Hot on the heels of news that a deal between Yahoo! (YHOO - commentary - Cramer's Take) and Microsoft (MSFT - commentary - Cramer's Take) may be revived if Yahoo!'s sitting board is dumped comes evidence in the option market of an anticipated October resolution to the takeover tangle. Yahoo! shares rose 1% today as a mammoth-sized block trade appeared in the October contract. The trade had all the earmarks of a long ratio call spread, with the trader buying 70,000 lots at the October 25 call strike at $2.28 apiece and selling 140,000 lots at the 27.50 call strike for $1.19. In this case the trader took a 10-cent credit on the transaction -- selling twice as many out-of-the-money calls to keep trade costs low, even at the expense of upside exposure -- and would be looking for shares to trade above $25 by October but not to surpass $27.50. This is further reinforced by the fact that the trader apparently sold twice as many 30-strike calls as he or she bought 25-strike calls. This would leave half the volume at the 27.50 strike call uncovered, thus leaving the trader vulnerable to hefty upside risk if Yahoo! shares blew past $30 and he/she was exercised on the calls.
It's interesting however that in the space of no more than one week, this is the second sizable trade in Yahoo! to implicate the October contract and the 27.50 strike, where a 61,000-lot straddle was sold last Wednesday. In last week's trade -- spurred by a Wall Street Journal report that Microsoft might pursue a breakup of Yahoo! to yield the most juice for its search-engine thirst -- the sizable position yielded the trader a potent premium of $7.29 in a bet that Yahoo! shares would trade at $27.50 by expiration. The trader may also have been looking to extract maximum benefit from time decay and an anticlimactic closing price on a Microsoft deal, all factors that would likely whittle the value of that straddle to far less than the $7.29 initial ticket price.
Elsewhere, there was plenty of meaty options action in the tech space today. News of the departure of VMware (VMW - commentary - Cramer's Take) founder and CEO Diane Greene and a sharp cutback in its yearly sales guidance had a predictably awful effect on the stock (shares paid a 27% penalty to $39, crashing through the 52-week low, and implied volatility spiraled by a nearly identical percentage rise). But it was downright deleterious for VMware's parent company, EMC (EMC - commentary - Cramer's Take), where the perceived risk measure rose 28.9 percentage points to 51.2%, a six-month high. Compared to the 30% volatility shown by EMC shares in the past, we can conclude that the news out of VMWare has led option traders to ascribe about 61% additional price risk to EMC Corp shares over the next 30 days, with a pronounced bias to the downside. Even with its earnings report scheduled for July 23 (coinciding with the August options contract), we observed traders sell out of July 15 calls, the value of which have plummeted 86% to just 7 cents today. Fresh put-buying at the August 13 and 14 strikes suggest further declines past these newest lows in the aftermath of earnings. Evidence of stability in EMC's share price surfaced further out in the option calendar, notably in January calls, where calls at strikes 12.50 and 15 were heavily bought on the offer.
Finally, shares in Logitech (LOGI - commentary - Cramer's Take), the maker of computer mouse trackballs, game controllers, keyboards and other digital miscellany, are down 3.6% today at $25.18. An increase in option trading volume to 9.5 times the normal level appeared in an interesting 3,000-lot put spread in the front month, where it looks like a trader sold the upper-strike 30 puts for $4.60 against the purchase of 25-strike puts for 80 cents, taking in a $3.80 credit to wager on the spread between those strikes narrowing over the next week and a half in the event of a rebound for Logitech shares. Implied volatility on all Logitech options reads 51.5% against a historic reading of 38.6%.
At the time of publication, Darst had no positions in the stocks mentioned.
Rebecca Engmann Darst is an equity options analyst for Interactive Brokers in Greenwich, Conn., and is the author of its daily "Options and Futures Intelligence Report." Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." She also appears on BNN Canada and has been a guest on Fox News' "Your World With Neil Cavuto."
Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.
RSS FEEDS
PODCASTS
