Today’s tickers: IWM, DAL, SEED, UAUA, CAL, INTC, DELL, ABX, BBBY, XME, YRCW, BGP, MGM
IWM – A dispirited outlook for the U.S. smallcap equity segment drove put options in the iShares Russell 2000 ETF to trade at the highest level in 2 months as its underlying share price declined 3.4% to set a new 52-week low at $71.77. Most actively traded was the newly in-the-money January 74 put option, which conveys the right to sell the underlying ETF at $74, but it is worth noting that some 30% of today’s total active volume in the IWM was located January puts at strikes of 74 and below. Premiums on most of these contracts doubled in value overnight in tandem with the broader market slump.
The defensive action extended into the February contract, where traders entered fresh positions in out-of-the-money February puts at strikes of 70 and 67. Volume at both strikes (83,369 at the former strike, 16,837 in the latter) was nearly 3 times the prior level of open interest, as a look at the delta reading indicates option prices reflecting a less than 1-in-4 chance that the IWM can slide below $67 by February.
SEED – One of a conspicuous minority of stocks trading in positive territory today, Origin Agritech gained 34% to read $9.77 this afternoon, as option volume advanced to 13 times the normal level. Option traders put 8 times as many calls into play as puts in the highest volume day for Origin calls on record. The Beijing-based agricultural biotech specializes in the research, development and sale of crop seeds, primarily corn, rice, cotton and canola, and interest in exposure to bullish developments in its share price may be regarded as a shrewd dive into a defensive, non-cyclical stock with a kinship to soft commodities and the Asian market. Implied volatility rose 17% to 115.15%, making it one of the day’s top gainers according to our scanners, and a look at volume distribution suggests traders positioning for immediate upside volatility, given that more than half of today’s volume is located in front month calls at strikes of 7.50 and 10.00. The value of that latter strike has appreciated 300% in the space of a single session.
Earlier today, the Air Transport Association released a report forecasting a third consecutive year of profits from major air carriers, which have “moved aggressively to redeploy assets and adjust aircraft…to trim unprofitable flying” in the face of difficult economic headwinds and high fuel costs.
DAL – Options in Delta Airlines, long and widely tipped as a potential M&A player, traded at their highest level in a month as shares surrendered 2% of their value to close at $13.37. With 17.5 times as many calls trading as puts, we observed fresh long call positions traded in combination with the sale of puts in a call spread strategy, in which the trader seeks the right to buy shares at or around current price levels, but calls a de facto ceiling on any share price appreciation by selling a call at a higher strike. We observed this kind of activity in two contracts, first in January, where traders bought the 12.50 call in fresh volume, funding the trade through the sale of calls at the 15 strike. In the March contract, calls at the out-of-the-money 15.00 strike traded on volume 2 times the existing open interest, in what may have been combined with the sale of calls at the 17.50 strike.
This seeming anticipation of share price advances in air carrier shares in the month of March is consistent with trading activity we’ve observed elsewhere in the major airline space. Also noteworthy is the extremely high level of implied volatility, which at 96.7% compares to a historic reading of 70.5% and implies that traders are bracing for 37% more share price fluctuation from the likes of Delta than its shares have documented historically.
A look at the proportion of calls to puts shows 5.4 open call positions for every put – a strong indication that option traders on the whole are optimistic about Delta’s forward-looking prospects, even in a difficult market environment.
UAUA – We continue to observe volatility developments in UAL Corp., the parent company behind United Airlines. The holding company rated as one of the day’s top implied volatility gainers according to our market scanners, with a 17.4% advance in the implied 30-day volatility reading to a vertiginous 101.9%. This measures up to 1.7 times the 59.1% historic volatility reading, occurring as United shares trade 3% lower at $30.79. Much of today’s massive volumes in deep-in-the-money front-month calls may be attributed to the fact that UAL is ex-div on Monday, but we also observed fresh buying in at-the-money February 30 calls as premiums on the at-the-money call came off 10% to $2.95.
CAL – Options in another major airline, Continental (CAL) rated among the most actively traded option families with 68,600 options in play against a 2.3% decline in share price to $19.98. The past 2 weeks has seen a massive divergence in implied versus historic volatility in Continental, in step with rising fuel prices and conjecture over the outlook for industry consolidation, and the implied reading at 84.7% suggests traders anticipating a 30% greater degree of share price fluctuation from Continental than it has shown historically. While the ratio of 1.28 puts to every call reflects the highest proportion of defensive puts to calls since mid-October, it is worth noting that the 27,600 puts in play at the January 20 strike today traded mostly to sellers.
