Schaeffer's Trading Floor Blog

Options Check-Up: Tesla Motors Inc (TSLA), Groupon Inc, and DryShips Inc.

Analyzing recent option activity on TSLA, GRPN, and DRYS

by 8/27/2014 7:42 AM
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Among the stocks attracting attention from options traders lately are electric car maker Tesla Motors Inc (NASDAQ:TSLA), online coupon concern Groupon Inc (NASDAQ:GRPN), and ocean transportation issue DryShips Inc. (NASDAQ:DRYS). Below, we'll break down how option buyers are positioning themselves, and how much speculators are willing to pay for their bets on TSLA, GRPN, and DRYS.

  • TSLA has rallied 74% this year -- and based on Tuesday's close at $261.74, the stock is sitting just 2% away from its Aug. 18 record peak of $267.26. Against this backdrop, option players have been initiating long calls in a flurry, and at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), TSLA's 50-day call/put volume ratio of 1.46 ranks in the bullishly skewed 80th percentile of its annual range. With nearly 27% of the stock's float sold short, it's possible some of this recent call buying is a result of short sellers hedging against any additional upside. Regardless, now is a prime time to scoop up front-month Tesla Motors Inc options at a relative bargain, as the equity's Schaeffer's Volatility Index (SVI) of 33% ranks lower than 98% of similar readings taken in the past year.

  • GRPN tacked on 2% to close the session at $6.4, with the stock breaking north of its 50-day moving average for the first time in three weeks. Year-to-date, though, the shares are still staring at a roughly 45% deficit. In spite of this dismal technical showing, the stock has racked up a 10-day call/put volume ratio of 5.77 on the ISE, CBOE, and PHLX -- which ranks in the 78th annual percentile. As with TSLA, short sellers could be using these long calls to guard against an unexpected rally. At present, 20.7% of Groupon Inc's float is sold short. Meanwhile, front-month GRPN options are pricing in extremely low volatility expectations at the moment -- the equity's SVI of 38% ranks below all comparable readings taken in the last 12 months.

  • At the ISE, CBOE, and PHLX, option traders have bought to open nearly 23 DRYS calls for each put over the past two weeks. What's more, the resultant call/put volume ratio of 22.75 ranks just 10 percentage points from an annual bullish peak. In the front-month series, specifically, call players have targeted the overhead September 3.50 and 4 strikes, where a collective 25,718 contracts are currently in residence. Those purchasing these short-term options are doing so on the cheap, relatively speaking, as DryShips Inc.'s SVI of 45% ranks lower than 93% of similar readings taken over the past 52 weeks. On Tuesday, DRYS closed the session at $3.32 -- 29.4% below its year-to-date breakeven line.

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Analyst Update: The Gap Inc., Las Vegas Sands Corp., and Qihoo 360 Technology Co Ltd

Analysts adjusted their ratings on GPS, LVS, and QIHU

by 8/26/2014 2:05 PM
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Analysts are weighing in today on retail chain The Gap Inc. (NYSE:GPS), casino operator Las Vegas Sands Corp. (NYSE:LVS), and Chinese anti-virus expert Qihoo 360 Technology Co Ltd (NYSE:QIHU). Here's a quick look at today's brokerage notes on GPS, LVS, and QIHU.

  • GPS reached a new annual high of $46.61 earlier after receiving a price-target hike to $48 from $41 at Cowen. At last check, the shares were just off that mark, up 1.7% at $46.47. All in all, it's been a strong year for The Gap Inc., which has advanced nearly 19% in 2014. Nevertheless, the brokerage bunch is slanted in a bearish direction, with 14 tepid "hold" recommendations outweighing 10 "strong buy" endorsements; also, the security's consensus 12-month price target is just $45.80. If GPS continues to perform on the charts, however, the equity could be met with additional bullish brokerage notes.

