Schaeffer's Trading Floor Blog

Analyst Downgrades: Kindred Biosciences Inc, InterMune Inc, and La-Z-Boy Incorporated

Analysts issued bearish notes on KIN, ITMN, and LZB

by 8/21/2014 9:28 AM
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Analysts are downwardly revising their ratings today on biotech concerns Kindred Biosciences Inc (NASDAQ:KIN) and InterMune Inc (NASDAQ:ITMN), as well as furniture maker La-Z-Boy Incorporated (NYSE:LZB). Here's a quick look at today's bearish brokerage notes on KIN, ITMN, and LZB.

  • KIN is bracing for a 30% plunge out of the gate -- and could erase its year-to-date surplus -- after the firm unveiled disappointing data for its joint pain drug for canines. As a result, some once-bullish analysts are hitting the exits, with Roth Capital cutting its price target to $11.50, BMO slashing its price target to $19 from $30, and Leerink more than halving its price target to $11.25 from $29. More negative notes could be on the horizon for Kindred Biosciences Inc, too, as the consensus 12-month price target of $26.40 represents a steep premium to the stock's current perch at $14.21.

  • ITMN -- which settled at $54.10 after tagging a nearly 14-year high of $55.24 on Tuesday -- is pointed 1.1% lower, after Wells Fargo downgraded the shares to "market perform" from "outperform." The bearish note is relatively rare for InterMune Inc, as seven out of nine analysts offer up "strong buy" opinions. In light of the stock's stunning performance on the charts -- ITMN has skyrocketed 267% in 2014 -- its 14-day Relative Strength Index (RSI) sits at a lofty 73, in overbought territory. In other words, the shares could be due for a short-term breather.

  • LZB dropped 6.4% to finish at $21.74 yesterday, as investors panned the company's fiscal first-quarter earnings report. This morning, Raymond James weighed in by trimming its price target on the security to $28 from $32, though the firm offered up a "strong buy" rating. Despite its lackluster showing in the earnings spotlight, or its year-to-date loss of nearly 30%, La-Z-Boy Incorporated still has quite a few fans on the Street. In fact, not one of the five brokerage firms following LZB deems it a "hold" or "sell," and the average 12-month price target of $29 represents expected upside of more than 33% from the equity's current price.

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Markets are poised to start the session on a strong note ahead of a busy economic calendar. In company news, here are some names to watch today.

  • Ford Motor Company (NYSE:F) said it will introduce a new series of hybrid vehicles, as a means of competing against Toyota Motor Corp's (ADR) (NYSE:TM) successful Prius series. The vehicles -- which will be powered by both gasoline and electric -- are slated to be introduced to stores as a 2019 model.(Reuters)

  • Russia has closed the doors on four of its McDonald's Corporation (NYSE:MCD) restaurants in Moscow, including the flagship location that was opened almost 25 years ago. The stores have come under pressure of late, after Russia's federal consumer agency accused MCD of "sanitary violations." In response to the accusations, MCD said, "We are closely studying the subject of the documents to define what should be done to re-open the restaurants as soon as possible." (CNN Money)

  • Customer information at roughly 51 domestic United Parcel Service, Inc. (NYSE:UPS) may have been compromised by a group of hackers from Eastern Europe. At this point, it's not clear how many customers have been affected, but the hackers are assumed to be the same group behind Target Corporation's (NYSE:TGT) massive security breach last holiday season. (Mashable)

  • Family Dollar Stores, Inc.'s (NYSE:FDO) board of directors has unanimously voted to reject Dollar General Corp.'s (NYSE:DG) $9.7 billion bid, due to concerns over antitrust approval. FDO will instead be acquired by Dollar Tree, Inc. (NASDAQ:DLTR), whose $8.5 billion offer was approved by FDO's board in July. (Charlotte Observer)

  • Bank of America Corp (NYSE:BAC) is close to settling with federal and state officials for a reported $16.65 billion over its role in the mortgage-backed securities crisis in 2008. The financial firm is expected to release the details of the settlement at a news conference later this morning. Additionally, prosecutors are rumored to be preparing a civil case against Countrywide Financial Corp. co-founder Angelo Mozilo. BAC acquired Countrywide in 2008.(The New York Times)

  • Among companies that reported earnings are DLTR, L Brands Inc (NYSE:LB), Hewlett-Packard Company (NYSE:HPQ), and Sears Holdings Corp (NASDAQ:SHLD). (The Washington Post; MarketWatch; The New York Times; USA Today)

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Analyst Upgrades: Hewlett-Packard Company, Target Corporation, and PetSmart, Inc.

