MORNING BID – Herbalife and the options market

Jul 28, 2014 15:59 UTC

One of the market’s more well known short bets, Herbalife, reports earnings after the close on Monday. The company is most notable as the target of activist investor Bill Ackman, who has had plenty of choice words for the company and yet has not been able to make good on his short position just yet, despite his fervent belief it is defrauding investors and taking advantage of poor people.

That’s a hefty set of accusations for anyone to deal with, but the stock’s 25 percent one-day surge last week just after Ackman’s presentation turned into a big loser for folks who were betting on big declines by the end of last week.

Ackman, from what we’re aware of, has big positions in put options expiring in January – so it’s a long view he’s taken, and if he took it at the right time, it’s not necessarily a loser just yet. (The options rose in value for the first few months of this year, so it’s possible Ackman got out in time – given his presentations, though, he’s clearly got a position somewhere.)

If that’s the case, he’s currently losing money, and today’s earnings report – and subsequent activity – will be another test of his staying power. Now, he’s said he’s prepared to go to the ends of the earth for this short position, but there are limits to everything, and it’s worth looking at just what the bet is like right now.

There are huge, huge amounts of outstanding contracts in various put options expiring in January – about 220,000 contracts across a swathe of nine different strike prices, to say nothing of a bunch of other less popular strikes.

Most of these big positions are currently not profitable, and are actually worth less than what they’ve been worth over the last several months.

If Ackman did his buying in chunks, a good spot to examine is in the $50 put option contracts expiring in January – a bet the stock will fall below $50 by that time. There was a hell of a lot of volume in these options in January 2014 – on January 9, volume in the $50 strike contracts came to 25,000 contracts and on January 10 volume of 20,759 contracts.

On those days, the stock was trading around $81 a share, so if Ackman is behind these purchases, it means he thought that was an opportune time to buy those puts, which cost $7.25 and $7.45 on average that day, according to Thomson Reuters data.

If he doesn’t hold those options anymore, he may have sold them at a profit, but currently those options are a loser, and as long as the stock keeps rising, they will continue to erode in value.

Doing the math, it shakes out like this – at 25,000 contracts at $7.25 each (x 100 because each contract is 100 shares of stock), those would have cost $18.125 million. The other group would cost $15.465 million, for a total cost of about $33.6 million.

Right now, those options would be worth about $18.9 million, so that’s a 40 percent loss, and that’s just for the $50 strike, never mind all of the other strikes. This of course may not be his position, but whomever took these positions, be it one person or several, is not in a happy place.

What matters is this: Since the first day the $50 strikes expiring in January 2015 started trading (back in Oct 2013), this strike has never been worth less than it is now.

If he’s holding the options now that he bought at just about any time between Oct ’13 and now, he’s losing money. Of course, given these are options, he’s easily able to keep rolling down and buying another money and selling these, but eventually, if the stock doesn’t do what he wants, he’ll be losing a ton of money. He’s got a lot of money, but how much pain can he endure? That’s a real question.

MORNING BID – Popping in 3-D

Jun 9, 2014 12:47 UTC

One of the stocks in one of the recent go-go sectors, 3D Systems Inc, holds its analyst day on Tuesday, and it’s one of those names that’s been beaten down so much of late that it’s bound to have some kind of positive reaction to news. But like many other companies, implied volatility in the stock is pretty low right now – it’s hard to see much of anything happening during such a tranquil period when the S&P 500 adds a point or two here and there every day or so. It’s doubly difficult because stocks like this have had their big correction – in this case, falling nearly 50 percent from its all-time high reached early this year.

Right now the expected move on the stock post-analyst day is about 2.3 percent, which is low compared to the last three analyst days, which have seen the shares move at least 3.3 percent, and Goldman Sachs believes there could be a bigger swing. They believe the company could raise its guidance for the fiscal year, depending on what it says about research and development and new products.