Elsewhere, a soft surprise in employment data gave the markets impetus to wither into sell-off territory for a second straight session. Volatility as measured by the VIX Index advanced 6.7% for an index value of 24.00 heading into the close.
INTC –Intel – Intel’s stumble continued today with an 8% decline to $22.66 after a J.P. Morgan analyst downgrade of the chipmaker. With nearly 329,000 contracts in play today, Intel was one of the day’s most active option families according to our scanners. Twice as many calls traded as puts today, with traffic logged to buyers and sellers in the January 25 calls, which traded nearly 44,500 times. Front-month puts at the $22.50 strike traded mostly to buyers on a volume of some 48,000 lots, as the value of the position appreciated 320%. While traders looked to freshly short calls at the February 25 strike, we suspect this may have occurred in tandem with buying at the February 25 level, implying some stabilization in prices over the next month.
DELL – Dell Inc. – A 6.7-percent decline in Dell’s share price to $22.10 was part of a broader slump in tech stocks, bringing Dell to within 50 cents of its 52-week low. Option traders have put 153,000 lots in play, trading evenhandedly between puts and calls. Earlier today we noted a willingness to enter fresh longs in February 22.50 calls on volume of 19,500 lots – 4 times the existing open interest. Calls at the 25 strike in the May contract also traded to buyers, with current premiums reflecting about a 37% chance of this position landing profitably in May.
ABX – Barrick Gold Corp Com – Shares in Barrick pulled off a flat close this afternoon at $48.55, still within a dollar of the 52-week high, and with 53,000 options in play, it was one of the most active tickers to register on our market radar this afternoon. Puts and calls trading at equal pace, with puts at the January 45 put bought freshly on a volume more than twice the open interest today. Call spread activity in the April contract between strikes of 50 and 60 could imply massive upside, capped at the $60 level, in the spring.
BBBY – Bed Bath & Beyond – Our “Hot by Options Volume” scanner detected an increase in trading volume to 4 times the normal level as shares in the housewares chain dived 4%, setting a fresh 52-week low at $26.26. In options trading we observed traders appearing to bail out of positions in January 27.50 calls, where open interest had increased nearly 6-fold this week. Buyers and sellers shifted instead to January puts at strikes of 25 and 27.50, while we observed what may have been a move to take profit in puts at the 30 strike. The value of this $5 position increased 66% overnight.
XME – Metals and Mining SPDR– The value of the commodity-rich ETF, whose components include the likes of Newmont, Hecla, Peabody, and Freeport-McMoRan declined 4%to $65.88 this afternoon, as what may have been put spread activity in the March contract between strikes of 50 and 70 bumped the total volume reading to 37 times the normal level. A look at the lay of open interest in this ETF gives the impression of a popular destination for hedgers, with open put positions outnumbering calls by 19 to 1.
YRCW – YRC Worldwide – This morning’s Fitch downgrade of YRC Worldwide and two of its trucking units to BBB- status with a negative outlook cited concerns over the impact of a faltering US economy on the trucking giant’s credit metrics. Shares plunged 8.5% to $12.65, while options activity accelerated to 4 times the normal volume, matching up to 13% of its total open interest. Fresh long positions appear to have been sought at the February 12.50 straddle, a position that at $2.45 costs a whopping 20% of the current share price to enter, but would cover the buyer in the event of a break above $14.95 or below $10.05. Fresh volume was also observed in in-the-money puts at the February 17.50 strike, which traded for $5.45 to the middle of the market.
BGP – Options in beleaguered book chain Borders Group are trading at nearly 23 times the normal volume today, and implied volatility advanced 30% to exceed 93% today. This occurred as shares in the company turned the page on a new 52-week low of $9.29, down 3.6% from yesterday’s close. Puts outmoved calls by some 17 to 1 this afternoon, but earlier today we discerned some willingness to take contrarian positions and bet on a stabilization of Borders prices south of January. Puts at the January 10 strike traded freshly to the middle of the market at $1.05, protecting a buyer in the event that shares remain in single-digit territory but providing a seller with a tidy premium credit if shares recoup slightly and volatility comes off a bit. Calls at the February 10 strike were bought freshly at $0.70.
MGM – Options in MGM Mirage Inc., the holding company of Las Vegas casino resort destinations including the Bellagio and Excalibur, traded at 7 times the average volume today, as shares declined 6 % to $73.25. Implied volatility surged 14.5% to 47.5%, making the company one of the day’s top implied volatility gainers as options traded at their heaviest volume in more than a year. Defensive positioning appears in the ascendancy as traders sought long put positions at the 70 strike in the January and February contracts.
