Today’s tickers: LEH, WSM, BUD, CBG, HRB, RHT, LVLT, XLF
LEH – Yesterday afternoon, Lehman Brothers’ Chief Administrative Officer said at an investor conference that the firm is “very comfortable” with its valuable of illiquid Level 3 assets, but a look at developments in implied volatility and put volume this afternoon show a level of discomfiture in Lehman’s share price action ahead of tomorrow’s option expiry. Implied volatility surged more than 17% this afternoon to 54% against the backdrop of a 4% decline in share price to $62.65. A look at the option action shows selling pressure in the November 65 calls, where premiums have eroded some 77% on the session, to $0.30, while traders have sought to buy puts at the 65 and 60 strikes. A look at that November 60 put shows a brash bearish bet indeed – given today’s premium, in order for that position to break even at $59.72 tomorrow would require a further 5.2% drop for Lehman shares in the space of a day. Buying in the December 60 puts occurred on a volume of some 7,600 lots. A look at the ratio of open puts to calls in Lehman Brothers indicates that put open interest is at a 52-week high, with 1.35 puts outstanding for every call.
CFC – Implied volatility in mortgage lender Countrywide Financial also took a leg higher, up 16.7% to 95.2% as of this afternoon’s dispatch. The action in Countrywide is occurring against the backdrop of a more than 7% decline in its share price to $12.40, within around 50 cents of its 52-week low, amid rueful prognostications about the duration and severity of the current housing slump. Earlier this week the company announced a 48% drop in monthly mortgage volume for October and a steadily increasing rise in mortgage delinquencies. This afternoon’s option volume shows selling pressure in Countrywide’s November 12.50 calls, with calls at the 15 strike in the December and January contracts selling to the bid on volume of around 2,500 contracts each.
VIX – The afternoon hit for financials sent the Volatility Index careening 7.7% higher to read 27.94 as of this afternoon’s dispatch. On the options front, the most heavily trafficked contract was the November 22.50 put, which sold off heavily even as their value eroded 55% on the session. The November 25 calls were bought on a volume of 13,500 lots with the market currently reflecting a 75% chance that VIX will remain elevated above 25 through tomorrow. The current premium on that call implies that just breaking even on this strike through expiry would require a closing reading of 27.20. We also noted buying interest in the 32.50 calls in November and December. A look at the delta on these two calls shows that while the November 32.50 calls have just a 15% chance of landing in the money tomorrow – a feat that would require a frantic bidding up of the fear index in the space of a day – the odds on such a move in December are twice as good, about one-in-three.
XLF – Financial Select Sector SPDR – A modest early-session slide in the financial sector ETF redoubled in the afternoon, and as its underlying share trades 2.6% lower at $30.71, options are moving on a volume of more than 294,000 contracts. Earlier today we observed some traders take an opportunity to place bets on December price action in the sector ETF. December 33 calls traded to the middle of the market for $0.68, on a volume of 31,000 lots – open interest in that strike having more than doubled in the space of a week. We also observed possible bull put spread activity occurring in the December contract, with puts at the 29 strike being bought against the possible sale of puts at the 31 strike. Implied volatility on this sector ETF stands at 38% against a historic reading of 33%.
BUD – Anheuser Busch Cos. – Is something bullish brewing at the Budweiser brewery? Shares in the brewer are .96% lower this afternoon at $50.34 as options trade at 2.7 times the average daily volume, with what looks like buying in the December 55 calls in anticipation of a break of the standing 52-week high of $54.53 over the next month. It appears that the January 50/55 strangle may be in play as well, given the similar 4,000-lot volumes on each of those strikes. Implied volatility at 23.5% suggests that option traders are expecting about 20% more volatility from Anheuser Busch shares than they have shown historically.
