Today’s tickers: MER, XLF, C, VIX, CROX, LVS
Stocks made a quick show of tossing this morning’s bullish job figures aside as investors contended with deepening distrust in the financial sector, amid a daisy chain of market reports predicting continued writedowns and runaway credit losses for the nation’s largest banks and brokerage firms. For a reading on just how deep the level of distrust in financials runs, consider the implied volatility readings our market scanners picked up this morning.
Readings of implied volatility – which gauges the anticipated future degree of share price turbulence as priced in by option traders – rose like a very pessimistic fog on most major financial issues. Earlier today the increase at Merrill Lynch was most dramatic, up 44% to more than 65%. Elsewhere, options implied volatility at Goldman Sachs rose 30% to 54.3, while at Washington Mutual, the nation’s largest thrift, implied volatility rose 29.8% to 54.2%. All of these are signs of an illness that continues to fester in the S&P, with the market at a loss as to how to remedy it.
MER – Merrill Lynch –The drubbing continues for Merrill today, down 8.7% to $56.95 in step with that spiraling implied volatility. Heavy buying is occurring in the November 55 puts, where 13,800 lots have traded on premiums up some 477% on the session. A telling commentary on the outlook for continued depressed share price performance in Merrill and other financials can be seen in the January 60 puts, which boasts the highest open interest of any contract under the Merrill ticker. Even as its share price looked to recoup late last week when the first rumors of newly exited CEO Stan O’Neil’s departure circulated in the market, open interest in this strike began to build massively, and at more than 51,000 contracts has increased some 50% in the space of a week. A buyer of this contract today pays 100% more in premium than yesterday to bet that Merrill shares will remain around $52 even into the New Year.
XLF – Financial Select Sector SPDR – Writedown roiling in the financial sector has driven the share price of the sector ETF down 1.7%, while its options are among the day’s absolute most liquid. While the November series shows evidence of straddle buying at the 33 strike, which could imply up-or-down breaks from the 33 point, the additional buying pressure in the November 31 puts is a sign of investors seeking to buttress themselves against continued near-term decay in the financial space. Volume of more than 525,000 contracts is spotted about both calls and puts and is showing up as blocks of 40,000-lot-plus positions in what looks like hectic strangle trading.
C – Citigroup – A 3.5% decline in share price to $37.13 – a new 52-week low – has more than 305,000 options in play. Buying interest in the November puts has tended toward the at-the-money $37.50 strike, while calls in the same month at strikes of 40 and 42.50 are attracting buyers and sellers. We note here the rise to all-time-highs in implied volatility – two days ago options traders were pricing in about 29% anticipated volatility in share prices as measured in implied volatility. Today that reading sits at just below 52%.
VIX – The fear factor pervading the market left a calling card in the form of the Volatility Index, which having breached the 25-mark just before noon now stands at 23.76, a 2.37% gain on the session. With 91,900 options in play it appears that the traders may be looking to call spread activity in the November contract to express an anticipation of further notches higher. The November 27.50 calls were bought heavily this morning on premiums up some 36%, possibly funded in part with the sale of November 35 calls. A trader in this case says the market has room for at least 15% more volatility in the next few weeks, not to exceed a reading of 35. Meanwhile, calls at the December 22.50 level were also bought heavily, in the expectation of a reading in at least the low 20’s persisting into the last month of the year.
CROX – Crocs Inc. We noted heavy options volume on Thursday in the trendy shoe maker having delivered a positive earnings report. Investors, however, sliced the capitalization of the company by one-third thanks to downbeat guidance form the company. On Friday, option traders have ensured a top position once again for CROX as one of the most actively traded option series. Shares reversed this morning’s near 5% decline towards a three-month low, and are now 4.2% higher standing at $49.72. Option implied volatility once again rose, but traders seemed more content to trade the call side of the market today. The November 50 through 60 calls were active, but there was also decent volume as high as the 70 strike call, where it appears traders bought 1,400 contracts. This could be a bet that CROX will soon regain its glory days with a 54% stock rally within three weeks, but more likely is that an investor is spending around 0.15 to buy back open short call positions. Existing open interest in that series is more than 9,000 lots. Overall the trading pattern today suggests investors continue to buy volatility. The balance in buying and selling between calls and puts, while it favors calls today, suggests straddle and strangle plays. The November 45 straddle today costs 7.0 implying share price movement ranging from $38.40 to $52.40 by expiration.
LVS – Las Vegas Sands Corp. – Options in this gaming company showed up as high volume on Friday after disappointing with earnings. The company blamed high opening costs in relation to a new Macao casino, high operating costs and some lucky gamblers all for reasons behind a quarterly loss instead of the expected profit analysts had expected. Investors pummeled the stock with a 9.4% drubbing to $113.55 while put option trading outpaced that in the call series by a factor of 1.4 times. Trading had a distinctly bearish undertone in the November contract, where call sellers sold almost 5,000 lots at the 130 strike clearly betting that the stock won’t recover from its stumble between now and expiration. Open interest at the strike is only half today’s traded volume indicating this is indeed fresh positioning. Traders were also keen to sell both 120 and 115 strike calls ahead of the weekend on the options series carrying 56% implied volatility. Assuming nothing changes over the weekend, traders will see decay reduce the premium nicely. On the put side investors seemed to use the 100 strike series as a floor for the share price. The volume of selling on this put tells us that this was the strike used in conjunction with long positions at the 105, 110 and 115 strikes in today’s session.
