Kraft Options Suggest Massive Straddle

Kraft Foods (KFT) stock options saw another day of heavy trading on Thursday with nearly 319,000 contracts changing hands. The activity mirrors that of Wednesday when more than 182,000 contracts traded hands with a focus on the 35 August ‘08 contracts. Trading on both sides of the line - both calls and puts - along with large block trades suggest that a single purchaser may have been trying to establish a straddle position on Kraft Foods stock.

The options activity on Thursday involved 274,866 calls and 277,975 puts, which suggests a similar straddle at much greater stakes. The put portion of today’s action alone costed traders over $95 million with the call portion costing an additional $2.7 million to establish. These trade’s suggest that Kraft’s stock would have to fall past around $30.50 or advance past $35.00 in order to break-even. The big bet (most expensive) is that Kraft heads to the downside.

Currently, Kraft Food’s stock is trading at just $31.82, which means that the lower end of this boundry is most likely to hit. Moreover, there is a lot of downside pressure on the stock from analysts and bearish sentiment by the market in general. The calls in this trade are likely in place as a kind of insurance policy designed to protect against a sudden move higher due to, say, Warren Buffett announcing an increased stake in the firm.

In the end, the options activity this week suggests that some large investors are placing a straddle on Kraft Foods. Straddle plays rely on sizable moves in either direction in order to make money. And many analysts, such as Mark Fightmaster who broke the story Wednesday for Schaeffers Research, are speculating that the recent activity is biased towards the downside. Regardless, it is a situation that the rest of the market will be monitoring.

AK Steel Options Surge Higher

AK Steel Holding Corporation (AKS) shares surged higher Thursday after reports surfaced that the company has been involved in early talks with multiple parties regarding a possible sale. Options on the stock surged higher with over 20,000 contracts changing hands in heavy trading. The most active options were the 60 September ‘08 calls set to expire in 50 days, followed by the 60 August ‘08 calls set to expire in just 15 days.

The options trading suggests that AK Steel shares will hit $66 over the next 15 days and continue to rise above $70 over the next two months. Of course, whether or not this happens depends on the reliability of the sale rumors. According to those close to the situation, the company has been informally on the block for several months and is interested in an all-cash transaction. AK Steel, however, refused to comment on the rumors.

Experts warn that this isn’t the first time that AK Steel has been exploring a sale, however. The Ohio-based steelmaker has continuously been the target of takeover rumors that haven’t produced any tangible offers. The Financial Times also reported that a second source said the company’s bankers were “teasing the crowd with a very unrealistic price tag”. However, ThyssenKrupp and Evraz have reportedly been taking a very close look at the company.

AK Steel Holding Corporation is a producer of flat-rolled carbon, stainless and electrical steels and tubular products through its wholly owned subsidiary, AK Steel Corporation (AK Steel and, together with AK Holding, the Company). Currently, shares in the company are trading at around $62 per share, which remains well off of its 52-week high of over $73 per share.

GRA Soars on Takeover Speculation

W.R. Grace & Co (GRA) shares soared Wednesday after reports surfaced that BASF SE (BASFY) may be interested in acquiring the chemical manufacturer. Options also soared with just over 20,000 contracts trading hands, which is more than 13x the average daily volume of just 1,501 contracts. The majority of the contracts were focused on the 30 September ‘08 calls, which suggests that many are making a cheap $0.40 per share bet on a hefty takeover premium.

The Financial Times Deutschland reported that German BASF was looking for acquisitions in the United States, citing management and other sector sources. BASF is reportedly studying whether ot bid for W.R. Grace & Co. The news comes shortly after W.R. Grace reported a rise in second quarter, but noted inflationary pressures that caused some complications. The stock itself continues to trade in the middle of its 52-week range.

Similar to BASF and Dow Chemical, W.R. Grace & Co. is engaged in the production and sale of specialty chemicals and specialty materials. Recently, these companies have been forced to raise prices in order to counteract rising commodity prices. As a result, many of these chemical companies have seen slimmer margins and more difficult business. Any acquisitions may help lower the cost of inputs and assist in cross-marketing key products.

EMC Options Ignite Rumors

EMC Corporation (EMC) options soared Wednesday after some 280,836 contracts changed hands, which is 6.92x the average daily volume of 40,603 contracts. CNBC’s Dylan Ratigan characterized the market’s sentiment by calling the move “just unbelievable”, since the calls will be worthless on the third Friday in August. The traders behind the move are betting strongly that EMC Corporation shares will be trading above $15.87 by the middle of August.

The sharp move higher in options also sparked a rally in EMC Corporation’s shares on Wednesday. The underlying stock moved up $0.99, or 7.06%, to $15.02 before moving up an additional 3.53% after-hours to $15.55 per share. The catalyst behind the move is a combination of takeover speculation by Reuters and WSJ speculation that the company may want to spin-off its remaining 85% stake in VMWare, which has been valued at a substantial discount to the market price.