WSM – Shares in tony kitchen and home décor retailer Williams-Sonoma, also known for its fanciful holiday delectables, posted lower Q3 profits this morning, citing continued challenges in the home improvement sector, and issued a sober warning about the approaching holiday season. Traders immediately put down the designer nog, sending shares nearly 6% lower to $28.47 as of noon’s dispatch. Trading on the open in Nov 30 puts was conducted at a premium of 0.65 – the price down by half on last night’s close – but within four minutes the price had more than doubled to 1.55. Options volume was heavy at this strike with 8,600 morning volume. Given that the November series expires Friday, these puts are trading as a proxy for the stock, which is down 4.2% at $28.99.Implied volatility slipped some 14% following earnings.
In the February strike at the 27.5 line existing open interest of 3,000 contracts will be boosted by action today involving some 11,000 lots. Activity in the stock piqued our interest today given the relatively high option volume. An equivalent to one-in-three of the current 79,998 contracts were at play in morning volume of almost 25,000 contracts. Despite the drop in implied volatility, investors paid higher put-side premiums of 2.10 to purchase puts expiring in February conveying rights to sell stock at $27.50. That implies protection to holders of the stock at a share price south of $25.40.
CBG – Shares in CB Richard Ellis Group, the L.A.-based, world’s largest brokerage for commercial real estate, set a new 52-week low earlier today at $19.30. Shares remain flat at that level this afternoon. The company’s chief executive, Brett White, acknowledged in an interview that the pace of real estate transactions in the U.S. was slowing and that prices were decelerating on some markets. Option volume, meanwhile, picked up to 8 times the daily average owing to a 37,500-lot transaction in the January ’09 calls at the 25 strike. The size of this single trade measures up to 66% of the firm’s total open interest. CB Richard Ellis shares have been stripped of more than half their value since their July ’07 high of $42.74, and the shares have underperformed the S&P Financials Index by nearly 15%. A buyer of the 25 call suggests an outlook for price stabilization in the company’s shares, but by timing the transaction to January ’09 implies a rough road ahead through 2008.
HRB – A few days back we noted a dramatic spike in put volume in H&R Block, volume that by session’s end had swelled to the highest level in 9 months. At the time, we spouted off a laundry list of volatile woes that had beset the company in recent weeks, to wit the abrupt resignation of its CFO and its failure to unload its subprime-exposed Option One Mortgage division. Implied volatility in H&R Block options has continued to rise, and now exceeds 55%. A look at our market scanners shows that implied vol now dwarfs the historic average volatility by a factor of 1.74, a sign of continued unease among investors as to the share price’s forward prospects. Today’s option volume shows volume in puts at the 20 strike in the January ’08 and January ’09 contracts as shares trade.55% lower at $19.80.
RHT – Red Hat Inc. Options volume in Red Hat is large in comparison to its average daily volume making us sit up and take notice today. Only 14,000 contracts have traded but according to our screening system, that’s more than four times the norm. Shares are lower by 2% today at $19.58, but that seems to be spurring some interest in the December 20 calls and puts implying investor interest in the straddle at a combined premium of 2.50. Both calls and puts were bought today and we’re left wondering whether traders are looking for an increase in implied volatility from its current 49.3%. During the last eight weeks the Linux software developer has seen shares swing between $18.91 and $22.67. Implied volatility accelerated to over 60% heading into September earnings and we wonder whether investors expect both company specific and market volatility to increase going forward. That view seems be mesh neatly with observed activity in the post-earnings January contract where call buyers are picking up the same 20 strike while simultaneously selling the 17.5 and 20.0 strike puts. The trading approach seems to be to buy volatility now and yet look for a more bullish directional play into 2008.
LVLT – Level 3 Communications – A pair of huge transactions involving March calls has sent volume in Level 3 options to 24 times the average rate, as its shares trade 4.7% lower at $2.85. It appears that 164,000 lots traded in the March 5 calls, half of them bought, half sold, while a like amount were bought in the same month’s 7.50 calls. Both of these transactions traded within existing open interest on both those strikes, suggesting that they may be closing trades. Level 3’s standing 52-week high is $6.80.
