Ariad Pharma (ARIA): Bullish Option Spread Targets 2H 2011 Catalysts

This was an interesting spread I came across after hours, and after some research it looks like a very nice trade...

Ariad Pharma (ARIA) call volume jumped to 3X daily average as the August $11 / January 2012 $11 calendar call spread traded 2,500 contracts at $1.20 to open, the trader trying to time the Biotech for a move, looking for shares to stay near the $11 area through August expiration, and then potentially close the spread or let the January calls ride if the outlook is bullish. The spread is show below based on August expiration:



The spread traded as shares hit 5 year highs, although closing modestly lower, and overbought. Shares have tripled since last November, and volume has been strong lately with heavy accumulation. Ariad is a $1.35B Biotech that trades 7.6X sales and has a 10.65% short float. Ariad is in a strong trend, as seen below:



On June 20th, Oppenheimer raised its target to $13 from $11. Lazard reiterated a Buy with a $10 target on June 7th, and shares moved 25% and reached the target already. Lazard noted it expects Ariad to file for approval in the US and EU in 2H11, and forecast approval in the first half of 2012 for Ridaforlimus which has shown strong results, a 28% reduction in risk of progression in sarcoma and endometrial cancer. Lazard also notes that Pantinib in resistance CML is the most promising opportunity for Ariad, and data expected at ASH in December.

It is fairly clear from these event dates why this calendar call spread strategy is well designed, and has the potential to be very profitable as Implied Volatility jumps later this year in anticipation of the events.

The August/January $10 calendar call spread also makes for a solid trade if you see less near term upside, as the IV Skew has the $10 August calls bid up quite a bit. If more bullish, you could try the $12 strike, but regardless, the spread is set up well.

If you prefer not to take directional trades, you could look at the August/January Double Calendar or Diagonal Spread as more of a play on the likelihood of increased volatility later this year.

Philip Morris (PM): Option Trade Looks for Flame to Burn Out

I do a lot of work after hours scanning for any action in the options market I may have missed during the day, and this spread in Philip Morris really caught my eye as a large trade that makes a lot of sense with the current Technical and Fundamental outlook.

Philip Morris (PM) with a large spread in August as the $65/$60 ratio put spread traded 3,000X6,000 on the ISE at a debit of $0.42 to open. The spread profits with shares in the $55.42 to $64.38 range (Shown Below)




The spread comes as shares sold off on heavy volume and broke back below its 50 day EMA. Shares also broke through the neckline of a head and shoulders pattern that would target the 200 day EMA just below $62. Today's breakdown was the start of a new trend, according to DeMark and the ADX Crossover. The chart below shows the Head and Shoulders Breakdown:



The $118.5B cigarette maker has been on a major run and is finally showing weakness, and shares now trade 16.3X earnings, 1.73X sales and 25.5X cash flow, and the yield is now only 3.84%, so shares do look over-valued. The trade also comes as the FDA released new grisly warning labels to try and deter smoking, a potential impact to profits moving forward.

BofA raised its target to $78 in early June, noting strong pricing power. However, the Japan and Spain markets could see weakness due to recent events, and with the economy struggling, the spending on cigarettes could become more discretionary.

Ratio put spreads are often used as protection, and the small outlay here can yield a big return if shares head towards $60, while the risk is limited , because shares are not heading back below $55 due to value/yield buyers.

Smart Money Positioning for Late Summer Commodity Rally

Discovering trends in options activity often leads to the highest probability trades, and the recent trend has been large opening positions in commodity names, mainly the metals.

The S&P has corrected more than 8% in the last 2 months, while Metals (XME) have corrected more than 19% in the same time period, notable weakness in Coal, Steel, Iron Ore, Gold, Copper, and Steel stocks, with many of the individual stocks down more than 30%.

Commodities are considered a risky-asset, tied more closely to global economic growth than other industries, and a heavy reliance on China, India, and other growth markets. However, the group does appear to be over-shooting to the downside, especially if the 2H 2011 improves from 1H 2011.

The recent data also supports a bullish fundamental view on the metals, with China showing strong demand for Coal, Steel, and Iron Ore, while Japan is also seeing a demand surge as the rebuild begins.

