Today’s tickers: AIG, PRU, CVH, TBX, XLF, GM, VIX
AIG – Shares in American International Group, the world’s largest insurer by market value, hit their lowest level in more than two years after the company announced late yesterday that it has pre-empted the theme of an early December investor conference in order to discuss its exposure to the ailing U.S. home mortgage market in greater detail. Concern about the capacity for further writedowns was reflected immediately in a near 47% jump in AIG’s implied volatility to 63%, levels not seen since 2002, as option traders put some 56,000 options in play before noon. The option action here is characterized by buying in the December puts at strikes of 45 and 50, with additional call volume at the December 50 strike at a level twice the open interest. Most of these calls are trading to the middle of the market, making it hard to discern the order flow, but a buyer of this call might be doing so in conjunction with puts at the same strike in a volatility-based straddle combination, or may be anticipating AIG shares to bounce back from the $50 level in December if the investor conference succeeds in allaying investor concerns about its mortgage exposure.
PRU – Prudential Financial – With stocks melting just about everywhere today, there is no respite for the Pru as options traders step up to the plate and lift puts. Options aren’t hugely traded in this issue, which is why our market scanners picked it up today. Traders are playing the put side and sending volumes to more than twice the daily average rate. Open interest of 163,950 contracts compares to today’s volume of 13,075 lots. Investors seem to be buying protection against a further slide in the share price below today’s 2.5% loss, where shares are left trading at $91.83. In the December contract the 80, 85 and even 95 puts have been active. The share price has slipped 9% in one week and is now threatening a two-month low. All three of the most active December puts are trading at around the current level of open interest in the individual strikes, but these are likely more opening trades at a time when investors across the board are reaching for protection. Curiously in the January series at the 55 strike some 2,779 lots have traded at premiums between 0.15 and 0.20. The likelihood of seeing Prudential’s share price slide by 40% is assigned under a 2% chance of occurrence according to the reading of delta on the option. But with so many big names falling victim to the subprime spillover, investors seem willing to risk a small premium for protection against that outcome.
CVH – Coventry Healthcare – Despite an immediate slump for its shares on par with the broader market, some option investors appear confident of an upside move next spring for diversified managed health care company Coventry. Yesterday it was announced that the company’s CFO is scheduled to speak at an investor conference for health services company next week in New York. With shares down 1.5% to $56.61, the 7,250 options in play this morning measure up against some 17% of the total open interest and represent 11 times the average volume. Today’s volume appears seated in calls in the January contract, where calls at the 65 strike traded to the middle of the market within the bounds of existing open interest, possibly the close of a position at that strike against the purchase of April 60 calls, which traded to the middle of the market at $3.73. A purchase of this position first breaks even upon a break for Coventry shares of $63.73, fully a dollar premium on the current 52-week high.
TBX – TIBCO Software –Given the recent spate of dealmaking and dealbreaking activity in the tech space, little wonder that our pre-Thanksgiving appetite has been whetted by interesting activity in TIBCO. Option traders are presented with an interesting platter of facts on this one. Options in the business integration software maker are moving at 13 times the average volume – with calls being traded at their highest rate since January. This is occurring against a 5% decline in share price to $6.80, a new 52-week low. While today’s share price is pure turkey, it appears that option investors are taking the opposite tack and seizing the opportunity to buy January 7.50 calls, which are being bought on the offer on a scale twice the existing open interest. A move to the $7.50 range would restore TIBCO to its price levels of earlier this month. Furthermore, a look at implied volatility in TIBCO shows an abrupt jag higher, up from 48% a week ago to read 66.75% – that’s a gain of nearly 40% in the space of seven days.
XLF – Financial Select Sector SPDR – A 1.7% decline in the underlying share price of the financial services sector ETF to $28.55 has more than 217,000 option contracts trading. While the rate of moving puts outpaces that of calls, we noted heavy buying in the December 29 calls on a volume of more than 40,000 lots – some of which may be tied up in strangle buying with the December 27 puts. A look at implied volatility shows a reading of nearly 45% – which when measured up against the 36% historic reading indicates option traders anticipating 25% more fluctuation in the value of the ETF than its shares have shown historically.
GM– General Motors – Today’s near-5% slide for General Motors to $25.01 has set a new 52-week low for the automaker, with shares malingering at levels not seen since May 2006. The near-125,000 option contracts moving this morning show twice as many puts moving as calls, with interesting fresh positioning in the March contract, where the 17.50 puts sold for around $1.18. Front-month action has tended to show buying in GM’s December 25 puts, which have traded on a volume of 10,000 lots at prices of some $2.00 apiece – a 30% increase in premium from yesterday.
C – Citigroup –Shares in the big money bank are down 1% to $31.04, within 20 cents of its 52-week low, with the 97,000 options trading before noon showing a volume bias of calls to puts, however slight. Of interest here is heavy buying in the December 32.50 calls on a volume of some 14,000 lots, trading for $1.30 apiece. Positioning at this strike – coupled with the fact that implied volatility at 51% actually measures below the historic gauge of 56% – may infer a feeling among option traders that recent carnage is already accurately priced into the current share price and are looking for a moderate bounce to the slightly-less-depressed mid-30’s in December.
VIX – CBOE Volatility Index Traders appeared to take the James Bond approach towards the VIX today – they were shaken, but not stirred. Despite another slide in the S&P 500 index, and despite the increase in the VIX itself, it’s still some way off its recent peak above 30. Today the index stands at 26.93 for an 8% increase on the session. Investors are finally figuring out that there is no inverse linear relationship between the two index readings. It was certainly the case over the summer sell off when the S&P fell, it would be profitable to buy the VIX. Today, as global investors have joined the selling, that relationship is looking stretched although not broken. We have recently commented that a VIX reading of 30 appears to mark a line in the sand at which investors appear comfortable to sell volatility or option premium into. That degree of volatility also implies that in order for protective call buying on the VIX (put buying on the S&P index) the S&P would need to fall further than 8.7% over the next month, which is what the VIX is telling us. To support that notion, we observe a lighter degree of activity in today’s session coupled with apparent sales of December calls at the 30 and 35 strikes. Investors have built up hefty positions in the December strikes between 30 and 40. Should managers begin to realize the ranges implicit in their VIX positioning and continue to trade accordingly, the spikes higher in the VIX may well kick in at lower levels.
