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Pall Corp. (PLL) Poised to Gap Lower as Call Traders Are Disappointed with Earnings

Jocelynn Drake (jdrake@sir-inc.com)

3/12/2010 9:27:05 AM

Pall Corp. (PLL) slipped into the earnings confessional to report that second-quarter earnings came in at $46.9 million, or 42 cents a share, from $38.9 million, or 33 cents, a year ago. The company cited strong bio-pharmaceuticals demand for its filtration systems. Revenue rose 3.2% to $560.4 million from $543.3 million. Analysts had expected the company to earn 47 cents a share on $591 million in revenue.

Hopes were riding high ahead of the company's earnings report. The Schaeffers's put/call open interest ratio comes in at 0.15, which is lower than 95% of all those taken during the past year. In other words, short-term options players have been more optimistically aligned toward the shares only 5% of the time during the past 12 months.

The International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have seen an increase in call trading. During the past 50 trading sessions, nearly 14 calls have been purchased to open for every one put purchased to open. This ratio of calls to puts is higher than 86% of all those taken during the past year, pointing to a growing optimism.

Technically speaking, the shares of PLL are up more than 12% since the beginning of the year, but are poised to gap sharply lower on the open, falling below key support at its 10-day moving average.

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Disappointing Trial News from Pfizer Inc. (PFE) Could Shake Loose Call Traders

Jocelynn Drake (jdrake@sir-inc.com)

3/12/2010 9:13:53 AM

After the close on Thursday, Pfizer Inc. (PFE) reported that two late-stage studies of an approved kidney cancer drug failed to treat breast cancer significantly, and that it will also halt an unpromising late-stage study of a lung cancer drug. The pharmaceutical company said two studies following the kidney cancer drug Sutent failed to show a significant benefit to advanced breast cancer patients when used with chemotherapy compared with using chemotherapy alone. Another study to test the experimental drug figitumumab as an advanced lung cancer treatment was discontinued after a data panel determined that the study was unlikely to succeed, Pfizer said.

Options players are extremely optimistic toward the shares. The Schaeffer's put/call open interest ratio rests at 0.43, as call open interest doubles put open interest among options slated to expire in less than three months. This ratio is also lower than 86% of all those taken during the past year. In other words, short-term options players have been more optimistically aligned toward the shares only 14% of the time during the past 12 months.

Analysts are also optimistic, as 14 of the 19 brokerage firms following the company rate it a "buy" or better. This configuration leaves the shares vulnerable to downgrades following last night's disappointing news.

Technically speaking, the shares are down nearly 5% since the beginning of 2010 and are poised to continue their downtrend when trading opens today. The equity has been guided lower by resistance at its 10-day moving average since late Janauary.

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Call Trading Skips Higher on Ann Taylor Stores Corp. (ANN) Ahead of Earnings

Jocelynn Drake (jdrake@sir-inc.com)

3/12/2010 9:03:32 AM

Before the open this morning, women's clothing retailer Ann Taylor Stores Corp. (ANN) announced that it swung to a fourth-quarter profit of $41,000 or break even a share, from a loss of $375.6 million, or $6.66 a share, in the year-earlier period. Sales fell to $469.1 million from $483.4 million. Excluding restructuring charges, the company said it would have earned 5 cents a share. Analysts, on average, had expected a loss of 1 cent a share on sales of $472 million.

The company said it has "strong momentum" into the first quarter, with both its namesake and Loft chains generating comparable sales of about 10% in February. It sees first-quarter sales of about $445 million. For the year, it said it sees a return to positive comparable sales at both brands in each quarter this year with total sales to rise above last year's level.

Heading into the earnings report, options players showed a preference for calls, as the International Securities Exchange (ISE) reported nearly eight calls purchased to open for every one put purchased to open during the past 12 months. This ratio of calls to puts is higher than 86% of all those taken during the past year, pointing to a growing optimism.

On the other hand, Wall Street is giving the retailer the cold shoulder. According to Zacks, 11 of the 16 analysts following ANN rate it a "hold" or worse. Any upgrades from this group following the company's stronger-than-expected earnings report could add some lift to the shares.

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High Dosage of Put Volume Hits Medco Health Solutions Inc.

Sarah Wasserman (swasserman@sir-inc.com)

3/11/2010 3:46:04 PM

Option players have flocked to Medco Health Solutions Inc. (MHS) in force today, sending volume surging to 11 times the health care concern's average. This activity has been heavily skewed toward puts, with 20,000 of these bearish bets crossing the tape, compared to just 530 calls.

