Wipro (WIT) - The Benefits of Getting Long Stock

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WIT is a $32 billion IT firm. The LIVEVOL Pro Summary is below.



The company has traded over 1,500 options today in the first 20 minutes on total daily average option volume of 275. Further, over 1000 have been deep puts in March. The Company Tab snapshot is below.






The 1000 contracts have been purchases of the Mar 30 puts for $8.20 and $8.30 vs 22.30 stock. The biggest trades and Option Tab snapshots are included below (click either image to enlarge).





Paying $8.20 vs $22.30 stock on the March 30 puts Analysis:
Parity = $30 - $22.30 = $7.70
So that's $8.20 - $7.70 = $0.50 over.
The calls (see the options tab above) are $0.00 x $0.15.

Hypothetically one could reverse (do the opposite of the order flow) for a 0.35 credit.

Reversal:
Sell Puts @ $8.20
Buy Calls for $0.15
= Long synthetic stock for $30 - $8.20 + $0.15 = $21.95
Sell real stock @ $22.30
Reversal collects $22.30 - $21.95 = $0.35.

So that's an arb right?
Wrong!

Being long stock has value. Some are:
(1) Voting rights
(2) Collecting dividends
(3) Rights from stock rights offerings
(4) ADR rights
(5) Anything with a choice is always beneficial to long stock and harmful to short stock. Remember the edict for public companies - Enhance share holder (read long stock) value.

WIT pays an annual dividend (usually in June) which seems to move around. The Earnings & Dividends Tab snapshot is included below:



The dividend has never been larger than $0.12 over the last 7 years. Very interesting, as paying 0.35 over for deep puts requires a divi of at least that much to break even.

Other possibilities:
(1) The stock is slightly hard to borrow - this could be a converter (paying 0.35) hoping to reverse later for more if the stock gets even harder to borrow.
(2) the stock has a two tier takeover where voting rights are actually worth explicit value (but the bet would be to get long calls here probably for upside move).
(3) There is a rights offering - long stock has explicit value.
(4) Someone is short stock and is getting threatend for a buy in - rather than get naked long, they pay $0.35 to get out of the risk.
(5) ADR rights
(6) All of the above.
(7) Some of the above.
(8) None of the above.

Either way, this is a fascinating examination into the world of long vs short stock benefits.

Keep in mind, short stock only wins if a divi is cut.

Just to be clear, I am talking about delta neutral long vs short stock - not being short or long deltas.

UPDATE (one day later):
Just saw this news: "Wipro to Launch $1 Billion Sponsored ADR Issue" via Yahoo! Finance

Well there you go...

This is trade analysis, not a recommendation.

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Cadbury (CBY) - The deal with the deal (takeover)

CBY is trading 51.13. The LIVEVOL™ Pro Summary is below.



The company is amid a hostile takeover. The Corporate Action snapshot is included below (click to enlarge). CBY has formally rejected the bid.



The company has traded over 14,500 options today in the first 2.5 hours on total daily average option volume of 1,751. The Company Tab snapshot is below (click the image to enlarge).



The biggest trade of the day was a straddle sale here on the NYSE ARCA floor 3000x. The Feb 50 straddle @ 4.25 (2.75 in calls and 1.50 in the puts). You can see the day's biggest trades and Options Tab snapshots below. Click either image to enlarge.





The Feb 50 straddle makes money if the stock at expiration stays between 45.75 - 54.25. The payout diagram is included below.



So what's going on? note CBY price is $51.13

First, the original news implies this (from above):
Takeover price: 0.2589*(29.47) + 4*(3.00 BritishPound)*($1.6292/1 BritishPound) = $50.07 which is above the current price.

NB: The ADR is four times the European stock. 100 pence = 1 British Pound. $1.6292/BritishPound is current conversion rate.

The story:

First
KFT has stated they will increase the cash portion of the deal (300 pence) and reduce the fraction of shares. They will not change the overall value of the bid.

Second
CBY does not want the hostile bid from KFT - they have formally rejected it.

