Today’s tickers: WMT, RIMM, XLF, JBLU, VIX, C, ETFC, HRB, DISH, COGN
VIX – Markets dog-paddled their way through much of the session Monday, chin just barely above water, as investors grappled with contradictory signals out of the financial space (bullish price action in Citi, grievous selloff for E*Trade and rumors that subprime-correlated losses could top $400 billion) and little abatement in the tech-sector slide. Late in the day, played out by the sheer effort of staying afloat, fears of an extended market correction smothered any late-day breather for stocks, sending the VIX up 8.35% to 30.88. This is the first close above 30 for the VIX since the turmoil of mid-August. With nearly 120,000 options in play, most of today’s option action was engaged in front-month calls. Particular liquidity was observed at the November 20 strike, with buying at the November 25, 30 and 35 strikes. Open interest at the latter strike has swelled by more than 25% over the past week. Earlier this morning, we noted that the current delta reading on the November 35 call showed only about a 13% chance that the fear index will make another test past 35 – as of the market’s close the odds had risen to better than one-in-four.
WMT – The tone and tenor of tomorrow’s market open may in large measure be determined by major earnings reports from retail bellwethers, notably Wal-Mart (WMT). Shares in the the big-box retailer were up as much as 4% earlier today as economists conjectured that a U.S. slowdown might send consumers headlong into the arms of cheaper retailers. Curmudgeons in the analyst community would argue that the same demographic that seeks cheaper prices at Wal-Mart is already struggling against the headwinds of higher energy prices and declining real estate values, and may pressure the retail giant to press its “everyday low prices” even lower. Shares gave up most of today’s gains later in the session to close 1.1% higher at $43.37. A look at the at-the-money straddle in Wal-Mart shows the market prepared for a 4% move higher or lower on back of tomorrow’s earnings, and heavy buying in the November 45 calls even as premiums on this strike rose 150% from Friday. Today’s active volume represented about half the open interest on this strike in play.
RIMM– Shares in Blackberry maker Research in Motion took a pounding as tech stocks continued to curry disfavor among investors – down 9.2% with cold comfort in the fact that the share price did manage a combative close just above the $100 mark at $10.234. With 364,000 option contracts in motion, traders bought and sold November 105 puts at a level twice the open interest – and for sellers of this position, there was added juice from the fact that these contracts gained more than 235% in value from Friday’s close. Elsewhere traders appeared to favor the November 110 straddle in anticipation of further volatility in the final week of the November contract. This position was trading for $11.44 today – buyers of this position would wager on a recovery break past $121.44 or down below $98.56 – a move that would virtually wipe out the spoils of RIM’s enchanted run of the previous 6 weeks.
XLF – Let it be said, however, that financial issues found ready bargain hunters on an otherwise tepid market day, share prices on a number of tickers having been battened down sufficiently last week. The Financial Select Sector SPDR (XLF), which is indexed to a number of S&P-listed financial stocks (notably Citigroup), closed flat this afternoon at $30.25, recovering respectably after last week’s auspicious dip below the $30 line. With more than 365,000 options in play, nearly 40,000 lots in volume have traded in the December 31 calls – twice the prior open interest, and particularly noteworthy given that open interest at this cautiously bullish strike level has swelled nearly three-fold over the past week. A look at this fresh positioning shows volume trading both ways, but the number of call-buyers outnumbering sellers by a factor of 1.4.
C – A rebound in shares in Citigroup this afternoon to $33.60 (+1.5%) had them as the largest component gainer within the XLF financial ETF. Options activity was frantic with some 291,000 contracts trading this afternoon. The call/put ratio at 1.55 indicates that relatively more investors are backing the hunch that shares will inevitably rebound. Implied volatility has slumped 18% over the course of the weekend indicating less nervousness surrounding the prospects for the financial giant. It does, however, seem as though there is some shrewd motivation behind the plethora of call trading in today’s session. We’re seeing plenty of call selling as we review the tape indicating one of three things. First, today’s action is large relative to current open interest standing, where in the December contract we’re seeing the equivalent to around one half of the position in play. This could indicate that investors who previously bought calls are taking advantage of the improved tone to bank profits. It could also be symptomatic of traders willing to cap a lid on any stock gain ahead of the expiration of the December contract. The large blocks going through in the Dec 35 calls imply a breakeven of $37.15 while at the 40 strike the premium implies a breakeven of $40.43 meaning shares would need to rise almost 16% by expiration. Of 23,000 lots traded in that contract this morning some 19,000 lots were traded to the bid. The other alternative is that investors are buying Citi shares and taking in the premium to enhance yield.
