June 3 2008: CBS, UTSI, XLE, LEH, DRIV, MVL, RIGL, QCOM

[cindy987]

Some commentary I gathered for June 3rd 2008.


LEH- Lehman shares were stung by early session reports that the company may be strong-armed by the ceaseless and multi-pronged credit crunch into new capital-raising efforts. While the company made haste to elaborate that a new round of raising equity capital was just one of several tools at its disposal, and quickly denied that it had sought funding via the Fed’s primary dealer facility today (in fact, the company’s treasurer told CNBC that the last time Lehman went to the window was on April 16, “for testing purposes.”) This came as cold comfort to shareholders, sending shares 9.4% lower to $30.65, while implied volatility at 115% shows option traders expecting twice as much price risk to its shares over the next month than has been the case historically. Meantime, with more than 454,000 Lehman options trading this afternoon, we must observe that more than one-fifth of the active volume in Lehman options today was situated in June puts at strikes of 30 and below – with some 14,000 lots alone trading at the 17.50 mark. Activity in out-of-the-money puts extended into the July contract at strikes as low as $2.50. We should also note that the unsettlement over the Lehman story and its impact on the broader market appears to have tipped the CBOE Volatility Index, a measure of implied volatility across the S&P index, back across the 20-percent mark – a level it hasn’t closed above since April 30.




CBS- Perhaps inspired by a compelling theory posited in this week’s The New Yorker’s by James Surowiecki known “the fallacy of ownership” – a theory based pointedly on CBS’ recent bid to acquire CNET Networks, some option traders may be looking for shares in the troubled network to move outside “the zone” in coming months. Citing what he called a “myth of synergy,” Surowiecki notes of CBS’ near-$2 billion bid for CNET, “If CBS and CNET had simply agreed to cross-promote each other’s brands and distribute each other’s content, CBS would have had many of the benefits of merging without the costs.” It is with that in mind that we consider today’s 1.3% decline for CBS shares to $21.45, which has the company trading at about a buck above its 52-week low. What we observed in its options, however, was a more than 23-fold increase against the normal level, with roughly two-thirds of this 30,000-strong volume centered at the January $20 straddle. A trader in this case shells out a $4.65 premium – roughly a fifth of the current share price, and this in a climate in which implied and historic volatility are more or less equal – in the expectation that CBS shares will break above $24.65 or below $15.35. It should be noted that option traders already hold more than twice as many calls as puts in CBS, and that it’s traded as high as $34.48 over the past 52 weeks.




UTSI - It’s been a charmed – if volatile – run for UTStarcom in recent months. Shares in the maker of set-top boxes and broadband equipment have doubled in value since the month of March alone, spackling on ebullient gains in the weeks subsequent to a better-than-expected Q1 report with a 2.7% gain today to $4.99. A near-15% spike in implied volatility suggests there may be other bullish rumors making the rounds on this stock, but the consensus – at least in terms of volume – indicates that the risk here lies to the upside. Today’s glut of call-buying activity has sent overall volume to 10 times the normal level, with heavy buying in front-month calls at the $5 strike for 5 cents, extending into the July contract at strikes 5 and 7.50, and in the January contract at 7.50.




XLE- Energy Select Sector SPDR – Shares in this closed-end fund, which is indexed to the performance of leading oil companies, closed 2% lower at $85.05, despite musings from billionaire hedgie George Soros that there appeared to be no “imminent” correction in a run-up on oil and other commodity prices that has “some of the earmarks of a bubble.” Soros attributed some – but not all – of the heat in oil prices to commodity index trading by institutional investors. Despite the relative lack of immediate response in the sector ETF, we note that implied volatility at 32% continues to show a dramatic elevation above the 22% historic reading, further fanning a divergence that began in late-April and continued through the momentous pass at $135-per-barrel oil a couple of weeks back. Option traders may have sought to hedge against a long position elsewhere in the oil sector by buying put protection against a drop below $86 before June 21 – this could explain the 10,000 lots bought at this strike. A volatility-bullish appeared to go through in the June contract expiring at the end of the month, with a trader deploying a short put butterfly strategy, buying 20,000 lots at the June 83 strike for $2.23 and selling 10,000 lots at the 84 strike for $2.23 and against at the 86 strike for $3.15, initiating the trade with a 4-cent credit per contract that presumes a rally either past the 86 level or a correction below the 84 level by the end of the month.




DRIV- Option traders appear confident of the upside prospects of Digital River, the online software-delivery company that manages half of all digital downloads for the software market. Late last week the company was tipped by RBC for an upward price target revision from $43 to $47, news that may have had a deferred effect in the form of today’s 4% gain in share price to $41.16. The six-fold increase in option trading volume detected by our scanners represented well over a quarter of the open interest in Digital River, trading overwhelmingly to call-buyers at the June 45 call strike, where the 9,450-strong volume compares to open interest of just over 1,100 lots heading into today. Whether there are juicier rumors moving this stock is hard to say, but Digital River shares have shown a marked receptiveness to the impact of upgrades - a similar move by BMO last fall sent shares to a 52-week high of more than $53. Right now, option prices suggest a scant 16% chance of Digital River shares making a $5 climb by June 20, but that hasn’t deterred the call buyers.




MVL- Still coasting on the success of its “Iron Man” franchise and fresh on news that the company would replace Commerce Group in the S&P 400 MidCap Index we find shares in Marvel advancing 4% to $35.21, loitering around the 52-week high. With such a surfeit of summer blockbuster news flowing its way these days (and with implied volatility hovering comfortably - statically – below the historic reading), it looks like some traders have seized their moment to position for an inevitable turnabout in its fortunes coinciding with the winter doldrums. This interest in January puts helped to prod total option volume to 20 times the normal level. Early traffic showed what looked like long put spread activity going through between strikes 30 and 35, with traders defraying some of the $4.17 cost of the higher-strike puts by selling the 30’s for $2.07. Since that time, volume has also emerged 1 strike lower at the 25 strike for about 90 cents – this activity already amounting to twice the open interest at that strike. Marvel shares have traded as low as $21.23 over the past full year.




RIGL-Rigel Pharmaceuticals – Clinical data on phase-2 results of Rigel’s pipeline non-Hodgkins’ lymphoma drug, the so-called Syk inhibitor R788, failed to find favor with traders despite showing benefit in patients suffering from diffuse large B-cell and lymphoma and small/chronic lymphocytic leukemia. Shares are down 4% at $22.55 at present dispatch, and an early surge in option trading to 3 and a half times the normal level showed twice as many puts moving as calls. Front-month activity favored the 22.50 put strike, while we also observed buying interest in July 20 puts for $1.10. Implied volatility at 64.3% continues to show an elevation above the 50% volatility shown by Rigel shares over the past year.




QCOM- Shares in Qualcomm edged 1.5% lower to $46.99, reversing early gains after news of a “buy” recommendation out of Goldman Sachs. With more than 49,000 options in play, it made an early appearance on our scan of most active option contracts, with about half the active volume centered on either side of the June 47.50 line. Rather than being lots traded together, the disparate volumes at these positions show most of the calls being sold, with puts trading to buyers and sellers. This may be evidence of traders using options to protect an underlying position in a stock that’s risen 22% for the year to date, rather than bald speculation on a near-term correction. Open interest shows 1.7 call positions outstanding for every put.