Today’s tickers: RIG, GSF, OIH, UTHR, C, WM, VIX, XOM, CROX
Barely a day after yesterday’s 25 bp Fed rate cut was lauded by the market as a largely expected “treat,” financials swooped in on a proverbial broomstick, sweeping away yesterday’s late-session gains and unveiling yet another “trick.”
VIX – The VIX took a 17% leap to 21.70 this afternoon, urged on by redoubled trouble in the financial sector. With nearly 158,000 option contracts in play, it appears that some traders may have taken profit on positions in the November 22.50 calls, which sold heavily on the bid as premiums on the contract rose nearly 86%. The November 25 calls also sold heavily, with prices on the contracts nearly doubling today. Action in the December contract showed calls at the 25 strike trading to buyers and the middle of the market for around $2.00 apiece, implying a move past 27.00 to cap off the year. A look at the delta on this call shows option traders pricing in a less than 50/50 chance of this actually coming to pass, but if we’ve learned anything of the financial sector’s exposure to the credit squeeze, it’s that this tale is a very long yarn, and with each week comes new iterations, new layers of the crisis.
UTHR –United Therapeutics, the maker of drug therapies for cancer, infectious diseases and other maladies, resisted the broader market selloff, gaining more than 31% to $89.50 – a 6-year high – on better than expected Q3 earnings and the successful completion of Phase 3 clinical trials for its inhalable drug Viveta. The drug has been developed as an inhalable version of its drug Remodulin, used in the treatment of pulmonary arterial hypertension. With nearly 68,000 option contracts in play, the bullish biotech cracked the top 20 most actively traded option series according to our market scanners this afternoon. Risk reversal in the November contract was a preferred strategy, with traders shedding puts at the 85 strike and buying calls at the newly at-the-money 90 strike to capture continued price upside. Meanwhile, in the January contract it appears that some traders sought to take premium on a massive inflation in January 90 calls. These traded to the middle of the market at $7.10 – having doubled in value from yesterday.
RIG, GSF, OIH – The session was also a cleanup for selected names in the oil services sector. Shares of Transocean, the offshore driller specializing in deepwater and so-called “harsh environment” drilling, gained 2.7% this afternoon to set a new 52-week high at $122.57. With nearly 37,000 lots in play, more than 7 times as many calls traded as puts. Traders eagerly positioned in front-month calls at strikes from 115 to 130. Sector peer GlobalSantaFe (GSF) also set a new 52-week high, up 2.4% to $82.92. Most of the active volume today was tied up in selling the deep-in-the-money January 75 calls, a move that looks like call writing against an existing position in the underlying stock. Meanwhile, the sector ETF that comprises both GlobalSantaFe and Transocean, the OIH, traded flat this afternoon at $190.28, with twice as many puts trading as calls, possibly indicative of the ETF used as a defensive hedge against bull plays in specific components. Front-month activity in the OIH involved long positions in the November 190 at-the-money straddle, a position which costs $11.35 on today’s premiums, anticipating a break above $201.35 or below $178.65 by November’s expiry.
C – The day’s most actively traded option series on our platform, Citigroup put the scariest face on today’s market house of horrors. Analyst downgrades amid unsettling speculation on the company’s capital adequacy sent Citi shares down 7% to $38.46 this afternoon. Implied volatility shot up nearly 23% to start the trading day and now exceeds 42% (this against a historic volatility reading of 29.5%. The slide in prices sent put-side premiums sharply higher. Of note here is buying activity in the November 40 calls, which seems counterintuitive given Citi’s current straits. We noticed similar buying activity in the November 45 calls a couple of weeks back – contracts reportedly dubbed “Chuck Must Go” calls by traders because the positions wagered on an imminent exit for the company’s embattled CEO Chuck Prince. Though rumors persisted, no announcement was forthcoming and the trade seemed a wash. But with the screws tightening around Mr. Prince and other financial sector CEO’s in light of the credit crunch, the “CEO exit call” may once again be in vogue as the market “bays for blood.” A 59% decline in premiums on the November 40 calls can’t hurt – possibly luring some options traders in on a bet that its share price can recover in the short term if the CEO is at long last forced from his watch.
WM – Shares in Washington Mutual, the nation’s largest thrift, took an 8% dive today to $25.52 as speculation rises that the $1.3 billion in loan loss provisions it set aside for Q4 may not be enough to mop up what’s left of WaMu’s year-end losses. Shares in Washington Mutual have surrendered 15% of their value in the two weeks since its staggering 72% drop in Q3 income, and today’s share price action hints that the worst ain’t over. Option players, meanwhile, have sent more than 101,000 lots into action, with 3 times as many puts moving as calls. Traders sought hasty protection against further precipitous slides in WaMu shares by paying 260% more to obtain November 25 puts. The price outlook for December looks even bleaker given the intense buying interest in that month’s 22.50 puts.
XOM – Exxon Mobil surprised the market this morning, missing street estimates for Q3 earnings by 6 cents a share. Tight margins on gasoline prices trumped record-high oil prices, leaving Exxon vulnerable to the same refinery squeeze that hurt its competitor ConocoPhillips in the earnings stakes last week. Exxon’s share price took a 2.75% dent this afternoon to $89.46. Options remain extremely liquid today, ranking among the most actively traded series according to our volume scanners. The November 95 calls sold heavily despite a 60% decline in the value of these positions. Similar activity seen yesterday we took as an indication of covered call writing against positions owned in the stock – a move that is directionally neutral but would have shown a market anticipating in-line earnings from a monster stock. Put buying is observed in the front month at strikes of 85 and 90.
CROX – Crocs Inc – Shares in the trendy shoe maker are seeking traction with little success today, down 34.5% to $48.97. The company more than doubled its Q3 profits, beating pre-report estimates, but guidance well short of street expectations hit right at the heart of Crocs’ skeptics inclined to write off the company’s prosperity to the fickle attentions of the fad shoe market. Options are trading at nearly 4 times the average volume, with more than 200,000 options in play. Heavy liquidity is observed in the front month contract in the November 50 puts and 60 calls – possibly indicative of strangle activity between those strikes. The Crocs series is a rich hunting ground for volatility plays – options traders are currently pricing in 73% potential fluctuation in its share price – a slight comedown from yesterday’s pre-earnings peak near 80% – against a historical volatility reading of 53.5%.
