Today’s tickers: NWA, UAUA, DAL, ING, NG, GOLD
C – Shares in Citigroup slid 6% today to $29.77, breaking below the most recent 52-week low, after this morning’s report that the bank is exploring cost-cutting mechanisms, possibly involving a new round of sweeping layoffs, to stem losses emanating from the bank’s massive mortgage writedowns. Options traders have put 378,000 contracts in play today, with comparable liquidity between puts and calls. Particular activity was concentrated in December calls at strikes of 30, 32.50 and 35, where the combined volume –buyers and sellers in force – topped 17% of the total volume. Elsewhere in the January contract, puts at the 27.50 strike sold off heavily.
NWA – Options activity in Northwest Airlines quickly heated up to 14 times the average volume this morning, with calls trading at their fastest groundspeed in months, making the 185,194 contracts in circulation the day’s absolute most liquid option family by sheer volume. The trading here is characterized by what appears to be bull call spread activity in the December contract between strikes of 15 and 20, followed by buying in the March 17.50 calls on a volume of 90,000 lots. The action follows a 1.8% decline in the share price to $17.49. Implied volatility at 78% suggests option traders anticipating about 14% more variability in share price going forward than it Northwest has shown historically.
DAL – An article in the Chicago Tribune on the cusp of last week’s Thanksgiving peak-travel period reported that Delta Airlines pilots are vowing to fight tooth and nail any forced merger between Delta and United Airlines parent company UAL. Some weeks back, Pardus Capital Management, a Delta minority shareholder, imploring the company to pursue a consolidation with Delta, and its management responded if not in the glaring affirmative, then certainly with a wink and a nudge, announcing that an exploratory committee had been established in the interest of seeking partnerships to allay the effects of higher fuel costs and tighter competition. Option action in Delta Airlines this morning suggests option traders deferring their expectation of deal making from the December calls, where lots at the 15 strike were sold, to the March contract, where contracts at the 17.50 strike were bought. A look at the ratio of calls to puts in Delta shows bullish calls outnumbering bearish puts by a staggering 5 to 1, which on the surface indicates a high level of confidence among shareholders that the company is on a course to do right by its market and shareholders. Call volume in Delta is at its highest level since the first merger mumblings emerged earlier in November, and again, option implied volatility at 84% shows a sustained and substantial gap above the 67% historic reading. Delta shares declined 3.7% today to $17.48.
UAUA – The March contract in United Airlines’ parent company UAL was again the magnet for shareholders, with the 54,000 lots traded this afternoon grounded in fresh buying on scale of 20,000 contracts at each of the 35 and 40 strikes in the March calls. A look at the latter strike shows buyers paying around $6.50 to lock in a $40 price per United share in the month of March. This would imply a move to $46.50, a 16% premium on today’s share price of $39.78 and within a modest $5 of its 52-week high of $51.60.
GRA – W.R. Grace & Co. The January series of options saw practically all of today’s activity on this ticker. Some 16,000 options traded at three strikes as the shares added slid 3% to $24.79. The activity shows up on our market scanners today as unusual in so far as this morning’s flurry of interest constitutes five times the normal daily average volume. Open interest stands at 136,871 in the options series. Here’s what we can discern from reading the tape. The January 25/30 call spread appears to have been bought on an approximate 1-by-2 ratio with 7,500 calls at the upper strike selling for each 25 strike call purchased. The net cost here was 1.20. The January 20 put contract was then purchased at a cost of 0.65. It would seem to us to make more sense had those puts been sold to create a credit against this bull play. Shares recently retreated from around $31 each and perhaps this investor is looking for initial weakness before any rally.
ING – ING Group (ADR). Interest in options on ING Bank swelled to commence the trading week. However, the action appears to involve a single options strategy from an investor seeking protection from a decline in the share price. Today shares closed at $36.45 (down 2.6%) and close to a new 52-week low having tumbled below the established low point in August created during the liquidity crunch. Just six weeks ago shares in the European bank were sailing high at above $46.00 per share, making the speed of the decline alarming. Today’s play would appear to be a risk-reversal play with an investor combining three options contracts. First, the 35/30 put spread was bought with 10,000 puts at the upper strike purchased against the sale of the same amount of 30 strike puts. The net cost of that part of the trade is a cost of 1.40. Finally, the 45 strike call options appear to have been sold at 0.75, which further funds the cost of the bearish play to 0.65. For this trade to make money for the investor, the share price would need to keep sliding well beyond the current 52-week range and towards $30.00. It seems a little late in the bear market for financial stocks to be making such a play, but the cost is appealing should the market roll over. The risk is that the market recovers sharply sending shares in ING back to the $45.00 mark where the investor is short of calls. The options activity earns a place on our screens today given its sheer volume: The 30,000 contracts kicked into play compare to just 13,161 in existing open interest.
NG – Our market scanners showed a veritable “Tale of Two Gold Miners” emerge against very different share price action in sector peers NovaGold and Randgold Resources – but what looks like good-as-gold confidence in a happy resolution for both companies by next spring. Options in Vancouver-based miner NovaGold traded at 14 times the average volume today as shares took a bitter 54% licking to $9.32. Earlier today it was announced that NovaGold and its Vancouver associate Teck Cominco would shelve construction on their Galore Creek copper and gold mine project, having failed to accurately gauge estimated time and labor costs for the project. NovaGold has reportedly sunk $400 million to date on the project, which it now says is “no longer viable” using current metal prices. Option traders appear to have taken a forgiving tack toward the company’s repentance, with March 25 calls attracting fresh long positions on a volume of more than 19,600 lots as these contracts traded at a 75% discount from Friday’s premiums. Call buyers also piled into the June 17.50 calls on a volume of 8,000 lots.
GOLD – While NovaGold stumbled to a new 52-week low, American depositary receipts in its sector peer Randgold Resources edged 5% lower to $36.62, despite having set a fresh 52-week high earlier in the session. While the 13,000 options trading this afternoon were modest in absolute terms, the volume measured up to more than a quarter of the total open interest and represents 5 times the average interest. Heavy liquidity was observed in the March 35 calls, which have attracted interest from buyers and sellers, as well as in the June 40 calls, where the delta reading shows current premiums pricing in a better-than-50/50 chance that Randgold’s share price can pull above $40 by next summer.