Analysts issued bullish notes on HPQ, TGT, and PETM

by 8/21/2014 9:03 AM
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Analysts are upwardly revising their ratings today on tech titan Hewlett-Packard Company (NYSE:HPQ), retailer Target Corporation (NYSE:TGT), and pet products maker PetSmart, Inc. (NASDAQ:PETM). Here's a quick look at today's bullish brokerage notes on HPQ, TGT, and PETM.

  • HPQ is flirting with breakeven at $35.12 ahead of the bell, as traders digest the company's fiscal third-quarter earnings, which showed a surprise increase in PC sales. Subsequently, RBC, Barclays, and Cantor Fitzgerald hiked their price targets on HPQ, to $38 (from $36), $41 (from $38), and $34.50 (from $30), respectively. Furthermore, Barclays reiterated its "overweight" rating on the stock. There's still plenty of room on Hewlett-Packard Company's bullish bandwagon, though. Despite HPQ's year-to-date ascent of 25.5%, more than half the analysts covering the security maintain "hold" or "sell" opinions, and the consensus 12-month price target of $36.93 is within a stone's throw of the equity's current price.

  • Despite confessing to a 62% drop in second-quarter earnings and slashing its full-year guidance, TGT rallied 1.8% to settle at $60.33 yesterday. In overnight action, Jefferies and Morgan Stanley both upped their price targets by $3 -- to $55 and $61, respectively -- but the former reiterated its "hold" recommendation, while the latter underscored an "underweight" rating. Most analysts are bearish when it comes to Target Corporation, which boasts just five "strong buys," compared to 16 "hold" or worse suggestions. The stock has shed 4.6% in 2014, and in the wake of yesterday's jump is staring up at potential resistance in the $61 neighborhood, which rejected TGT's advances in late July and early August.

  • PETM tagged a seven-month high yesterday, ultimately settling at $70.52, after the firm said it might put up the "for sale" sign. Barclays is rolling the dice on fresh year-to-date highs for PETM, hiking its price target on the stock to $75 from $63, and backing an "overweight" rating. The upbeat analyst attention is relatively rare for PetSmart, Inc., as 18 out of 19 analysts call the stock a "hold" or "strong sell." Elsewhere, short interest represents more than eight sessions' worth of pent-up buying demand, at PETM's average pace of trading.

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Reader Mail: Dissecting the VIX Drift

There are a number of factors that keep the VIX from lifting in a dramatic fashion

by 8/21/2014 8:03 AM
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Time to open up the (not terribly) voluminous viewer mailbag and answer some questions, some of which actually have to do with options.

And technically, it's not actually mail, or even email. These are just a few questions that I got asked on Twitter, which is a great way to ask questions, by the way. I'm @agwarner.


If VIX is a measure of put call buying why doesn't it go up on violent moves to the upside?

There's nothing to say it can't go up on violent upside moves, but we haven't seen that happen on any consistent basis since the late '90s tech bubble.

Remember that CBOE Volatility Index (VIX) measures implied volatility, which is part prediction of future volatility and part the price traders are willing to pay for portfolio insurance. A violent upside move pumps up realized volatility, and that does affect how the market prices implied volatility. But, the demand to protect portfolios generally decreases. No one's all that afraid of a super-fast move to the upside, plain and simple.

What's more, there's a natural headwind against VIX lifting in rallies. S&P 500 Index (SPX) options are skewed. The higher the strike, the lower the implied volatility. So, if SPX rallies, higher strikes with lower implied volatilities will comprise a larger part of the VIX calculation. Thus, VIX will dip on an SPX rally, even if the implied volatility of every individual option on the board stays the same.