Third (from theflyonthewall.com new service).
CBY is hoping for a deal with Hershey (HSY). The NY Post reports Cadbury's CEO Todd Stitzer hinted that he might be open to a merger with Hershey (HSY). However, The NY Post reports that a source said the company is less interested in a merger than an outright acquisition, with the Hershey board expected to decide within days whether to put together a bid to buy Cadbury. Hershey has until Jan. 23 to submit a bid.

Fourth (from theflyonthewall.com new service).
The Financial Times (FT) reports:
Italian chocolate maker Ferrero is close to abandoning its attempt to acquire Cadbury. Ferrero had been considering the possibility in partnership with Hershey (HSY).

Fifth
The Wall Street Journal reports that Cadbury reported sales gains and re-iterated a rejection of Kraft's bid - 2009 revenue and margins gains and a positive outlook for 2010 reinforces its defense against Kraft.

Sixth (Wall Street Journal "Heard on the Street" today).
Kraft must raise their bid for CBY to complete the takeover. It is valuing the company at 767 pence. It needs to be not less than 900 pence which would still be below expected 2009 EBITDA.

900 pence would lead to this price:
(900/763) * 50.07 = 59.06

Seventh
Warren Buffet controls 9.4% of the float and is the largest shareholder through Berkshire and pesonal holdings. He does not agree with the takeover, claiming dilution of the KFT shares.

So the takeover price is hostile and rejected. It is a floating price with a greater amount possibly given in cash. Throw in the fact that Warren Buffet is the largest shareholder and is rejecting the bid as well.

This all leads to vol in the options. The bet with the straddle is that the possibility of a rival bid goes away and then KFT may have no interest or incentive to raise the bid. If that's the case, the straddle seller could be a big winner. Keep in mind, the price only has stay in the range by the third week of Feb - that's options expo.

Of course, any number of things could blow this straddle up like - a rival bid, an increased bid, a removed bid and I'm sure many other sceanrios.

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Cell Therapeutics (CTIC) - Time Spread

--- UPDATE ---
See updated values below, then the original blog post below that (click the image to enlarge it; note the yellow highlighted areas - stock up, vol up, trade volume way up and 34,000 naked call purchases (listed as spread by exchange but that is an error on their part - I saw it trade right next to me on the floor - not a spread))



--- END UPDATE ---

--- START ORIGINAL BLOG ---
CTIC is a $700 million cancer treatment bio-tech. The LIVEVOL™ Pro Summary is below.



From what I can gather the news is this:
Cell Therapeutics' Pixantrone to get FDA oncologic drug review Feb. 10

Naturally the Feb vol is going to be elevated as FDA news in small companies like this can make or break everything. However, while a slight decline in IV is expected for the next months, CTIC demonstrates a vast difference. The Options Tab snapshot is inlcuded below (click the image to enlarge).



Note the markets in the Feb and March 1 lines. Also the markets in the Feb and March 1.5 puts. With a bit of luck someone might be able to buy March options and sell Feb options for even (same price). No matter how you slice it, a March option is worth more than a Feb option. Further, the company has earnings in March (a volatility elevating event).

N.B. With commissions the analysis is non-trivial (i.e. not necessarily a slam dunk).

Earnings in companies like this often times are non-events as everything is based on drug development and approval rather than quarterly operations. Having said that, any planned company announcement on unknown results is a volatility event - even if it is of reduced importance relative to "normal" companies.

Getting the spread off for even may in fact be impossible as there isn't a great deal of liquidity. Further, with commissions, the even trade might still not be worth it. Whether or not the spread is worth 0.05 or 0.10 becomes a deeper analysis. Either way, it's an interesting study.

This is not trading advice - it is trade analysis. We do not recommend trades in any way. Please note the legal disclaimer below. This is simply one way to analyze a time spread in a very risky instrument.

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SPDR Gold Shares (GLD) - Bearish Butterfly

GLD is trading ~112.91. The LIVEVOL™ Pro Summary is below. A large bearish bet was just put up in the Sep options.



The company has traded over 239,000 options today in the first 2 hours on total daily average option volume of 228,592. The Company Tab snapshot is below (click the image to enlarge).



