Schaeffer's Trading Floor Blog

2 Ways to Play Puts on NQ Mobile Inc (ADR) (NQ) Ahead of Earnings

NQ Mobile Inc (ADR) will unveil three quarters' worth of earnings reports after tonight's close

by 12/18/2014 10:37 AM
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NQ Mobile Inc (ADR) (NYSE:NQ) is scheduled to take its turn in the earnings confessional after tonight's close, and will unveil quarterly results from its fiscal first, second, and third quarters. Ahead of the highly anticipated event, put players from both the long and the short sides have been lining up their bets.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, the stock's 10-day put/call volume ratio has jumped to 0.48 from 0.02 since the start of the month. What's more, the current ratio ranks in the 72nd percentile of its annual range, meaning puts have been bought to open over calls at an accelerated clip in recent weeks.

As noted, though, put writers have been active on NQ, as well. In fact, over the course of the past 20 sessions, speculators at the ISE, CBOE, and PHLX have sold to open 2.42 puts for each one they've purchased.

On the charts, NQ has had a volatile run this year, with most of the action resolving to the downside. In fact, since their Dec. 31, 2013 close at $14.70, the shares have shed 63% of their value. Today, however, NQ Mobile Inc (ADR) (NYSE:NQ) is up 11.1% to trade at $5.40, as traders pile on ahead of tonight's quarterly earnings results.

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Analyst Upgrades: LinkedIn Corp, Tetraphase Pharmaceuticals Inc, and Visa Inc

Analysts upwardly revised their ratings on LNKD, TTPH, and V

by 12/18/2014 9:29 AM
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Analysts are weighing in today on professional networking site LinkedIn Corp (NYSE:LNKD), drugmaker Tetraphase Pharmaceuticals Inc (NASDAQ:TTPH), and credit card giant Visa Inc (NYSE:V). Here's a quick roundup of today's bullish brokerage notes on LNKD, TTPH, and V.

  • Wells Fargo initiated coverage on LNKD with an "outperform" rating. On the charts, the shares have outperformed the broader S&P 500 Index (SPX) over the past couple months, and -- at $219.78 -- are currently resting atop support at their 50-day moving average. However, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open more puts than calls over the last two weeks. Specifically, LinkedIn Corp's 10-day put/call volume ratio of 1.12 across this trio of exchanges sits 9 percentage points from an annual high. If the stock continues to outpace the broader market, a capitulation among these option skeptics could result in tailwinds. Just ahead of the bell, LNKD is up 2%.

  • TTPH has tacked on more than 145% this year to trade at $33.19 -- just 3 cents shy of yesterday's all-time peak of $33.22 -- and is poised to open 15% higher following a successful late-stage trial of its antibiotic, eravacycline. The brokerage bunch is cheering the news, too, as the stock has received no fewer than 10 upwardly revised price targets -- including JMP Securities' hike to $58 from $32, which represents the most ambitious outlook. Taking a step back, all of the analysts covering Tetraphase Pharmaceuticals Inc have handed out a "buy" or better rating. However, the equity's consensus 12-month price target of $27.80 represents a discount to current trading levels, paving the way for this morning's rush of positive analyst notes.

  • Finally, V saw its price target raised by $40 to $300 at Credit Suisse, which also reiterated its "outperform" assessment. On the charts, the stock has added 16.3% in 2014 to sit at $259.08 -- not far from its record high of $265.63, touched one week ago. Additionally, Visa Inc has outperformed the SPX by 20 percentage points during the last three months. As such, the brokerage bunch is overwhelmingly in the bulls' corner. In fact, 20 out of 24 covering analysts rate V a "buy" or better, versus four "holds" and not a single "sell."

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Analyst Downgrades: The Coca-Cola Co, SanDisk Corporation, and Schlumberger

Analysts downwardly revised their ratings on KO, SNDK, and SLB

by 12/18/2014 9:22 AM
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Analysts are weighing in today on blue-chip beverage giant The Coca-Cola Co (NYSE:KO), data storage solutions specialist SanDisk Corporation (NASDAQ:SNDK), and oil-and-gas issue Schlumberger (NYSE:SLB). Here's a quick roundup of today's bearish brokerage notes on KO, SNDK, and SLB.

  • SocGen followed in the recent footsteps of its fellow brokerage firms, reducing its price target on KO to $38, and underscoring its "sell" rating. It's been a tough month for the shares, which have shed 7.3% since their Nov. 28 record close at $44.83 to trade at $41.55. Against this backdrop, option traders have been growing increasingly pessimistic. The stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.03 ranks in the 84th percentile of its annual range. Simply stated, puts have been bought to open over calls on The Coca-Cola Co at a faster-than-usual clip in recent weeks.

  • Stifel cut its price target on SNDK to $109 from $112 -- and reiterated its "buy" rating -- although this still represents expected upside of 10.4% to last night's closing price of $98.74, and rests in territory yet to be charted by the shares. Overall, analysts have been upbeat toward a stock that's rallied nearly 40% year-to-date. Of the 22 brokerage firms covering SanDisk Corporation, 19 maintain a "buy" or better rating, with not a single "sell" to be found. Plus, the consensus 12-month price target of $110.69 sits at a 12.1% premium to current trading levels.

  • SLB is poised to pop 1.3% out of the gate, as a rebound in the energy sector overshadows a price-target reduction to $89 and an uninspiring "hold" recommendation at Jefferies. Longer term, the shares have surrendered 30% since topping out at a record peak of $118.76 in early July, and closed last night at $82.88, just shy of their 10-day moving average. Not surprisingly, option traders have taken the bearish route. At the ISE, CBOE, and PHLX, for example, SLB's 10-day put/call volume ratio of 2.19 ranks 3 percentage points from an annual bearish peak. Additionally, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.17 ranks higher than 64% of similar readings taken in the past year. In other words, short-term speculators are more put-heavy than usual toward Schlumberger Limited.