Some of the leading Wall Street Research shops are also starting to make bullish calls, Credit Suisse out with a very bullish Copper forecast last week, and Steel Market Intelligence making a positive Steel call, flipping from a bearish call that was spot-on.

In the last two weeks I have seen large institutional buying in upside call options across most of the metal groups, and will highlight that action below. Alcoa (AA) earnings will kick off Q2 earnings season, and is a potential catalyst for a resurgence in the metals, although aluminum fundamentals are not looking quite as positive as the other metals.

Steel
Arcelor Mittal (MT)September $35 calls were active the last 4 days of last week, with open interest starting the week at 207 contracts, and on Friday 5,013 contracts traded against open interest of 30,228 that accumulated in the contract throughout the week, and the implied volatility of the contract rose more than 15%. Arcelor has held up much better than its peers and have been basing above $31. The $39.2B Steel giant is trading 7.1X forward earnings, 0.85 PEG, 0.59X sales, and 0.8X book value, making it one of the cheapest names in the industry, and also a Company interested in acquisitions. Option traders are positioning for shares to gain more than 13% in the next 3 months.

Copper
Freeport Mcmoran (FCX)shares have held well above the $46 double bottom from earlier in 2011, and face resistance with a descending trend line at the $50 level. It has outperformed most of the names in the metals sector, and Copper, often seen as a leading indicator for economic growth, has held the $4 level very strong since rebounding sharply off $3.90 lows in early May, a bullish divergence versus other metals. On Friday, a large holder in call options extended his/her play out another month, rolling 25,000 June $42 calls to the July $43 strike, and another rolled 12,000 June $47 calls to 12,000 July $46 calls. Freeport is another value name at 7.66X earnings, 2.23X sales, 3.3X book and 11.3X free cash flow. Deutsche Bank noted last week that the Company is likely to return money to shareholders via special dividends and has a Hold and $65 target. Morgan Stanley also recently reiterated an Overweight, noting improving Copper fundamentals.

Iron Ore
Vale SA (VALE)is a $155.87B mining giant, often focusing on its Iron Ore business, but also a major player in other metals, and becoming a force in the fertilizer space as well. Shares trade very cheap at 5.8X earnings, 0.45 PEG, 3X sales and 2X book value. Goldman reiterated a Buy in April with a $45 target, citing a strong upcoming Iron Ore cycle, and the new CEO should lift the uncertainty. Recent speculation is the Company could announce a healthy dividend. Recent data out of China and Japan bodes well for Iron ore. Shares have been trying to base and remain in a channel down since January, current resistance at $32 and support at $28, while $29 remains major support from May lows and the September breakout level, so reward/risk is compelling. VALE August $32 calls were extremely active with buyers on June 16th, more than 30,000 traded including one block of 8,300 at $0.80 on the CBOE, and open interest in that contract doubled, now sitting at 61,376.

Coal
Arch Coal (ACI) shares have been under pressure since announcing the acquisition of International Coal (ICO), a longer term positive as metallurgical coal is the hottest coal group. Shares have fallen more than 30% off April highs. Arch Coal is trading 6.4X forward earnings, 0.42 PEG, 1.58X sales and 1.78X book value. On May 12th, Standpoint raised to Buy with a $37 target. Arch Coal was the focus of bullish option traders on three occasions last week. On June 14th, more than 10,400 July $26 calls were bought to open, while on June 16th 4,600 July $27 calls were bought to open, and finally on June 17th more than 11,600 July $25 calls were bought to open as $1.2 million in call premium was purchased. 30 day implied volatility in Arch Coal jumped 15% last week.

Gold
Barrick Gold (ABX)shares are trading 21% off a recent double top at $56, at August 2010 lows, while Gold prices are barely off all-time highs, a major disconnect. Barrick shares trade 9.4X earnings, 3.77X sales, and 2.1X book value. Stifel raised shares to Buy with a $70 target in late April. Barrick Gold saw a few large bullish option positions last week. On Friday, more than 2,500 October $43/$47 call spreads were bought at $1.53, a nice reward/risk trade. On June 16th, more than 11,350 July $45 calls were bought to open, looking for a nice run in shares in the coming month.