It’s going to be a tough road, though, because the stock is still, at this point, viewed as one of the more overvalued names in the StarMine universe. Short interest is high, at 32 percent of the float, but that may also work in the favor of those who could see a bounce, as it is a big short squeeze candidate going forward. Analyst revisions on revenue estimates have been pretty negative in recent days and weeks also – and given analysts are as much herd-followers as anyone else, that too points to perhaps the cessation of the losses in the stock. (A competitor, Stratasys, has been hit nearly as hard, and yet StarMine still sees it being worth only about half of its current value.)

MORNING BID – Google, IBM cloud market rebound

Apr 17, 2014 13:21 UTC

The markets have remained interesting this week as earnings season has ramped up, but the most interesting index remains the Nasdaq Composite.

The Nazz continues its upward swing following Tuesday’s volatile, deep plunge; it has now gained more than three percent in the brief period between the lows it hit Tuesday and the Wednesday close. That’s a pretty short period of time to see such a dramatic move in the index but doesn’t necessarily point to better tidings ahead. Bespoke Investment Group pointed out that when swings like this are usually seen – there have been 18 such occurrences since 2000 – it doesn’t bode well for the tech-heavy index.

On average, the decline following all of these types of days like Tuesday – where the market opens at least 0.1 percent higher, drops as much as 1.5 percent and then finishes in positive territory – is 2.84 percent in the week that followed. That’s not encouraging, but that’s kind of the way things go when the market sees bouts of volatility like this.

Notably, most of these volatile sessions are clustered around bad market environments – it happened several times in 2000 and 2001 before abating, only to return in 2008; so rough markets are generally when this kind of thing occurs. What’s undetermined now is how well the markets overall will do in a rebound attempt and whether it’s a Sisyphean pursuit at a time when many stocks are doomed for more pain.

Goldman Sachs doesn’t entirely think so, believing some stocks have plenty of room for upside after the momentum-driven selloff took down a lot of stocks heavily. They finger Illumina, Biogen, TD Ameritrade – as among those that could see relief rallies due to the kitchen-sink approach to investing that has driven stocks up, then down, all at once of late.

That may not translate to the entire market, though. Google and IBM results were lousy, with the kind of problems that bode ill for the rest of the market and not just to company-specific issues. Google saw a steep fall in mobile ad rates, while IBM blamed weak hardware sales for its lowest quarterly revenue in five years, as Reuters’ Alexei Oreskovic and Noel Randewich wrote recently.

An 11-percent drop in emerging markets including China, Brazil, Russia and India was partially to blame and that’s worrisome for tech names dependent on enterprise-spending, such as Oracle, Cisco, EMC and Hewlett-Packard. Looking further, these reports, should they continue to disappoint, will take the market’s renewed fervor and bury it. Robert Sluymer of RBC Capital Markets believes that the current technicals suggest nothing more than a ‘technical’ rebound that fizzles within a few days time.

And Scott Fullman, senior managing director and chief strategist at Increasing Alpha, who studies options activity, notes that with options expiration coming today that there are currently about the same percentage of calls and puts that look set to expire worthless – about 28,400 calls and 28,200 puts that have no bid are expiring. That means people are still collecting premiums, Fullman said, a sign they’re not really to stop trading them even this late in the one month cycle that marks expiration; they’re worried about volatility and using this to make a bit of money and also remain prepared against sudden market moves.

It speaks to wariness of more declines, and more earnings like Google and IBM will surely bring them.

MORNING BID – A (Green) mountain of short interest

Feb 6, 2014 13:50 UTC

There’s a lot of stuff going on in the world right now, but sometimes it’s more fun to look at more provincial issues, like what promises to be the mother of all short squeezes Thursday in Green Mountain Coffee Roasters, the maker of Keurig machines which announced a big investment and partnership with Coca-Cola (y’know, the biggest beverage company in the world, which buys all the vanilla, uh, everywhere).

The most recent data from Nasdaq puts short interest in this name at 25 percent of the outstanding shares (and about 30 percent of the float) – about 37 million shares, which doesn’t come close to the record of about 51 million shares back in November 2012, but still is a lot – average volume over the past 50 days is 3.11 million shares, so at that rate it would take about a dozen days to cover all of those short bets if they threw in the towel all at once.

