Schaeffer's Trading Floor Blog

Stocks On the Move: VirnetX Holding Corporation, Sony Corp (ADR), and Repros Therapeutics Inc

VHC, SNE, and RPRX are moving sharply in Thursday's trading

by 9/18/2014 12:40 PM
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Equities markets are on fire this afternoon, with both the Dow and S&P 500 Index (SPX) notching record intraday peaks. Not everyone is participating in the broad-market rally, though; specifically, tech licensing firm VirnetX Holding Corporation (NYSEMKT:VHC), electronics issue Sony Corp (ADR) (NYSE:SNE), and biotechnology concern Repros Therapeutics Inc (NASDAQ:RPRX) have all made notable moves to the downside. Here's a quick roundup of how VHC, SNE, and RPRX are performing on the charts so far.

  • It's been a terrible week for VHC, which has plunged almost 69% from last Friday's close to churn near $4.79, after a federal court on Tuesday ruled in favor of Apple Inc.'s (NASDAQ:AAPL) patent-infringement appeal. Today alone, shares of VHC are off 37%, and earlier hit the $4.18 mark -- their lowest perch in more than four years. Short sellers are likely cheering the sell-off. At present, 41% of the stock's float is sold short, and would take 53 sessions to cover, at VirnetX Holding Corporation's average daily pace of trading.

  • It's another down day for SNE, which has surrendered more than 11% since Tuesday's close, due to a number of poorly received fundamental developments. Today, the shares are roughly 4.7% lower at $17.99, but seem to have found a foothold atop their 60-day moving average. Should the security continue its slide, a round of downgrades and/or price-target cuts could apply additional pressure. Currently, all three analysts covering Sony Corp (ADR) maintain a "strong sell" recommendation, while the consensus 12-month price target of $23.65 represents a 31.5% premium to present trading levels.

  • RPRX tagged a fresh 52-week low of $8.88 earlier -- but was last seen down 25% at $9.67 -- after a Food and Drug Administration (FDA) panel unanimously voted to apply severe limitations to companies producing testosterone drugs. Heading into today's session, the equity was already sitting on a steep 30% year-to-date decline, yet option traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 4.66 calls for every put over the past 10 sessions. What's more, this ratio ranks in the 80th percentile of its annual range, meaning long calls have been initiated over puts at a faster-than-usual clip. With 22.7% of Repros Therapeutics Inc's float sold short, though, a portion of this activity could be the result of shorts hedging against any unexpected upside.

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Analyst Downgrades: Peabody Energy Corporation, Dean Foods Co, and Las Vegas Sands Corp.

Analysts downwardly revised their ratings on BTU, DF, and LVS

by 9/18/2014 9:29 AM
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Analysts are weighing in today on coal miner Peabody Energy Corporation (NYSE:BTU), dairy products maker Dean Foods Co (NYSE:DF), and casino name Las Vegas Sands Corp. (NYSE:LVS). Here's a quick roundup of today's bearish brokerage notes on BTU, DF, and LVS.

  • BTU was hit with a downgrade to "sell" from "neutral" at Goldman Sachs, which also lowered the stock's price target to $13 from $15. This isn't particularly unexpected, given the shares' year-to-date loss of 27.3%. In the options pits, long puts have been strongly preferred over long calls of late, per Peabody Energy Corporation's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 2.08. In fact, this number stands higher than 97% of all other readings from the past year, suggesting options traders have rarely been as put-skewed toward BTU as they are now. At last check, the shares were resting at $14.19, and are set to hit a near-decade low out of the gate.

  • DF received a price-target cut to $20 from $21 at BMO; however, the brokerage firm maintained an "outperform" evaluation on the stock. Technically speaking, the shares have slid 11.6% in 2014 to trade at $15.19, and have underperformed the broader S&P 500 Index (SPX) by 16 percentage points during the previous 60 sessions. Short sellers have taken notice, too, as 14.5% of Dean Foods Co's float is sold short. At the security's average daily trading levels, it would take eight sessions to buy back all of these bearish bets.