EMC Corporation has been a source of speculation ever since it spun-off its stake in high-flying VMWare (VMW), which soared to one of the best performing IPOs ever before collapsing when the economy turned. Still, EMC’s stake in VMWare remains substantially undervalued when compared to the market price of VMWare shares. Many attribute the premium to the lack of adequate liquidity, while others insist that the growth prospects of virtualization warrant such a premium regardless.

EMC Corporation (EMC) and its subsidiaries develops, delivers and supports the information technology industry’s range of information infrastructure technologies and solutions. EMC’s Information Infrastructure business supports customers’ information lifecycle management (ILM) strategies and helps them build information infrastructures that store, protect, optimize and leverage their vast and growing quantities of information.

Traders Are Bullish on BARE

Bare Escentuals, Inc. (BARE) shares may be rising ahead of earnings after-hours, but the options market is the real story of the day. The 15 August ‘08 puts, with only 16 days until expiration, were heavily traded Wednesday with some 9,055 contracts changing hands. Typically, this is a bearish sign, but the open interest on these options has declined while premiums plummeted. This suggests that many traders are abandoning their put positions ahead of earnings - a bullish sign for BARE.

Other key indicators, like insider trading, also points to a bullish sentiment. Insider trading over the past three months shows a net acquisition of over $18,000 worth of shares in the company, but without any buying or selling for the past month. Shares in the troubled company have also been picked up by institutional investors like Growth Portfolio, Lotsoff Capital Management, and Texas Capital Bancshares. Such buying by institutions and insiders is a typically bullish signal.

Bare Escentuals and other specialty retailers have been struggling with a sharp decline in consumer discretionary spending. Sharp drops in the housing market have led to fewer home equity loans, which forced many consumers to tighten their spending. The economic stimulus package has provided a brief break from the drop, but economists are divided as to how long the benefits will last. Combined, this news has many investors bearish on the retail sector.

Bare Escentuals develops, markets and sells cosmetic, skin care and body care products under its bareMinerals, bareVitamins, RareMinterals, i.d. and namesake Bare Escentuals brands, and professional skin care products under its md formulations brand. The firm’s bareMinerals-branded products include its core foundation products and a variety of eye, lip and complexion products, such as blushes, all-over-face colors, liner shadows, eyeshadows and lip colors.

MasTec Options Heavily Traded

MasTec (MTZ) options were heavily traded Tuesday ahead of the construction company’s earnings after-hours Wednesday. Some 2,007 option contracts changed hands, which is 12x the average daily volume of 116 contracts. The majority of the open interest in MasTec is centered in the 10 and 12.50 October ‘08 calls. There are also 1,408 contracts open on the 17.50 January ‘09 calls. The stock is up sharply in 2008, but remains well below its 2007 highs as the U.S. economy continues to struggle.

MasTec managed to surprise to the upside during its two most recent quarters, with analysts estimating just $0.21 per share for the second quarter. Meanwhile, DA Davidson recently raised its price target on the company from $9.50 to $12.50 per share, but noted it was the result of a higher valuation multiple rather than an increase in earnings per share, reflecting the increased growth potential of the pipeline market and the firm’s expansion into electrical and gas transmission.

MasTec’s acquisition of PumpCo, for $44 million plus a five-year earnout, will help it enter into the growing petroleum pipeline industry. The acquisition is expected to add to earnings next year, but has already helped it increase its growth potential and therefore earnings multiple. The diversification away from simply telecommunications also helps the firm make sure that it is not as vulnerable to one industry.

MasTec is a specialty contractor engaged in building, installation, maintenance and upgrade of communications and utility infrastructure with primary operations in the United States. The company provides similar services to customers to build and maintain infrastructure and networks that are critical to the transportation and delivery of voice, video and data communications, electricity and other energy resources.

WBC Options Spike Before Earnings

WABCO Holdings (WBC) shares jumped more than 3 percent higher Tuesday ahead of Wednesday’s earnings announcement. Options were also heavily traded with 6,543 option contracts trading hands, which is 17x the daily average volume of 378 contracts. The majority of the contracts traded centered around the 45 September ‘08 calls, which ended with an open interest of just 94 contracts. The 50 September ‘08 calls also saw heavy trading with a much larger open interest of 443 contracts.

Investors in the underlying stock appear to be bullish and it may be for good reason. Late last year, billionaire investor Warren Buffett’s Berkshire Hathaway purchased a 2.7 million share stake in the company, which is a vote of confidence in the underlying fundamentals. Then, in April of this year, WABCO raised its fiscal 2008 projections in April by nearly 10 percent, which sent shares even higher before they dropped when the economy turned even more sour.

During the first quarter of this year, WABCO reported record quarterly sales and net income, which were up 26% and 55%, respectively. The North American market contracted by 27 percent during the quarter, but international growth in Asia and Europe more than made up for the losses. Analysts remain divided on this quarter, as vehicle sales have slowed considerably more despite a brief drop in the prices of oil and gasoline, but the company still appears fundamentally strong.

The options activity today suggests that traders rolled up their options to higher strike prices, which is a bullish signal for the upcoming earnings number. After all, the 45 September ‘08 calls are trading at a hefty premium of $2.70 and can be switched up to more than two of the 50 calls premium of just a dollar premium. Essentially, traders could double up on their stock if they believe shares would head north of $51 per share - and they did.