JBLU – Shares in embattled discount airline JetBlue Airways recouped 3% as of this afternoon, trading at $7.23 after an ugly 10% rout on Friday. Today’s option volume rang in at more than 7 times the daily average, due mostly to the more than 10,000 lots bought on the offer in the January 10 calls. Open interest in this strike has risen steadily since late summer, so it cannot be definitively stated whether this was an opening purchase or closing trade. The current depressed share price of $7.25 is $10 off the 52-week low.
HRB – H&R Block – Shares in H&R Block advanced 3.6% to $19.68 , with a 28,000-lot transaction in the January 20 puts sending today’s total moving option volume to 6.7 times the daily average and put volume to its highest level in more than 2 months. A check of time and sales does not reveal the direction of the trade, but a look at overall open interest shows investors residually defensive on H&R Block shares, with 2.8 put positions open for every call. Implied volatility on these options stands at 50% as of this dispatch – a sign that investors are expecting a 64% greater degree of turbulence than its shares have shown historically. Earlier this month its CFO resigned abruptly, and the company has struggled mightily with its subprime-exposed Option One Mortgage division, which has been the subject of a long-drawn-out and failed divestiture. Internal strife fulminated with the replacement in September of three members of H&R Block’s board of directors with former SEC-chairman-turned-activist-shareholder Richard Breeden and two of his appointees. A look at the sustained level of elevated implied volatility in H&R Block is a hint that the market isn’t fully resolved about the forward prospects for the company – the current reading represents a 54% increase from the gauge at the start of the month, and has remained consistently high in the interim.
ETFC – Shares in online brokerage E*Trade Financial took a mighty 58% stumble to $3.59 today, dipping below half the value of its prior 52-week low, after the brokerage predicted “significant writedowns” due to exposure to asset-backed securities, and a Citigroup analyst raised the possibility of resulting bankruptcy. Given such dire prognosticating, it was little surprise to see traders rush to sell off January 12.50 calls, despite the fact that these contracts had lost 62.5% of their value. Volatility trading at lower strikes suggests options traders believe that E*Trade shares are likely to remain at this chthonic level until a new fight for survival in January. Fresh liquidity flowed into the January 5.0 calls, trading 8,000 times to buyers and sellers where open interest prior to today amounted to no more than 250 contracts, while the put side at the same strike attracted buyers and sellers as well. Bought together this combination of call and put is a neutral straddle, betting on either a break below $2.60 or above $7.60 in January. Open interest prior to today showed two calls open for every put.
COGN – This morning’s news of IBM’s acquisition of Cognos Inc., Canada’s largest software maker, a market leader in so-called BI (business intelligence) solutions, for $4.9 million, provided a bit of grist for the M&A mill this morning. Shares closed 7.8% higher at $57.101, with options trading at more than 4 times the average volume. Nearly all of today’s volume was centered in calls in the November contract, with what appears to be profit taking at that month’s 52.50 strike on strength of a more than 118% increase in premiums. Buyers flocked to the November 55 calls, which traded for $2.50 – a 100% increase on the session. Overall open interest shows 4 calls open for every put, and in another vote of investor confidence in Cognos’ outlook under the protective wing of “big blue,” implied volatility dropped a whopping 91% to read just 4.8%. This measures up against the near-48% level of volatility that Cognos’ shares have shown historically.
DISH – Echostar Communications – A 13% slide for Echostar shares to $41.97 has options moving at nearly 4 times the daily average. Earlier today the company, which rates as the second-largest satellite TV service in the country, reported a shortfall in Q3 subscriber growth. Analysts have suggested that Echostar’s lower-income demographic might be more immediately vulnerable to an economic slowdown, and that such a trend might patch through in subscription rates. On the option front, the 42,500 lots in play are trading with a bias to the calls. High liquidity is noted in the December 50 calls, which traded 5,500 times to the middle of the market at $0.30. It also appears that traders are buying the January 42.50 straddle, which for a combined premium of $7.15 supposes a break above $49.65 or below $35 by January’s expiry. Over the past 52 weeks, Echostar shares have traded as low as $35.16 and as high as $52.54.