There are likely a few names I am not mentioning, but all of these took place within the last week, so the trend is noteworthy. If the market shows signs of bottoming this week, I would concentrate on being long metals for the reversal move.

Cisco (CSCO) - Long Term Option Strategy Beats Buying Stock

As a lead in I have always felt that there really is no sense ever buying an equity where the options are liquid with tight spreads, because if you are confident in your view, the use of leverage allows you to better position for larger gains, whether you want to use deep in-the-money calls/puts or play the upside with out-of-the-money options. Also, if you are a long term investor willing to buy a stock at a certain level, why not just sell a cash secured put where you improve your cost basis due to the premium. If your fear is missing a big upside move, you can go long a call along with short a put for a risk reversal, a strategy that can amass huge gains if you catch a trend, or use a synthetic.

Anyway, I wanted to take a look at Cisco (CSCO), the $82.8B much-maligned former Tech leader. For months I have seen "value-gurus" trying to call the bottom and get long this Company, first on the move down to $18 on earnings, and more recently around the $16 level. Cisco is cheap on all metrics, trading 8.85X forward earnings, 1.9X sales and 8.95X cash flow, and also with around $40B in cash, or nearly half the market cap. One would question why management is not actively making acquisitions to drive growth, or returning money to shareholders in the form of a dividend, or even a special one time payment. Either of these actions would result in shares heading higher in my opinion, just anything to change the current sentiment, or maybe even a shakeup in management.

I'd rather not get too deep into the Cisco situation, as my goal is to lay out a strategy that is a much better play than simply trying to catch shares in this sharp trend lower. Shares are nearing the $14 level, which would be a 50% haircut from the early 2010 highs, and also a spot for a potential double bottom with the 2008 lows.

Most of the Street maintains $20+ targets on shares, seeing the longer term value.

The trade that caught my eye today was 10,000 January 2013 $20/$10 bullish risk reversals at a $0.23 Net Debit, buying the $20 calls and partially funding via selling the $10 puts.

The $230,000 outlay is a 41 Delta position, or equivalent to being long 410,000 shares of Cisco stock.

Through this strategy you are leveraged to being long Cisco, and if shares head higher the value of the calls increases, while the value of the puts decrease, and as that spread widens, a relatively small move higher in the stock can quickly double, triple, or more your $0.23 basis on the spread. I would note that the spread requires margin, so you would want to do this at a size where you are willing to be long Cisco (CSCO) at $10, so if you want $25,000 of Cisco, you can put on 25 of these spreads (note cost basis is actually $10.23 due to the debit, adjust accordingly).

The beauty of this strategy is that for a small outlay you limit your risk, but can participate in more of an upside move. If shares were to somehow tank below $10, making Cisco (CSCO) the greatest value buy of all time, you are willing to be long stock at $10.23, and did not just lose 33% on your equity position. If shares of Cisco have a resurgence and reach $25 by 2013, the spread is worth $5, roughly 20X your investment.

I would also note, if you see even less downside potential in Cisco, you could put on the January 2013 $17.50/$12.50 bullish risk reversal for less than $0.10.

These type of spreads are often done at a net credit, my preference, so you have zero outlay, willing to be long at a certain level, but able to participate in an upside move with maximum leverage.

These risk reversals are risky for growth stocks and high Beta stocks, but when you are looking at a beaten up value name with a limited downside view, it can really accelerate your returns.

Good Luck!

Could Rio Tinto (RTP) Acquire the Rest of Ivanhoe Mines (IVN)?

Ivanhoe Mines (IVN) is a $14.5B miner that is trading 3.88X book value. It's principal property is the Oyu Tolgoi copper & gold mine development project in southern Mongolia. The Company announced on June 9th that construction is ahead of schedule, currently 23% complete.

Ivanhoe is partnered with Rio Tinto (RIO), a $129B miner with nearly $10B of cash on hand, and always willing to make deals. Global mining M&A should be strong moving forward for cost efficiency, and most every CEO, whether it be for Gold, Silver, Copper, or other metals, has shown confidence that metal prices are only going higher.