A Smarter Way to Play U.S. Steel

U.S. Steel Corporation (X) shares jumped higher today after the company reported second quarter profits that more than doubled while also increasing its dividend in a vote of confidence. The domestic steel company announced net income of $668 million, or $5.56 per share, compared to analyst estimates of only $3.80 per share. U.S. Steel also boosted its earnings forecast for the third quarter, citing a positive pricing environment.

The big question now is whether or not steel prices are sustainable at these levels. Harbor Intelligence analyst Rodrigo Vazquez told SteelGuru.com that he expects sheet prices to soften in the fourth quarter due to continued economic weakness in the U.S. that could further erode end user buying activity and slow demand for steel. The analyst forecasts that the U.S. will show an overall steel demand decline of 3.6% for 2008.

Global steel demand, however, continues to show strong growth because of newly industrialized areas like China, Asia and the Middle East. Those areas alone are expected to consume 35% of the world’s steel for the year with Russia, South America, Saudi Arabia, and South East Asia also predicting growth of 10%. Combined, all of these forces are putting pressure on the supply of steel, which has resulted in the huge price increases we’ve seen in 2007 and so far in 2008.

Investors looking to get in on this action have a few options. Purchasing a block of U.S. Steel at current prices would cost around $16,540, which is much more than many investors feel comfortable spending. Purchasing the stock on margin is another option that would cost around $8,000, but also involve the additional risk of a margin call. A third option - and perhaps the best - is purchasing LEAPS calls as a stock substitute.

The 160 January ‘10 LEAPS are currently trading at around $50 per contract. This means that long-term investors can purchase the right to buy U.S. Steel at $160 anytime between now and January of 2010 for only $5,000. The breakeven on the trade is around $210 per share, which means shares need to move up 27.7% within two years in order to make money. Considering shares have already increased some 30% so far this year (and 13% today), this may not be a far-fetched bet.

LEAPS also offer a lot of additional leverage and protection, since only $5,000 in investment is required. If shares move to $250 per share, the LEAPS investor will have made an 80% return on their investment. This compares to a 51% return on the underlying shares if purchased right now. Meanwhile, if the stock declines, LEAPS investors can only lose the $5,000 they put in, which means underlying shares would lose more if they dropped more than 30% within the same timeframe.

In the end, U.S. Steel LEAPS can be an effective way to play the global demand for steel prices without spending a huge amount of cash and taking on a huge amount of risk. See Using LEAPS as a Stock Substitute for more information on this strategy and LEAPSInvestor for more LEAPS strategies trading ideas.

LFG Options Suggest Earnings Surprise

LandAmerica Financial Group (LFG) shares jumped higher Tuesday after falling sharply during the last few trading sessions. Options on the insurance company were particularly active on Monday with 3,186 option contracts changing hands, which is 14x the average daily trading volume of 235 option contracts. The 20 August ‘08 options were the most active with 2,665 in open interest. This volume suggests that many investors are betting on positive earnings after the close Tuesday.

The S&P recently put LandAmerica’s ratings on negative watch following the announcement of unfavorable operating results by its peers and news on macroeconomic factors that affect title insurers, such as mortgage originations. The ratings agency reiterated its belief that the environment for title insurers would remain challenging until 2010 because of declining mortgage originations and rising claim rates that are huting the entire housing sector.

Despite the negative performance of its peers and weak macroeconomic environment, many investors appear to be bullish on the stock’s upcoming earnings announcement. Some experts believe that the stock has been driven down too far to justify and that any reasonable earnings number could send shares dramatically higher. For many options holders, the news will have to send shares past $20.60 in order to turn a profit on their positions.

LandAmerica Financial Group’s products and services facilitate the purchase, sale, transfer, and financial of residential and commercial real estate. The company operates through approximately 700 offices and a network of more than 10,000 active agents, and conducts business in Mexico, Canada, the Caribbean, Latin America, Europe and Asia. The bearish market for real estate companies has pushed shares from a 52-week high of $79.89 to a low of $14.75 per share.

AMCC Sees Unusual Options Trading

Applied Micro Circuits Corporation (AMCC) options are seeing heavy trading ahead of the company’s first quarter earnings set to be released tomorrow afterhours. The semiconductor company saw 3,442 option contracts trade hands yesterday, which is 18x the average volume of 188 contracts. The vast majority of the contracts were the 7.50 August ‘08 calls, which suggests that investors are betting on a positive earnings announcement.

Recently, networking companies like Cisco Systems (CSCO) and Netgear (NTGR) saw their sales skyrocket as networking equipment sold extremely well. Many analysts believe that these strong sales could equate to equally strong sales by companies like Applied Micro that supply networking manufacturers with integrated circuits and boards necessary to produce their products. However, results at other IC manufacturers have been questionable.

Applied Micro designs, develops, markets and supports integrated circuit and storage components, which are essential for the processing, transportation and storing of information worldwide. The company also offers integrated circuit products and printed circuit board assemblies for wireline and wireless communications equipment, edge switches, routers and gateways, metro transport platforms, and core switches and routers.

Next Page »