Which means expect a gigantic trade on Thursday; it wouldn’t be surprising to see Green Mountain as the most active issue of the day behind the usual suspects (Bank of America, the S&P 500 tracking ETF, not much else). Note: Data from Markit, which calculates its own figure on short interest, puts it at 16 percent as of Wednesday, so some shorts have covered in recent days but that’s still a lot.

The stock is one of those that’s confounded investors for a long time, the kind of short bet that’s only worked as a “rental,” as hedge fund manager Doug Kass likes to put it when he jumps in and out of a bet for a few minutes or hours. StarMine data suggests it was already overvalued, putting its intrinsic value at about $69.50 a share — a price it’s not going to see again for a while as the stock surged by more than 40 percent in after-hours action.

One of the most notable short-sellers out there, David Einhorn of Greenlight Capital, has very publicly expressed his concerns about the value of this stock, and as of October 15 the hedge fund manager was still short the shares. That’s the date of his latest communication, and per my colleague Jennifer Ablan, his people didn’t comment on a question on whether he still has a short position.

So who’s getting rich Thursday on this? Besides those who have held a long position, it’s best to look at the options market on this one. There was some notable options activity in way, way out of the money call options of Green Mountain on Wednesday – more than 4,300 contracts traded at the $95 strike for a paltry 46 cents a share when there were just 780 existing contracts before the day.

The stock was trading around $110 in after-hours trading, so let’s do the math. Those 4,300 contracts would cost very little – 4,300 multiplied by 46 cents by 100 (since one contract covers 100 shares), so about $197,800. At $110, that contract is about $15 in the money — and the premium will rise to reflect that, too, so those contracts bought at 46 cents (well, $46) turn into a cool $6.45 million. Seriously.

And there was other buying, too, in the $100, $105, and even $110 strike prices; contracts expiring next week saw new positions in deep out of the money calls, too. Can’t say anyone knew something, but it sure is fishy…

Optimism in Facebook options, with rebalancing at day’s end

Dec 20, 2013 15:06 UTC

Okay, the year *really* ends today, as the next two weeks will feature a market holiday and some real thin liquidity. Options activity was brisk on Thursday as investors dumped positions ahead of today’s quadruple-witch expiration of index futures and options.

One of the more interesting aspects of the trade today will involve Facebook, which is being added officially to the S&P 500 and therefore should have a big trade upon the close of action when the index funds will have to add the stock officially to their funds. Howard Silverblatt, S&P’s index analyst, puts the estimated share buy at about $10.5 billion (so it’s convenient that Mark Zuckerberg & Co are selling a 70-million-share secondary, much of which is going to go to index managers who need to make room by selling everything else).

Still, this buy is only a part of it, as the stock has been subject to significant upward pressure in recent weeks, thanks to emulators who try to mimic the index – or beat it by buying most of the index and then using call options or other structures to try to come out ahead of it. (Silverblatt says they’re index managers in all but name, because then, “I’d have to charge them a licensing fee.”)

It’s helped the stock – whose disastrous May 2012 IPO still stands as a black mark for Nasdaq OMX – which is now trading near all-time highs and has gotten past several months of underperformance that followed the ridiculous first day of trading. Shares have more than doubled this year and there’s been heavy activity in the options market as well, where Schaeffer’s Investment Research analyst Beth Gaston pointed out Thursday that 9 of the 10 most popular options contracts were in the front-month December contract.

The optimism has been increasing in the options world as well when it comes to these shares – its current put-to-call option interest ratio is higher than 89 percent of readings in the last year, implying expectations for more gains going forward.

Overall action is going to be mostly interesting at the close, as the market gets a big rebalancing with about $31 billion in share rebalancing for the S&P 500 index and smaller rebalancings for a number of other major averages. The biggest net buy for the S&P is, as said, Facebook – though Credit Suisse analysts note this morning that some of this has been now offset by the secondary offering. Other big net buy-on-close names are going to be General Motors ($1.05 billion), Alliance Data Systems ($464 million), while the net sales will be led by Apple ($739 million) and Pfizer ($532 million).

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