On upward movements, it's often the drift that cause the problems (for premium sellers), not volatility.

OK, that's more statement than question. But, it's a statement I agree with.

Suppose SPX rallies 0.25% to 0.5% per day or so, without a range that extends much above or below that. That's going to come out to about an 8 volatility or so. If you can sell options at an implied volatility of 12, it sounds like a good deal, right? I mean, you theoretically will earn more in daily decay than you lose in price movement. And, it's so static that you probably won't bother to hedge your position much, if at all.

But here's the problem. Let's say you're short straddles or strangles. You're going to keep getting gradually shorter and shorter into rallies. In a day or two, it won't matter much, but eventually you're going to be just straight short -- and even though it's rallying very slowly, the net of the move cost you money.

Of course, you could take action at some point. The above assumes you just sell options premium and check back when the options expire. You could hedge your options' deltas every day, for example, and that would more or less lock in the advantage you generated by selling implied volatility at what turned into a good price vs. realized volatility.

Unfortunately, we don't know in advance what the market will do. If it has low volatility and just meanders in a range, you will cost yourself money with the constant hedging, Inaction was a better course.

It's always best when you sell implied vol. over whatever happens in realized vol. It's just not a guarantee of a winning trade.

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

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Among the stocks attracting attention from options traders lately are financial firm Bank of America Corp (NYSE:BAC), firearm issue Smith & Wesson Holding Corp (NASDAQ:SWHC), and alternative energy concern Trina Solar Limited (ADR) (NYSE:TSL). Below, we'll break down how option buyers are positioning themselves, and how much speculators are willing to pay for their bets on BAC, SWHC, and TSL.

  • BAC has spent the past few months trading between $15 and $16, and yesterday, the equity settled squarely in the middle of this range, at $15.52. Option traders are keeping the faith, though, per the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 5.54, which ranks in the 86th percentile of its annual range. Simply stated, calls have been bought to open over puts at an accelerated clip in recent weeks. Currently, premium on BAC's front-month options is lingering near historically low levels, as evidenced by the equity's Schaeffer's Volatility Index (SVI) of 17%, which ranks lower than 88% of similar readings taken in the past year. In today's session, Wall Street will be awaiting confirmation of Bank of America Corp's record $17 billion settlement for its role in the 2008 financial crisis.

  • Put buyers have picked up the pace on SWHC, ahead of next Tuesday evening's fiscal first-quarter earnings report. At the ISE, CBOE, and PHLX, the stock's 10-day put/call volume ratio of 0.88 ranks in the bearishly skewed 80th annual percentile. This negative tone isn't too surprising, considering SWHC shed 8.7% the day after the company unveiled its fiscal fourth-quarter results in June. Despite the uncertainty surrounding this scheduled event, front-month SWHC options are pricing in relatively low volatility expectations for the stock. Specifically, the security's SVI of 43% ranks lower than 64% of comparable readings taken in the previous 12 months. On Wednesday, Smith & Wesson Holding Corp settled at $13.19, and now sits 2.2% lower on a year-to-date basis.

  • Also stepping up to the earnings plate next Tuesday is TSL, with results due out ahead of the open. The company handily beat bottom-line estimates in late May, sending the shares nearly 31% higher in the subsequent session. Option traders are hoping for more of the same, per the security's 10-day ISE/CBOE/PHLX call/put volume ratio of 11.72, which ranks just 11 percentage points from an annual bullish peak. With 22.6% of the stock's float sold short, though, a portion of this call buying could be a result of shorts hedging their bearish bets against another earnings-induced surge. Regardless, now is an opportune time to scoop up front-month Trina Solar Limited (ADR) options at a relative bargain -- the equity's SVI of 61% ranks in the 13th percentile of its annual range. Shares of TSL finished at $13.15 on Wednesday -- notching their second consecutive close north of $13 for the first time since June 2.

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