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Buzz Stocks: AK Steel Holding Corporation, Oracle Corporation, and The Pantry Inc

Today's stocks to watch in the news include AKS, ORCL, and PTRY

by 12/18/2014 9:04 AM
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The major market indexes appear ready to rally, adding to yesterday's Fed-induced surge. In company news, today's stocks to watch include metal manufacturer AK Steel Holding Corporation (NYSE:AKS), enterprise software giant Oracle Corporation (NYSE:ORCL), and convenience store chain The Pantry Inc (NASDAQ:PTRY).

  • AKS anticipates current-quarter shipments will soar to 2 million tons -- a 37% increase over the prior three-month period -- sending the shares more than 8% higher ahead of the bell. The firm also expects to benefit from falling metal and energy prices. Yesterday, AK Steel Holding Corporation rallied 6.1% to close at $5.56, but remains 32.2% lower on a year-to-date basis. Option traders have responded by buying to open puts over calls at a faster-than-usual pace, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, AKS' 10-day put/call volume ratio across these three exchanges is 0.29, near the top quartile of its annual range.

  • ORCL reported slightly better-than-expected per-share earnings for the fiscal second quarter. Sales increased 3% year-over-year, as well, powered by $7.3 billion in software and cloud revenue. Elsewhere, the brokerage crowd reacted positively to the results, as no fewer than 10 firms raised their price targets on Oracle Corporation, with D.A. Davidson, Canaccord Genuity, and Barclays all eyeing a move up to $50 -- in uncharted territory, representing the boldest forecast of the bunch. These price-target hikes are well-deserved, considering the shares have advanced 19% in the last year to perch at $41.16, just a chip-shot away from their consensus 12-month price target of $43.68. On a related note, a slight majority of analysts are bullish toward ORCL, with 14 firms handing out "buy" or better ratings, versus 11 "hold" or worse opinions. Returning to the charts, the stock is pointed 5.8% higher in electronic trading.

  • Finally, PTRY is being purchased for just over $860 million by Canadian convenience store chain Alimentation Couche-Tard Inc, owner of Circle K. The deal works out to roughly $36.75 per share, or a 3.5% premium to The Pantry's Wednesday close at $35.52. Longer term, the stock has been a beast, more than doubling in value this year, and touching a seven-year high of $36.71 yesterday on then-unconfirmed buyout whispers. What's more, the equity is sitting another 2.2% above breakeven this morning. Accordingly, options traders have been upping the bullish ante, based on PTRY's 50-day ISE/CBOE/PHLX call/put volume ratio of 4.95 -- in the 74th annual percentile.

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Breaking Down the 'Loud' VIX

How bad quotes translated into CBOE Volatility Index (VIX) volatility

by 12/18/2014 8:58 AM
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Speaking of volatility of volatility, check out how the CBOE Volatility Index (VIX) looked on Monday, via CNBC:

VIX from Dec. 12-Dec. 16

There's a simple explanation, of course, and it didn't involve fat fingers or major publications somehow believing a high school kid could earn $72 million out of the trading ether.

Yep, it was just good old-fashioned bad quotes!

The Chicago Board Options Exchange (CBOE) calculates the VIX via quotes in qualified S&P 500 Index (SPX) options. Thus, if an SPX option has an inaccurate quote, it can cause the VIX to "print" an inaccurate number. Multiply that by a lot of quotes and you get a VIX that will produce some odd numbers. And that's exactly what happened.

The issue, according to the CBOE, derives from the way the VIX equation collects options quotes. The CBOE takes the bid and ask price of every option (that is, the price at which market makers are willing to buy and sell each option, respectively) and finds the average. For instance, if the bid price is $0.10 and the ask price is $0.30, the "true" option price will be considered to be $0.20. However, what began to happen was that the bid/ask spreads on those S&P options started to widen vociferously and sporadically. Generally, the ask price was rising, while the bid price stayed the same.

Quotes went from $0.10 wide to $2 wide -- and then back again. This has the effect of lifting the midpoint of the quote up $0.95, and then back, and then up again, and so on. Thus, the rather loud VIX. As a general rule, by the way, if you ever see VIX doing that, assume it's some sort of mechanical error and not risk tolerance/aversion going up and back by the minutes.

Yes, it's possible that quotes go wide in a blink. We used to call it "fast market." It was a euphemism for "the quotes on the screen aren't right. If you really want to make a trade, you'll do it at my price." With everything automated now, you don't have the luxury of trading at different prices than you see, so systems are programmed to just quote everything super wide to begin with at times of market stress. But, the market wasn't all that stressed. Apparently, someone thought otherwise and kept going to wide markets. And then here's the part that kind of surprised me, from the aforementioned CNBC article:

"The reason the error would not have been limited to a single firm is that the four major firms that provide quotes for monthly S&P options follow each other closely, with the help of computer algorithms. If one firm pulls or hikes its ask price, the other firms' systems will not immediately be aware that it is due to an error, and will thus follow the ask price higher, according to former VIX market maker Brian Stutland."

In other words, if there's a glitch in one algo, the other algos see the resulting quotes and default to "find a human to trade with." Yeah, liquidity!

Good to know that four-and-a-half years after the flash crash there's about a 100% chance it could easily happen again. I hope I'm wrong on this, but it suggests that all we need is one firm going to wide markets at the same time there's a sell program going on and look out below!

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

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