  • By contrast, LVS is a long-term technical laggard, down nearly 14% this year to rest at $67.96. What's more, the shares are currently being pressured lower by their descending 20-day moving average, and are facing resistance at the overhead $70 level. Morgan Stanley may have taken note of these factors, as the firm slashed Las Vegas Sands Corp.'s price target to $76 from $83 this morning. What's more, the brokerage firm reduced its 2014 and 2015 Macau gaming revenue growth targets. Additional bearish notes could be on the way, too. Twelve out of 14 covering analysts have given LVS a "strong buy" rating (compared to just two "holds" and not a single "sell"), and the equity's average 12-month price target sits at a lofty $84.90 -- territory not explored since mid-March.

  • QIHU is struggling again this afternoon -- off 2.4% to trade at $91.59 -- following a reduction to "neutral" from "outperform" at Credit Suisse. Longer term, however, the shares remain up about 12% year-to-date. Today's bearish brokerage note is relatively rare for Qihoo 360 Technology Co Ltd, as 90% of the analysts following the equity have doled out a "strong buy" opinion.

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Stocks On the Move: Mobileye NV, Kandi Technologies Group Inc, and Trina Solar Limited (ADR)

MBLY, KNDI, and TSL are moving sharply in Tuesday's trading

by 8/26/2014 11:01 AM
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U.S. stocks are solidly higher this morning, thanks to another dose of big merger news -- though a mixed batch of economic data is keeping the bulls in check. Among the names making notable moves are Wall Street newcomer Mobileye NV (NYSE:MBLY), electrical vehicle issue Kandi Technologies Group Inc (NASDAQ:KNDI), and alternative energy name Trina Solar Limited (ADR) (NYSE:TSL). Here's a quick look at how MBLY, KNDI, and TSL are faring on the charts today.

  • With the stock's post-IPO quiet period over, MBLY was absolutely bombarded today by a wave of bullish brokerage notes. No fewer than six brokerage firms started the equity at "buy," "outperform," or "overweight," with Morgan Stanley going so far as to call MBLY its new top pick. (Baird, meanwhile, issued a lukewarm "neutral" rating.) Following this flood of endorsements, shares of Mobileye NV have surged 4.8% to trade at $40.03. The stock is now within striking distance of its all-time peak of $41.50, which was set Aug. 4 -- just one session after its public trading debut.

  • KNDI is up 6.9% to $19.52, bouncing back from yesterday's 5.2% slump. Despite the day-to-day volatility, shares of Kandi Technologies Group Inc now boast a bullish year-to-date return of 65.6%. Short sellers aren't buying into KNDI's price action, though, with short interest rising 6.4% over the past two reporting periods -- and now accounting for 23.6% of the equity's float. Elsewhere, KNDI remains a prime target for options traders, as the stock's Schaeffer's Volatility Scorecard (SVS) stands at a towering 91. This high reading indicates the shares have tended to make more significant moves over the past year than what the options market has priced in, creating some attractive opportunities for premium buyers.

  • TSL has tumbled 7.3% to trade at $12.39, pressured by a softer-than-forecast second-quarter revenue number. Today's bearish gap has left TSL back on the south side of the $13 level, which could now resume its previous role as resistance. In the wake of the company's disappointing quarterly report, Trina Solar Limited (ADR) could be vulnerable to downgrades. Among the eight brokerage firms following TSL, no fewer than five maintain a "strong buy" rating.

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Why Bother With XIV?

Volume is increasing on the VelocityShares Daily Inverse XIV Short-Term ETN (XIV)

by 8/26/2014 9:37 AM
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In focus: 200 on SPDR S&P 500 ETF Trust (SPY) and 2,000 on S&P 500 Index (SPX)!

It's party time, and everyone wants to celebrate, including volatility sellers. As Bloomberg noted last week, VelocityShares Daily Inverse VIX Short Term ETN (XIV) volume is increasing. That's, of course, more or less the same thing as shorting iPath S&P 500 VIX Short-Term Futures ETN (VXX). But fear not, shorting VXX is staying trendy, too:

Volatility in U.S. equity markets is near an all-time low, and because traders have loaded up on bets, it has farther to fall.