  • For the second day in a row, LVS is seeing bearish brokerage attention. Specifically, J.P. Morgan Securities lowered the stock's price target to $69 from $83 this morning, after Sterne Agee cut its own price target to $80 from $84 on Wednesday. The Street's dimming view of Las Vegas Sands Corp. may spring from Wells Fargo's earlier comments that Macau gaming revenue for September will decline by a steeper-than-expected margin. Additional bearish notes may be on the way, too, as 11 out of 14 covering brokerage firms have handed out "strong buy" recommendations on LVS, versus three "holds" and not a single "sell" rating. On the charts, the equity is down nearly 21% this year to rest at $62.38.

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Analyst Upgrades: Kohl's Corporation, Level 3 Communications, Inc., and United States Steel Corporation

Analysts upwardly revised their ratings on KSS, LVLT, and X

by 9/18/2014 9:04 AM
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Analysts are weighing in today on retailer Kohl's Corporation (NYSE:KSS), communications services provider Level 3 Communications, Inc. (NYSE:LVLT), and metal producer United States Steel Corporation (NYSE:X). Here's a quick roundup of today's bullish brokerage notes on KSS, LVLT, and X.

  • KSS -- which has advanced 8.4% year-to-date to rest at $61.52, and outperformed the broader S&P 500 Index (SPX) by nearly 18 percentage points during the last two months -- was upgraded to "buy" from "neutral" at Citigroup. This bullish brokerage attention is fairly familiar to the stock, as 10 out of 17 covering analysts have doled out "buy" endorsements toward the shares. However, Kohl's Corporation's consensus 12-month price target of $60.43 represents a discount to the retailer's current share price. If the stock's recent rally continues -- the equity touched a near-seven-year high of $61.79 yesterday, after the firm announced plans to hire 34% more holiday staff than last year -- price-target hikes may be in the cards.

  • J.P. Morgan Securities initiated coverage on LVLT with an "overweight" rating and a $55 price target. This makes sense, considering the security's 38.2% year-to-date rally to perch at $45.84. Also, during the past month, the shares have outperformed the SPX by 7.5 percentage points. Nevertheless, short sellers have taken a keen interest in Level 3 Communications, Inc. of late. Specifically, short interest rose 15.3% during the two most recent reporting periods, and now comprises 9.5% of the equity's float -- which would take two weeks to cover, at LVLT's average daily trading volume. Should the shares maintain their uptrend, the shorts may be forced to cover their bearish positions, producing tailwinds.

  • Finally, X saw its price target raised to $60 from $40 at Deutsche Bank, which also reiterated its "buy" opinion on the shares. On the charts, the stock has been flying high, more than doubling in value on a year-over-year basis, and outpacing the SPX by a brow-raising 73.2 percentage points during the previous three months. Yesterday, in fact, the equity hit a fresh three-year-peak of $46.55. Elsewhere, during the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open puts over calls at a rapid-fire rate, as United States Steel Corporation's 10-day put/call volume ratio of 2.08 ranks just 10 percentage points from an annual bearish acme. However, some of these long puts may have been initiated by shareholders seeking a downside hedge.

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Buzz Stocks: Pier 1 Imports Inc, Rite Aid Corporation, and Steel Dynamics, Inc.

Today's stocks to watch include PIR, RAD, and STLD

by 9/18/2014 8:53 AM
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Equity markets are poised to continue their Fed-induced rally, with futures pointed solidly higher ahead of the bell. In company news, home furnishings retailer Pier 1 Imports Inc (NYSE:PIR), drugstore chain Rite Aid Corporation (NYSE:RAD), and commodity concern Steel Dynamics, Inc. (NASDAQ:STLD) are three stocks to watch in today's trading.