Ivanhoe owns 66% of the project, with Mongolia's government owning the rest, and Rio Tinto owns 42.1% of Ivanhoe, and can raise its stake to 49%. Ivanhoe's CEO also owns 15.5% of the Company, a positive sign.

Ivanhoe's chart is not a thing of beauty to say the least, breaking support o a $6 horizontal channel at $23 that would measure a move to $17, while $19 is major support as a re-test of a big breakout level from September 2010.

Ivanhoe Mines has caught my eye lately due to the options action, the January 2012 $25 calls which traded 5,585 contracts today, and buyers paying $2.20 on a $2/$2.25 bid-ask, aggressive bullish trades, and these contracts have been seeing action for more than a month.

Ivanhoe typically trades just 1,790 calls a day, but has been running well above that pace lately. The January $25 calls had open interest of 21,594 contracts going into today, and likely to increase with the volume seen today. On May 13th there were only 521 contracts in open interest and then:

1) May 16th: 3,670 contracts bought
2) May 17th: 5,411 contracts bought
3) May 20th: 1,072 contracts bought
4) June 3rd: 7,926 contracts bought
5) June 6th: 2,535 contracts bought
6) June 7th: 1,645 contracts bought
7) June 8th, 1,170 contracts bought

On May 18th a trader bought 210,000 shares of Ivanhoe, along with 15,000 January $17.50 puts in a hedged play, betting on increased volatility.

The implied volatility (IV) of that contract has jumped from 42% to 47.3% over the course of that time as well, and the September IV Skew is exhibiting a bullish smile, while January s surprisingly normal.

Logically it would make sense for Rio Tinto to acquire the rest of the Company as the Mongolian asset is seen as a crown jewel, so better to make an offer before the mine is actually producing and Ivanhoe's shares are re-valued higher.

Ivanhoe also owns part of Ivanhoe Nickel & Platinum which made majro Tier 1 copper discoveries in South Africa back in February.

Packaging and Paper M&A is Hot -Who's Next?

...MeadWestvaco (MWV) and Bemis (BMS) are Two Names that Stick Out...

Temple Inland (TIN) recently received a $30.60/share offer from International Paper (IP), a 44% premium, valuing the Company around $3.3B, or 15X earnings, 0.85X sales, and 3.5X book value. On EV/EBITDA, commonly used in M&A Analysis, TIN is at 9.3 while MWV is at 6.8 and BMS at 6.9, so MeadWestvaco/Bemis look to be better values here, and in an industry seeing a lot of consolidation, a potential takeover target. Remember, that Silgan (SLGN) bought Graham Packaging (GHM) for $1.3B back in April also.

There has been notable call action in packaging names the last few days since the deal was announced, looking for the next target, and seen in names such as Crown Holdings (CCK), Avery Dennison (AVY), Packaging Corp (PKG), Rock-Tenn (RKT), Boize (BZ) and Sealed Air (SEE).

There was notable action in Crown Holdings (CCK) today with 3,450 In-the-Money October $37 calls bought to open today, detailed to subscribers in full earlier today. However, MeadWestvaco (MWV) traded 2,036 calls on the day with offer side buyers, more than 10X daily call volume as 739 June $35 calls traded and 1,184 July $35 calls. IV was up modestly and the action was unusual, although very cheap contracts, but potentially thinking buyout.

MeadWestvaco Corp (MWV) is a $5.55B packaging Company mostly geared to the consumer related industries that trades 14.4X earnings, 0.96X sales, and 1.63X book value.

On May 14th UBS recommended IP as its top pick, but also noted it liked TIN and MWV, raising its target to $37 a few weeks prior. RBC has a $40 target and JP Morgan a $38 target. MeadWestvaco shares have a confirmed uptrend off the Summer 2010 lows, through the March 2011 lows, coming into play at $31, support, and currently in a narrow channel down, consolidating while momentum indicators begin to trend bullish, near a bullish MACD and ADX crossover.