Short holdings on an exchange-traded note tracking the Chicago Board Options Exchange Volatility Index (VIX) reached a six-month high in August, essentially a bet that the volatility gauge will keep falling. There are about 19 million shares of the iPath S&P 500 VIX Short-Term Futures ETN (VXX) that have been borrowed and sold to speculation on declines, almost three times the level from early June, data compiled by Markit Ltd. shows.

The iPath ETN, often known by its ticker VXX, has become one of the most-traded U.S. securities as strategies based on volatility exploded in popularity. A daily average of 42.8 million shares changed hands over the past month, third only to the SPDR S&P 500 ETF Trust (SPY) and iShares MSCI Emerging Markets (ETF) exchange-traded funds, according to data compiled by Bloomberg.

Now, even though XIV is literally an inverse play on VXX, buying XIV is not exactly like shorting VXX. Generally speaking, shorting VXX is a better play.

That's because XIV is a tracker and subject to the same laws of compounding as every other tracker. If VXX churns, then XIV will gradually drift.

For example, VXX hit its last all-time low of 26.95 on July 3 and closed at 27.17, about where it trades now. XIV closed at 47.27 the same day and is now about 5% below that. So in about seven weeks of churn, XIV has lost 5% of its "value" relative to VXX.

So why ever bother with XIV? Well, it does have a couple potential advantages. One is that VXX can become hard to borrow, though it's not that way right now. If it does become difficult, you'd have to pay interest on your short which would eat into some of the advantage over XIV.

The other is that it's less risky to be long something than short it. The upside is theoretically open-ended in VXX vs. defined in XIV. Shorting VXX is de facto going short gamma on your portfolio. If/when volatility lifts, the "value" of your volatility short is increasing. Conversely, the "value" of an XIV long is decreasing. If the position is wrong, an XIV works less badly than a VXX short.

For those that can't short anyway, it's a moot point; you can't use VXX unless you want to buy it. And you should never want to buy it; use regular puts instead.

For what it's worth, I'd rather only short VXX or go long XIV as a fade against a VIX pop. Not saying it won't work now; it probably will. Just that it's not for me at this time.

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

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Analyst Downgrades: Renren Inc, Tim Hortons Inc. (USA), and Wolverine World Wide, Inc.

Analysts downwardly revised their ratings on RENN, THI, and WWW

by 8/26/2014 9:21 AM
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Analysts are weighing in today on China-based networking platform Renren Inc (NYSE:RENN), coffee concern Tim Hortons Inc. (USA) (NYSE:THI), and performance footwear designer Wolverine World Wide, Inc. (NYSE:WWW). Here's a quick roundup of today's bearish brokerage notes on RENN, THI, and WWW.

  • RENN posted a second-quarter earnings beat last night, but revealed steep year-over-year declines in profit and revenue. On the charts, the stock has been lackluster, as well, down more than 5% year-over-year to trade at $3.27. As such, Barclays reduced its price target on Renren Inc to $3 from $3.30. Other brokerage firms are even more bearish, as the equity's consensus 12-month price target checks in at $2.78 -- 2 cents from RENN's 52-week low of $2.76 from early December.

  • THI is up more than 9% ahead of the open, after Burger King Worldwide Inc (NYSE:BKW) announced it will buy the Canada-based coffee chain. This only adds to Tim Hortons Inc.'s (USA) technical strength, as the shares are up roughly 28% year-to-date to trade at $74.72. Meanwhile, during the overnight hours, Desjardins cut its rating to "hold" from "buy," and Longbow downwardly revised its opinion to "neutral" from "buy" -- though Canaccord Genuity, CIBC, TD Securities, and Desjardins all raised their price targets on the equity. Heading into today, 100% of the brokerage firms covering THI had given the stock a "buy" or better recommendation.

  • Finally, Macquarie initiated coverage on WWW with a "neutral" rating and $29 price target. The relatively tepid note isn't surprising, given that the stock has shed nearly 21% in 2014 to rest at $26.89. Elsewhere, short sellers have been having a field day with Wolverine World Wide, Inc., as 11.2% of the equity's float is sold short, which would take more than two weeks to buy back, at average daily trading levels.

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