The biggest trade of the day accounts for 80,000 contracts. Someone bought 20,000 Sep 60/75/90 butterflies with the puts and paid 1.50 + 0.19 - 2*(0.35) = 0.99. Total outlay is 20000*100*$0.99 = $1,980,000. The day's biggest trades and Options Tab snaphots are included below (click either image to enlarge). Max gain occurs if GLD goes to $75.





The PnL chart for this trade is included below.



It's $2 million bet (max loss) to win $28 million (max gain). If you think the odds are better than the sum of the total area of positive pnl, then it's a bet with theoretical edge.

The underlying and vol chart is included below for reference.



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Phillips-Van Heusen (PVH) - Feb Straddle Seller

PVH is a $2.25 billion vertically integrated seller of apparel. The LIVEVOL™ Pro Summary is below.



The company has traded over 6,6000 options today in the first hour on total daily average option volume of 388. The Company Tab snapshot is below (click the image to enlarge).



Almost all of the volume has been a Feb 45 straddle seller @ ~$3.00. The day's biggest trades and Options Tab snapshots are included below (click either image to enlarge).





The OI (open interest) on the Feb ATMs is well below the trade volume. These are opening positions. The Vol chart comparing IV30™ (red line) to HV10™ (white line) and HV20™ (blue line) illustrates the divergence. Notice the IV30™ is down over 10% today significantly lessening the divergence with historical vol. The underlying chart (top portion) illustrates in fact that the stock has traded in a tight range for several months. The Charts Tab snapshot below can be clicked to enlarge it.



Yesterday (1/11) PVH raised Q4 '09 guidance. Today, Citigroup added PVH to its Top Picks Live list. Note also that earnings are in late March - the Feb options do not include that volatility event.

Ultimately the short straddle bets on lower vol and at expo simply bets the stock goes to $45 with a PnL range if stock stays between $42 - $48. With the stock almost to $44, this is a slightly bullish bet while also betting on lowering vol. The bet is consistent with the recent news.

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Nexen (NXY) - Bullish Risk Reversal and Calls

NXY is a $10 billion Canadian energy company. The LIVEVOL™ Pro Summary is below.



The company has traded over 17,000 options today in the first three hours on total daily average option volume of 712. The Company Tab snapshot is below (click the image to enlarge).



The day's biggest trade is a sale of the Mar 30/20 risk reversal (buy calls/ sell puts) @ 0.16 net. The OI on both lines is substantially smaller than the trade sizes - these are opening positions. Someone is collecting 0.16 to get super long NXY if it goes through $30.

The next largest trade was a purchase of the Feb 25 calls - ~500 times total. Both of these trades are large opening bullish bets relative to average option volume. You can see the day's biggest trades and Options Tab snapshots below (click either image to enlarge).





The stock chart illustrates that the price has bounced around these levels for a number of months with no strong directional move. The Charts Tab snapshot is included below for reference.



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Take-Two (TTWO) - Call Buyer on Big Reverse Skew

TTWO is trading 10.76. The LIVEVOL™ Pro Summary is below.



The company has traded over 12,000 options today in the first hour on total daily average option volume of 3,535. Further, 11,888 have been calls for a 40:1 call:put ratio. The Company Tab snapshot is below (click the image to enlarge).



The Jan 12.5 and Feb 12.5 calls are trading the vast majority of the volume. The day's biggest trades and Options Tab snapshots are included below (click either image to enlarge). Note the OI in the Feb calls is substantially smaller than the volume - those are opening.





The Jan 12.5 call purchases are going to increase OI. The Level II pop-up below demonstrates that an increase in opening positions on 12/21. The Time & Sales Tab snapshot on that day for the Jan 12.5 calls demonstrates that these were purchases. Since the trades today are also purchases, this is a double down on the original bet. You can click either image below to enlarge.





An interesting trade could be to sell the Jan 12.5 calls to fund a Feb 12.5 purchase. If the stock stays below 12.5 through expo you have funded the calls of interest one month further. Of course, a takeover in the next few days could make that a 100% loser. Notice also the IV on the Options Tab snap above for Jan.

With the stock 10.76 the 10 level puts ($0.76 out of the money) are 0.05 x 0.15. The Jan 12.5 calls ($1.74 out of the money) are 0.15 x 0.20. So the calls are substantially further out of the money and still more expensive. That translates into a 150 IV in the calls and 79 in the puts. That is the complete opposite you would expect to see in vol skew. For more details you can read the vol skew blog posted a few days ago. You can go there by clicking HERE. Ultimately this points to much greater demand for upside calls.

