Today’s tickers: C, BAC, STI, GOOG, VRTX
STI – SunTrustBanks – Shares in SunTrust, the third-largest banking name in subprime-sweltering Florida, gained more than 2% this afternoon to $73.43, this despite the company’s report earlier today of a 23% decrease in Q3 net income. The decline was attributed to swelling loan-loss provisions and a near doubling in net loan charge-offs. While earlier today we noted lumpen trading in the puts, action in the afternoon appeared indicative of rumor-driven activity in SunTrust options. Fresh buying was observed in the October 75 calls – one day before expiry. Delta on this call indicates just a 29% chance that SunTrust, woe be damned, can break above $75 by sundown tomorrow. Call buying was also prevalent in the November and January contracts at strikes of 75, 85 and 90. Implied volatility at 31% remains elevated above the 24.3% historic reading. No specific rumors as such have landed at our feet this afternoon, but market makers we’ve spoken to are skeptical, saying any bank with the wherewithal to pull off a takeover of SunTrust is likely grappling with its own troubles in the credit and loan departments…
BAX – A balance sheet in rude good health from biosciences firm Baxter International elicited a 7% gain for shares to $59.58, setting a new 52-week high. Confident of more oomph to the rally before expiry tomorrow, the development also sparked a wave of fresh buying in the October 60 calls, which traded nearly 4,000 times at around $0.45. Interest in the 60 calls extended to the November contract, where some 4,600 lots traded at around $1.95 apiece, implying a sustained 3% gain for shares into the next month.
C – Rumors of an imminent exit for harried Citigroup exec Chuck Prince briefly sent shares in the money giant 5% higher yesterday before company officials hastily refuted the reports. Today Citi’s shares closed 1.8% lower at $43.91, making the conspicuous volumes in upside November calls particularly eyebrow-raising. So what in way of bullish news are option traders seeking from a company that’s just reported 57% drop in quarterly earnings and become the apparent target of an emergency liquidity operation to shore up its ailing SIV’s? Our guess is that many in the market are unconvinced by Citi’s protestations about Prince’s departure and option traders may be putting their best guess to work by wagering on a November adieu for the chief. A big hint is the massive build over the past few sessions in November calls at the 45, 47.50 and 50 strikes. Open interest on these calls has more than quadrupled at the 45 level, and tripled in the 47.50 and 50 strikes. A noteworthy aside – option volatility remains elevated at nearly 35% – even higher than before its lackluster Q3 earnings report, a telling tidbit on the level of anxiety coursing through the market about yet-to-be-revealed problemsin the big money center banks.
BAC – Bank of America’s before-the-bell report revealed a 32% drop in quarterly earnings due to heavy losses in its consumer division and investment banking unit – gapping far below the early morning market consensus. Shares in the company closed 2.4% lower at $48.85 today – making yesterday’s at-the-money 50.0 straddle buyers playing on a break out of the September/October range very sage indeed. Volume in the November contract showed put buying atstrikes as low as 45.
GOOG – Google shares gained 2.45% to $648.85 ahead of this evening’s greedily anticipated earnings report from the ginormous search engine. The question on traders’ lips today remains how high the share price can catapult – or plummet – on back of today’s earnings release. A look at the price on the October at-the-money straddle provides a good index of the kind of up-or-down move currently being anticipated in the market. At $33.65, the October 30 straddle covers a move up past $664 or below last week’sheralded $600 mark to $596.
The past week has seen what may be referred to as “huffing-and-puffing” in the October calls at strikes of 630, 640, 650 660 as traders upped the stakes on a top shelf for the share price. Open interest in these strikes has nearly doubled during that time. But what we’ve seen this week, especially yesterday, was positioning in anticipation of a possible toppe for Google shares today. Traders did this by selling calls at strikes above the share price and buying puts at lower strikes, specifically the October 600’s. This is a strategy – known as a “collar” – is generally bearish because the trader buys the puts and sells the calls in the hope that the puts will increasein value, and the calls will decrease in value.
Interestingly, the implied volatility reading in Google (up around 39%) is similar to what it was a year ago, when its earnings report missed street estimates but still showed 56% growth in earnings. Last Q3, Google’s earnings report elicited a $32 upside jump in shares from the closing share price to the next day’s opening. The move among some traders to protect against a downside surprise this time may be due to general skittishness over the share’scurrent all-time-highs.
VRTX – Vertex Pharmaceuticals – Vertex shares lost more than 13%, closing at to $31.11, after a Schering-Plough clinical study showed promising results for a rival hepatitis drug. Options in the biotech are moving at 9 times the average rate, with what appears to be heavy buying in the November 25 and 35 puts. Implied volatility at more than 66% dwarfs the 36% historicreading.
