strike – almost equivalent to the 10,694 previously established calls. Put sellers were also in evidence using the same November contract and collected rich premiums in the expectation that the share price will rise despite the additional risk that the company has a less diversified product line in light of the Mead Johnson announcement. Option implied volatility rose, but only jumped from 21% to 23%.


FTR – Frontier Communications Corp. – An investor appears to have maintained either a short position or rolled out a covered call on telecom provider, Frontier. With a chunk of open calls at this week’s expiring 7.5 strike, we identified 7,500 options purchased at 5 cents while at the same time a fresh batch of open interest was established at the same strike expiring in February. Those calls were sold to the bid at a 20 cent premium and we’d say that an investor is already long the underlying utility and is simply hoping to enhance the yield from that investment. With shares trading up by 0.7% today at $7.30 the investor would essentially double his gain if the shares get called away at expiration since the 20 cent movement required matches the 20 cent premium received today. That offers a possibly return totaling 5.5%.


FDO – Family Dollar – An interesting trade on Family dollar – purveyor of goods priced at under $10.00. The shares are trading 0.6% higher in today’s action and we’ve heard it said that the “dollar-trade” has become a crowded one, meaning that many investors charged headlong into stocks that might prove recession proof. Because it was a popular trade, there is a smaller pool of willing buyers. Hence shares in FDO have failed to capitalize and the $30 price tag looks like tough resistance these days in comparison to the $32 and $35 prices reached during July and April. It appears that an investor bought 10,000 December expiration call options to sell the same amount expiring at the same 30 strike in January. That’s at least what we can tell from time and sales and we are at the mercy of order entry clerks here. Now, if this is the case (both strikes carry only sparse open interest readings and the trade is entered as a spread transaction) the investor hopes for a yuletide boost for Family Dollar while anticipating that shares will become overlooked by January. The December calls cost around 90 cents and the January 30 strike traded at 1.55. Apart from giving the call buyer possible ownership since he can call shares at expiration assuming shares break $30, there is a nice cushion attributable to the extrinsic or time value that delivers value to this investor.

Published on  Mon, Nov 16 2009, 18:43 GMT