NOTE: This is not trading advice, this is trade analysis. Please read the legal disclaimer below - we do not provide trading advice.

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United States Steel (X) - Kink in Apr Skew

Quick note to follow up on skew discussion:
Details on skew blog: Click Here.



X Apr 65 and 75 calls are getting sold today ~25,000 times in total. This has created a smallish skew kink in the upside calls in Apr. I have providd a rudimentary chart below to further the point. Click the image to enlarge it.

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Enzon (ENZN) - Opening Call Purchase

ENZN is a $500 million bio-pharma company focusing on cancer and adjacent diseases. You can see the LIVEVOL™ Pro Summary below.



The company has traded 3600 options today on daily average option volume of 295. Zero (0) puts have traded today - everything has been a call. The Company Tab snapshot is included below (click the image to enlarge).



The day's biggest trades and Options Tab snapshots below (click either image to enlarge) tell the story. There is a buyer of both Aug 7.5 and Aug 10 calls. Note the small OI relative to trade size - these are opening orders. This is referred to as a call "stupid" (a spread that is the same side twice). I don't have any great insight as to why they call it a stupid...





The Aug 7.5 calls are trading ~3.60 and the Aug 10 calls are trading ~1.85. I believe the 7's to be purchases because the biggest order (see image above) was 1261 for 3.60 vs 3.30 x 3.70 NBBO. This is clearly closer to the offer - probably cust purchases (similar analysis for the Aug 10s).

What's the News? (below provided by www.theflyonthewall.com)
Enzon opens Phase 2 study of PEG-SN38 for breast cancer
Enzon Pharmaceuticals announced that the first patient has been treated in the Phase 2 studies of PEG-SN38 for metastatic breast cancer. PEG-SN38 or EZN-2208 is Enzon’s PEGylated form of SN38, the active metabolite of the cancer drug Camptosar. The PEG-SN38 compound is currently being evaluated in a Phase 2 study for metastatic colorectal cancer.

Regardless of the stock and trading - I hope this one turns out to be a winner.

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Japanese Yen (FXY) - Bearish Bet on Yen

FXY is the CurrencyShares Japanese Yen Trust. It's designed to track the price of the Japanese Yen net of Trust expenses, which are expected to be paid from interest earned on the deposited Japanese Yen. The LIVEVOL™ Pro Summaryis included below.



The Trust normally trades 1,516 option contracts a day. Today over 35,000 have traded in 2.5 hours. 30,000 of those were in a massive bearish spread. The Company Tab snapshot is below (click the image to enlarge).



The day's biggest trades snapshot and the Options Tab snapshot (both below - click either to enlarge) demonstrate the large spread.





The trade:
Buy 10,000 Mar 105 puts for 1.70
Sell 10,000 Mar 100 Puts @ 0.40
Sell 10,000 Mar 110 Calls @ 1.20

Net outlay is 10,000*100{1.70 - 0.40 - 1.20} = $100,000
In other words, the spread cost 0.10 for each one.

The Payoff:
This is exactly the bet taken on a Chinese stock I blogged about a few weeks ago. You can read that blog by clicking HERE.

Analyzing a multi-leg trade is easiset done by separating the trades into smaller and more recognizeable trades.

In this case let's look at the spread in two trades:
(1) A put spread.
Buy 10,000 Mar 105 puts for 1.70
Sell 10,000 Mar 100 Puts @ 0.40

Simply stated, this is a 105/100 put spread betting the underlying goes down to 100 but not much below that.

(2)
Sell 10,000 Mar 110 Calls @ 1.20

Short calls - nuf said.

So the trade is selling updide calls @ 1.20 to pay for a put spread that costs $1.30. Bearish on the put spread, bearish on the naked call sales (note, there is no underlying so the calls are naked ignoring actual investments in the Yen).

The payoff diagram is included below:


If the Yen rips, this is an "unlimited loser."

The Charts Tab snapshot is included below for reference (cick the image to enlarge).



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