Thursday's Options Report: EP, HNZ, R, BID, CLWR, CSCO, RIG, V, ACE, AXP

El Paso (EP) – Option traders continue to see little risk to holding calls in oil pipeline and exploration/production pacesetter El Paso, even as implied volatility on all El Paso options indicate a 43% additional price risk over the next 30 days – implied volatility is up more than 15% from yesterday’s levels. Today’s option volume registers 4 times the normal level, with calls outnumbering puts by 5 to 1, with heavy buying interest in May 19 calls extending once again today into the same strike in the June contract. Open interest at that latter strike has swelled 20 times over this week from 771 contracts to more than 15,500. With shares up 2% at $18.59, El Paso continues to spackle gains on a 52-week high. As to how much more room this company has to move, the front-month at-the-money straddle suggests as much as a $1.30 move (6%) on back of the numbers tomorrow.

H.J. Heinz Co. (HNZ) – Riveting defensive positioning occurred today in options of the global ketchup, condiments and frozen-foods company. Not only did a glut of put-buying in January 50 puts send overall option volume to more than 11 times the normal level, but it represented the highest level of put activity since late February. These $50 puts were bought for $4.80, nominally in the money but requiring an almost 5% decline from current share price levels to break even. Implied volatility continues to show an upward divergence from the historic reading – at 20.3% it’s at a near-30% elevation to the degree of fluctuation that Heinz shares have tended to show historically. According to our data, this divergence began in late-April and shows no signs of closing. A look at overall open interest shows puts and calls split evenly down the middle, begging the question as to whether today’s put activity might tip the scales in favor of the bearish puts.

Ryder System Inc. (R) – Shares in the global trucking and transportation logistics giant showed a shallow, 21% decline to $71.34 – but consider this in light of the fact that Ryder truck shares have gained some 52% in value so far this year. A desire to protect hard-won gains in an underlying share price position could explain the increase in option activity to nearly 4 times the normal level, according to our scanners, situated largely in fresh put buying at the June 70 put. It seems reasonable that a trader would be willing to part with the $2.85 premium to protect gains in a share that has recovered admirably from a 52-week low of $38.72. Buying pressure at this strike appears to have been sufficient to send implied volatility up some 15% today to 39.2%.

Sotheby’s (BID) – Are Sotheby's shares about to emerge from their “blue period…?” Yesterday we noted a dramatic pickup in call buying that follows months of fallow action for the auction house. The company is due to report earnings on Friday and is in the thick of its New York sale of Impressionist and Modern Art pieces. We received further validation of an incipient bullish tinge to the option trading with an increase in volume to some 7.5 times the normal level – again with call options out-moving puts by 8 to 1 and an extraordinarily sustained elevation in implied volatility. At nearly 71%, implied volatility in Sotheby’s options suggests 40% more price risk over the next 30 days than it has already proven capable of (bear in mind that historic volatility factors in that cataclysmic 1-week decline in early November when Sotheby’s lost half of its share price). Traders today continue to seek long exposure to May 30 calls for 80 cents apiece, with buying interest in the strike extending into the June contract.

Clearwire (CLWR) – News that Sprint Nextel (S) plans to merge its high-speed wireless network with Clearwire, creating the first nationwide WiMax network, elicited a 6-fold increase in option trading activity in Clearwire. Shares gained a modest 1% to $16.63 as implied volatility – a measure of the degree to which option traders expect underlying shares to deviate from historic performance – plummeted nearly 40%: more than any other ticker on our platform. While the 25,000 active contracts showed a slight bias to calls, the volume was remarkably two-way – May 17.50 calls traded to buyers and sellers well in excess of open interest – and directionally noncommittal. Fresh two-way traffic was likewise noted in out-of-the-money calls at the June 25 strike, where traders were willing to take both sides of that price wager in the market that currently ascribes just a 6% probability of its landing profitably.

Cisco (CSCO) – It was no joke for those of us who felt Cisco earnings were a tough call yesterday – while higher-than-expected profits sent Cisco shares up 10% in extended trading yesterday, giving last-minute call buyers their payoff in short order – shares have pared back gains significantly today as the market appears to have thought better of Cisco’s very cautious outlook. With shares reading just .15% higher at $26.39, Cisco has gone “there and back again.” The fact that its implied volatility has receded some 25% and now rests well below the historic reading is a reliable signal that the option market is comfortable with the share’s current valuation. This hasn’t stood in the way of another brisk day for its option volume, with nearly 157,000 contracts traded actively ahead of the noon hour. Few stunning directional bets to report today, although early action did show traders willing to buy May 27 calls, while selling puts at the 25 and 27 strikes. Put-selling action extended into the June contract at the 24 strike.

Transocean (RIG) – Sky-high earnings from the world’s largest offshore oil driller failed to patch through to any great effect to Transocean’s share price, which is .27% lower at $157.42 – about $3 off the 52-week high. While some analysts have noted that the company’s share price has already exceeded some targets, perhaps adding to the lackluster action, option traders responded in two fashions – first by appearing to sell May 145 puts and 160 calls in what could indicate an expectation of very rangebound share price activity in the coming month; then by deferring new price bets to the August contract, where we noted heavy volume in out-of-the-money calls at the August 170, 200 and 210 strikes, and selling action in 120 puts.

Visa (V) – Speculative upside bets on the newly public credit card issuer continue to be a favorite option trader passe-temps. With shares up 1.6% at $88.96, the freshman stock is adding padding to its 52-week high and the fact that nearly 4 times as many calls are trading on a sum volume of nearly 82,000 lots is an indication that option traders don’t feel the summit is night. Today’s trading is fairly straightforward – heavy traffic in May 90 and 95 calls, with buying interest extending well into the June contract at strikes 90, 95, 105, 110 and 120. Delta on this uppermost strike suggests just a 7% chance of landing profitably by June – hence the 60-cent price tag. But worth wagering, some think, nonetheless.

Ace Ltd. (ACE) – Given the anticipatory air surrounding AIG’s earnings, it was particularly noteworthy to contemplate the 10-fold increase in trading volume of Ace Ltd., which rates as an AIG competitor (despite having only about 17% of AIG’s market cap). With shares trading 2% lower at $60.19 we observed a flurry of call activity at the out-of-the-money 65 strikes in August and November. Both strikes traded to the middle of the market, the August strike for $1.40 and the November for $2.90 – and given that a move to $65 would place Ace at least $1.50 above its 52-week high, we wonder if this might be evidence of covered call writing by an Ace shareholder eager to enhance yield in an underlying stock position by selling the right to buy Ace shares at $65 by contract expiration. Depending when the shareholder in question went long Ace stock – which has traded as low as $51.78 over the past year – that yield could be very well enhanced indeed.

American Express (AXP) – While options in Visa continued to entice upside speculators, we also saw interesting activity in American Express given a 2.8% decline in the stock to $49.46 no specific news catalyst. What caught our attention eye was the fresh buying (10,000 lots) in June 50 puts at $2.20 today. Comparable to what we observed in the case of Ace above – but playing the underlying stock position against an anticipated decline rather than rise  - it’s entirely conceivable that these puts were bought as some kind of insurance for an underlying position in the stock – say, by somebody who went long when AXP was trading around the $40 in mid-March and wants to protect those gains.

Rebecca Engmann Darst contributed to this report.

Comments

[peanuts]

CNBC announced that CLWR had sold $3,000,000.00 worth of shares to goolge and intel and other tech companies at $20/share, leaving shareholders with less than 1/4 of the shares. That's why it was up 8.4 percent on 5/7/08. Why would it go down in price so much the next day? Did I hear this news wrong?