Purely on valuation and technicals I have to favor Bemis (BMS), a $3.5B maker of flexible and pressure sensitive packaging. Shares trade 12.8X earnings, 0.68X sales and 1.86X book, cheaper than most of its peers and offering a 2.9% dividend yield. Sales grew nearly 30% Q/Q and EPS at 73.36% clip. There is 5.1% of the float short, or 7.17 days to cover. The Company was positive on business fundamentals at a Goldman Conf. in late May. KeyBanc raised shares to Buy with a $38 target on February 3rd. Specialty resin prices have impacted results in the past, as a commodity cost, but I am unable to find a good source for how pricing is currently tracking. The chart is a thing of beauty, an ascending triangle that finds support at the 200 EMA and bounces, and is now looking to breakout at the $33.50 level, strong volume buying the last 3 days.



The entire group is looking fairly cheap on valuation with healthy dividends, and the potential for M&A, so I like a lot of the names.

Will Oil Service/Equipment See Increased M&A? Is Cameron (CAM) a Target?

The Oil Services (OIH) group has outperformed the market recently and Crude seems to magnet to the $100 level, buyers at $95 and sellers at $105. I would expect M&A in this group moving forward, as valuation is fair, and synergies can result in great cost-savings. It is also no secret that the large Exploration and Production companies are boosting CAPEX, and some may be interested in integrating a service Co.

In 2010, Schlumberger (SLB) made an $11B deal for Smith International (SII) and in 2009 Baker Hughes (BHI) made a $5.5B deal for BJ Services (BJS), so this is an industry that is consolidating. The Smith Int'l deal was done at a 37.5% premium and the BJ Services deal was done at a 16% premium. Halliburton (HAL) could be next to strike, the $45.9B Company.

On valuation, Complete Production (CPX), Helix Energy (HLX), and Superior Energy (SPN) are three smaller names (All Under $3B) that are attractive targets, but I am looking for a big deal in this group, and Cameron International (CAM) is the name I am looking at. Weatherford (WFT) is the long rumored buyout target with a $14.4B market cap, while National Oilwell Varco (NOV) is another potential suitor in this space.

Cameron International (CAM) is an $11.3B maker of Drilling & Production Systems. Shares trade 13.35X forward earnings, 1.8X sales and 2.45X book value. Cameron shares have come down from recent highs above $60 to $46 and are re-testing a major breakout level from last November, likely to base around this level.

Cameron (CAM) has caught my eye as 32,775 August $48 calls have accumulated in Open Interest, which began on May 26th when 16,000 were bought around $3.60, another 8,800 bought on May 31st around $3.40, and a block of 5,300 bought on June 2nd at $2.70.

That is a whole lot of money sitting in that contract looking for a move higher. Maybe it is just a technical or fundamental call, as I can see the bullish argument for both, but a large M&A deal in Oil Services also makes a lot of sense to me, with Halliburton the likely buyer, and likely a stock deal, which has been the norm in this industry.



Disclaimer: I am just speculating and stating facts and have no inside information

Ethan Allen (ETH): Put Volume Soars to 240X Avg. - A Seasonal Sell?

Ethan Allen (ETH) shares fell 6% as MasterCard Spending Pulse data showed weak spending in furniture and it traded 6,066 puts on the day, 240X daily average with most of the action on the offer as bearish buyers cause IV30 to jump 21.8% on the day. The August $20 puts were the target today as 4,286 traded against OI of 62, opening positions.

The $594M home furnishing Co. trades 24.3X forward earnings, 0.89X sales and 13.35X cash flow, and a massive 19.3% short float, 19.5 days to cover. There was also no signs of buyers in the underlying stock on the day, so it looks to be plenty of outright bearish bets, mainly from 3:44pm to the close.

Meanwhile, Pier 1 stayed positive on a day that was weak for retail after reporting strong same store sales growth, potentially stealing market share from Ethan Allen.

Looking at the chart we have a clear double top at $25 from April 2010 highs and April 2011 highs, a very similar seasonal pattern and history may repeat itself here. Shares broke $21.30 that was acting as support and now are sitting right on the 200 day EMA that looks unlikely to hold, and a break below the 38.2% Fibonacci would target a move to $19, and then possibly lower. Shares also closed below the lower Keltner Channel, which over the last two years has resulted in sharp sustained sell-offs.

The best approach here may be to wait on a weak volume bounce to around $21.50, and let the IV come down a bit, but longer term, the put options look to be a good choice.