Looking into specific activity, the front-month series has seen the majority of today's action. And with March expiration approaching next week, it appears that one trader is counting on MHS to tumble in the very near term. This morning, a block of 5,000 March 60 puts crossed the tape at the bid price, suggesting they were sold. At the same time, 5,000 March 65 puts traded at the ask price, implying they were bought. Assuming these puts are newly added, it appears this bearish bettor opted to run a long put spread on MHS.

In a long put spread, the trader sells an out-of-the-money put, and purchases an equal amount of at-or in-the-money puts. As with a long put, the trader is bearish; however, the key difference between the long put and long put spread, is that the trader has a downside target. In other words, the long put player believes the stock will fall, but has a rough sense of where the stock will hit the brakes.

With MHS currently trading around $64.23, this option player is counting on the equity to remain below the $65 level, hopefully falling a bit deeper in the money.

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Nike Inc.'s Implieds March Higher Ahead of Earnings

Joseph Hargett (jhargett@sir-inc.com)

3/11/2010 3:31:04 PM

Nike Inc. (NKE) has seen its implied volatility spike sharply higher in recent weeks. The stock's Schaeffer's Volatility Index (SVI) tagged an annual low of about 12% in early January, but this reading has since spiked 142% to its current perch at 29%. For a point of comparison, NKE's one-month historical volatility currently arrives at 14.03%.

What's more, NKE's SVI could head even higher, as the company's quarterly earnings report draws nearer. For the record, NKE is scheduled to release its quarterly earnings report after the close of trading on March 17. Currently, Wall Street is looking for a profit of 88 cents per share, some 11 cents better than the same quarter last year. Historically, NKE has been a solid performer in the earnings confessional, besting the consensus estimate in each of the past four reporting periods by an average of more than 10%.

Checking in with data from the Chicago Board Options Exchange (CBOE) and International Securities Exchange (ISE), we find that activity among options traders is quite bullish ahead of the event. Specifically, the equity's 10-day ISE/CBOE call/put volume ratio of 1.93 ranks above 94% of all those taken in the past year.

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Commentary by WhatsTrading.com

Unusual Activity Roundup, March 11

3/11/2010 4:19:53 PM

Some less actively traded names seeing bullish order flow: Polycom (PLCM), Phillips Van Heusen (PVH), GMXR (also pre-earnings) Bearish order flow: Savvis (SVY), Intersil (ISIL), Varian Semi (VEA) Post Earnings: IMAX, Clean Energy Fuels (CLNE), ATP Oil and Gas (ATPG) Pre-Earnings: Ann Taylor (ANN), National Semi (NSM), Aeropostale (ARO) Ex-div.: Navios Maritime (NM), Burger King (BK), Mercury General (MCY)

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Cheesecake Factory Inc (CAKE) $26.66 +2.40%

3/11/2010 2:19:54 PM

Cheesecake Factory (CAKE) touched a new 52-week high and was recently up 60 cents to $26.63. Options volume is running 10X the average daily, with some unusual activity seen in July and October puts. A total of 20K puts traded, compared to 2290 call options. July 22.5s are the most actives. 7723 traded (89 percent ask). The top two trades were 607 and 594 contracts at 65 cents. July 20 puts are trading 92 percent on the bid and so some of today's flow might be spreads. July 25, 17.5, Oct 20, and Oct 17.5 puts are seeing interest as well, with volume exceeding open interest in all six contracts. No news today. CAKE was the subject of a downgrade Tuesday (MKM Partners to Neutral). Implied volatility is flat around 35 percent.

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Terra Industries (TRA) $46.88 -0.15%

3/11/2010 12:19:54 PM

Terra Industries (TRA) is off 10 cents to $46.85 and an investor pays 30 cents for the Mar 45 - 46 put spread, 15000X. It might roll a position up in strikes, but seems like a defensive play. CF Industries (CF) has started its exchange offer for TRA common stock at $37.15 in cash plus .0953 of a share of CF. CNBC's Faber said yesterday that Yara's Board of Directors is meeting today to see if they want to revise, perhaps top, CF's bid. They have 5 days to do so. The put spread is likely a short-term hedge should, for whatever reason, the buyout fall apart. March options come off the board at the end of next week.

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Citigroup Inc (C) $4.02 +1.53%

3/11/2010 10:59:56 AM

Interest in Citi (C) calls continues. 1.47 million traded in the name yesterday, creating 223,000 contracts in new open interest. Today, shares are up 6 cents to $4.02 and one player pays 10 cents for June 5 calls, 50000X. 240K calls and 66K puts traded in Citi during the first 30 minutes Thursday.