  • PIR is bracing for an 11% drop right out of the gate, after the company reported lower-than-expected fiscal second-quarter earnings. Adding insult to injury, Pier 1 Imports Inc reduced its full-year guidance, and was hit with no fewer than six price-target cuts and three downgrades. Year-to-date, shares of PIR have already shed nearly 33%, yet 64% of covering analysts maintain a "buy" or better rating, and the consensus 12-month price target of $19.21 stands at a 23.6% premium to the stock's current perch at $15.54. Simply stated, the door is wide open for an additional round of downgrades and/or price-target cuts, should the security continue to struggle.

  • For the second time this year, RAD downwardly revised its full-year profit forecast, sending shares almost 9% lower ahead of the bell. Since hitting a 12-year peak of $8.61 in early June, the stock has surrendered almost 23%, and more recently has encountered a stern layer of overhead resistance at its 200-day moving average. However, option traders have shown a preference for calls over puts, as evidenced by the equity's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.77, which indicates near-the-money call open interest outweighs put open interest among contracts expiring in three months or less. On Wednesday, Rite Aid Corporation closed at $6.64.

  • It was a solid day for steel stocks yesterday, and STLD was no exception -- finishing 3.8% higher at $24.85, but not before tagging a fresh six-year peak of $25.16 in intraday action. Wednesday's rally followed news that Steel Dynamics, Inc. had completed its acquisition of Russia-based Severstal's U.S. units, and today, the equity is poised to extend these gains after the company offered up a higher-than-expected current-quarter profit estimate. In 2014 alone, shares of STLD have tacked on 27.2%, and option traders think there's more room to run. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day call/put volume ratio of 74.76 stands in the bullishly skewed 92nd percentile of its annual range.

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Selling Volatility: A Win-Win Strategy?

CBOE's benchmark BXM, BXY, and PUT offerings boast lower volatility than the SPX

by 9/18/2014 8:07 AM
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Selling volatility sounds like it adds risk to your portfolio, right? Well, not so much, according to the Chicago Board Options Exchange (CBOE). They've created a whole stable of benchmark indices over the years, many of which you can find here.

Here's an interesting look at a few of them -- CBOE S&P 500 BuyWrite Index (BXM), CBOE S&P 500 2% OTM BuyWrite Index (BXY), and CBOE S&P 500 PutWrite Index (PUT). BXM is a buy-write index that buys S&P 500 Index (SPX) and sells at-the-money (ATM) options one month out, then maintains the position for one month and rolls into ATMs on the next monthly cycle. BXY is the same as BXM, except it sells options that are 2% above the money. PUT is, well, similar to BXM and BXY, but I'll let CBOE describe it.

The PUT strategy is designed to sell a sequence of one-month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates. The number of puts sold varies from month to month, but is limited so that the amount held in Treasury Bills can finance the maximum possible loss from final settlement of the SPX puts.

Anyway, here's how they've done over the last 25 years, per CBOE.

Annualized Returns
Standard Deviations

So, BXY and PUT have better returns than SPX, and all three have lower volatility. Sounds like a win-win! It also sounds counter-intuitive. Selling volatility reduces volatility?

Well, in this case, yes it does. Think about a buy-write vs. straight stock ownership. It underperforms on the upside in that it caps gains. That's especially true in this particular buy-write strategy. If SPX lifts early in the cycle, for example, the premiums on the calls BXM writes go close to zero and you effectively have no position on. You miss out on any further gains.

On the flip side, all these indices will lose less on a market decline (yes, those happen too). You still lose, but at least you take in some premiums to mitigate the losses. So yes, it does make sense that the standard deviation of the returns would be lower.

Now, there are a couple things to keep in mind here. These are just benchmarks, not actual tradable products. Of course, you can replicate it -- or buy a fund that replicates it. And, you can probably improve on the results by being more flexible with the timing of the rolls. On a "live" buy-write portfolio, it would make more sense to roll out once the options get to either a particularly high or particularly low delta. If the options are near either 100 or 0 delta, they turn your position into effectively either all-cash or all-stock.

Before you go and reallocate your portfolio, it's important to note that those CBOE numbers cover 25 years, and a lot of the benefit of the premium-selling strategy accrued during uglier markets. We'll break it down a bit in the next few days.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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