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Waters Corp. (WAT) $65.07 +0.0%

3/11/2010 10:19:55 AM

Waters Corp (WAT) was mentioned intraday Wednesday, with unusual call action and it continued throughout the day with shares closing near highs, up 1.6% while IV spiked 13% higher. More than 6,600 calls traded, which is 35X average, and comes after the recent takeover of Millipore has many thinking Waters could be next as a filtration play. The March 65/70 and April 70 calls attracted buyers, mostly offer side on the 100+ contract orders. Shares trade 15.4X earnings and 18.8X cash flow. The recent breakout has shares eyeing a move to 2008 highs around $70, although a takeover would likely fetch a 25% or more premium.

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Valero Energy (VLO) $20.55 +5.23%

3/10/2010 3:19:57 PM

Oil refiner Valero (VLO) is up $1 to $20.53 and options trading is brisk Wednesday, with 33,000 calls and 19,000 puts on the tape so far. The gains in the shares and the heightened options activity comes the day after Reuters reported that PBF Investments might be interested in buying VLO's Paulsboro refinery in New Jersey. Shares are now not far from session highs and the options action is really scattered: March 20 calls, March 20 puts, Sep 23 calls, Sep 25 calls, April 21 calls, Mar 19 calls, Jan11 20 puts, Mar 21 calls, June 18 calls. Meanwhile, implied volatility is up about 2.5 percent to 32.

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CBOE Volatility Index (.VIX) $18.23 +1.73%

3/10/2010 2:19:57 PM

CBOE Volatility Index (.VIX) is up .29 to 18.21 and looking to extend this week's winning streak. After falling during 17 of 18 trading sessions, VIX is up 4.5 percent since Friday and might be seeing some strength due to upcoming expirations -- VIX options a week from today and then the "Quadruple Witch" next Friday. In the options, noteworthy trades in the VIX today include two large blocks totaling 80K May 35 calls on the bid of 45 and 50 cents per contract. These blocks printed in morning action and, since it looks opening, might reflect expecations that VIX is unlikely to make a signficant move higher by the VIX May expiration (69 days.)

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Kinetic Concepts Inc (KCI) $43.99 +1.57%

3/10/2010 1:00:01 PM

Kinetic Concepts (KCI) is halted, news pending ahead of a trial verdict against Smith and Nephew. Shares are up 68 cents to $43.99 and options were active ahead of the halt, with 16K puts and 7500 calls traded. The top trades: 4700 and 4600 March 40 puts on the bid, 75 cents per contract. Looks like put sellers. Another player sold 1750 Mar 50 calls at an average of 37.5 cents. Implied volatility is up about 6 percent to 78.

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Microsoft Corp (MSFT) $29.02 +0.76%

3/10/2010 12:19:57 PM

The top equity options trade so far today is a block of 38K January 35 calls on Microsoft (MSFT). It was bought at 52 cents per contract and not tied to stock, according to a source on the floor. It might close an existing position, as open interest is 77.7K.

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Norfolk Southern (NSC) $53.74 +0.0%

3/10/2010 10:19:58 AM

Norfolk Southern (NSC) is often considered the best managed rail company, but the stock is not at 52 week highs like it's counterparts Union Pacific (UNP) and Kansas City Southern (KSU). That could change with a break of $55, which would target a move to $60. Option traders were decisively bullish Tuesday, with 4,425 calls trading, 3X average, and 90% offer side buys. The April and June $55 calls both saw buyers, with 2,800 in April $55's changed hands. Shares trade 13.2X earnings and 18X cash value, and recently were raised to Overweight at Barclays with a $62 target. Recent improvements in pricing, shipping volumes, and improved outlook for coal were cited as reasons for the upgrade.

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More Options Commentaries and Observations by Schaeffer�s

Early Edge: Goldcorp Inc., Toyota Motor, Dendreon Corporation, and Novavax, Inc.

Today's column includes the latest quarterly results from Goldcorp Inc. (GG), a rare bit of good news for Toyota Motor Corporation (TM), a bullish endorsement for Dendreon Corporation (DNDN), and a wider-than-forecast quarterly loss from Novavax, Inc. (NVAX). Each day, Early Edge focuses on the hot stocks in the news and gives you a unique insight into each stock's sentiment backdrop. Our time-tested contrarian approach centers on options, and gives you the trading tools to approach the day with a much-needed edge over the investing herd.

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Opening View: DJIA, SPX Head For New Highs; VIX Could Hit New Lows

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Market Recap: S&P 500 Flirting with Fresh 52-Week High

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Options Strategy of the Day: The Short Put Ladder

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