Today’s tickers: C, XLF, JPM, WFC, CVS, ISIS, BUD, CFC, SBUX, DFS
C – Implied volatility in Citigroup rose 12.3% to 49.8% this afternoon as its shares closed 4% lower at $27.12, another 52-week low for the company. The spike in implied volatility followed reports of an S&P downgrade of 8 Citi alternative investment funds, in a week that has already brought bearish conjecture on possible job cuts and the size of that all-elusive “kitchen sink writedown.” This morning, analysts at Merrill Lynch reckoned Citi losses at double the current estimate from $0.73 to $1.43 per share – all told, some $16 billion. With more than 720,000 options in play this afternoon according to our scanners, volatility traders came out to play in the January contract, with what appeared to be strangle buying between the 27.50 and 30 strikes, a position which costs $1.38 today, covering the buyer in the event of a move below $26.12 and above $31.38. The same strategy appeared in force in the February contract, where the long volatility position costs $2.53. It appears that some traders may be wagering on a subsidence of volatility by January 2009, however, with straddle activity at the 27.50 mark trading to the middle of the market on volume of some 20,000 lots at each strike. A seller of this position would pocket the $8.35 premium on this time-value-rich position in the belief that Citi is sure to turn out the lint in its pockets in 2008, one way or another, starting ’09 at the current 52-week low. A buyer would do so expecting that the volatile rockets’ red glare will continue to pour on Citi’s share price – to the upside or the downside – even into ’09.
XLF – A fresh 52-week-low was hatched this afternoon in the XLF, the Financial Select Sector ETF, which closed 3% off yesterday’s close at $26.58. With more than 600,000 options in play trading to puts by a factor of 1.5, put volume in the ETF hit its highest level in more than a month. While it appears that the immediate bias among traders is to seek long volatility positions in Citigroup and some of the fund’s other components, we observed some evidence of strangle selling and call spread activity in the XLF itself. The January 27/28 strangle may have been sold on volume of more than 40,000 lots – a position that would garner the seller some 92 cents in premium. The March contract saw sizable put volume go through at strikes of 24 and lower, suggesting that the bar on defensive action in the financial space continues to move lower.
JPM – Put-spread activity was prevalent in options of JP Morgan Chase, one of a number of money-center banks due to report earnings next week. Shares in the company closed 4.4% lower at $39.55, again, a new 52-week low. With 173,500 options in play on Tuesday, JP Morgan Chase was one of the most actively traded option families on our scanners. Earlier today we noted volume of 25,000 lots logged to the February puts, with traders selling puts at the 40 strike for around $2.00 apiece, and buying at the 35 strike for $0.55 to create a vertical credit spread in puts after the front month. The same strikes were in play in January puts, where premiums rose as much as 30% on today’s share price decline.
WFC – Options in Wells Fargo piqued our market scanners this afternoon as shares traded 4% lower at $26.45, owing to high-volume put spread activity in the January contract. The sizable volume here involved 140,000 contracts at each strike in the 27.50 and 32.50 puts, with the trader selling the 32.50 puts at 5.40 and buying the 27.50 puts at 1.40 to begin the transaction with a credit of $4.00. A position of this size was probably done against an existing stock position, with the trader limiting the risk of being exercised on the out-of-the-money 32.50 put by buying the put at the lower 27.50 strike.
CFC – Embattled mortgage lender Countrywide made headlines this morning after it emerged in a Pennsylvania courtroom that the company had apparently “recreated” or “fabricated” documents pertaining to a Pennsylvania client (now plaintiff) who sought bankruptcy protection to save her home from foreclosure. The case, which was detailed on The New York Times website, has invited fresh scrutiny of the company’s business practices and even gave rise to reports that the company might seek bankruptcy protection itself – reports that company spokesmen were quick to refute this afternoon. Shares in Countrywide lost 27.5% of their value today to close at $5.50 – the latest in a string of increasingly ignominious downside milestones – and with 500,000 options trading, it was one of the most active tickers on our market scanner. Implied volatility took a 76% uphill hike to 236% as traders appeared to position for more volatility – not less – in Countrywide’s battered share price. Nearly three times as many puts traded as calls, with some 21,500 lots mostly bought in the July 7.50 puts – a level 3 times the existing open interest. We also observed what appeared to be strangle buying in the January contract between the 5.0 and 7.50 strikes, a position which costs $0.95 today but protects the trader in the event of a test of the $4 level to the downside or around $8.45 to the upside. Huge volumes also appeared in front-month puts at strikes as low as $2.50.
SBUX – Options in Starbucks moved on a double-whammy of news catalysts today. Shares closed 8% higher at $19.87, following yesterday’s news that the company’s founder and chairman Howard Schultz will return as chief-executive after an 8-year hiatus. Starbucks shares had spent much of Monday hovering just above the $18 level – its standing 52-week low – on news that McDonald’s plans to roll-out a less-precious version of specialty coffee drinks, capitalizing on an increasing mass-marketization of these European-style beverages to the java-swilling masses. With 270,700 contracts in play this afternoon, Starbucks was one of the most actively traded tickers to appear on our market scanners, with puts outpacing calls by a factor of 1.7. The mood here appears to show a defensive posture among traders, perhaps looking to hedge their bets as Starbucks prepares to give the horns to the golden arches. This was reflected not just in the persistent high level of implied volatility, which at a hopped-up 46.7% is 1.5 times the 29.9% historic reading, but also in fresh put buying in the February and April contracts at the 17.50 strike.
ISIS – Options in Isis Pharmaceuticals, a drug maker focused on RNA-based (antisense) therapies for the strategic treatment of illness, traded at 30 times the normal level today. Today’s activity was the most frenzied in at least a year, as shares surged 28% to $18.69, blowing past the standing 52-week high. Late yesterday at the JPMorgan Healthcare Conference, biotech Genzyme announced that it had struck a deal with Isis to license its experimental cholesterol drug, mipomersen, an antisense drug which is currently in late-stage clinical trials. The injectable drug is to be targeted to patients with a family history of high cholesterol, and who have not been responsive to other therapies. Option traders put 6 times as many calls in play as puts, with January 20 calls trading on volume of more than 17,000 lots, twice the open interest, and mostly selling to the bid. The same phenomenon – fresh writing – was observed at the same strike in the February contract, and may be indicative of shareholders looking to enhance their yield by pocketing premiums at those strikes – the $2.00 price per contract in the January 20 call represents a 1100% appreciation from yesterday, while the $1.00 premium in the February call is up 900% on the session. A trader in this case would be either be reasonably certain that the froth around Isis shares will subside in the coming sessions, resulting in the call expiring worthless, or happy to pocket the premium if the call is exercised, owing to the underlying share position.
CVS – Another ticker moving on news from the JP MorganChase healthcare conference, options in the nation’s biggest pharmacy chain, CVS showed bold volume after chairman and CEO Tom Ryan, speaking to conference attendees, characterized last week’s selloff in drug-store stocks following softer-than-expected December same-store sales as an “overreaction.” Ryan also described the drugstore chain as “more resilient” than other retailers to an economic slowdown, noting that sales of discretionary, non-pharmacy products represent barely 3% of their total earnings. We immediately saw an acceleration in option trading volume to 5 times the normal level as shares turned south late in the session, closing 1.4% lower at $37.65. Of interest here was a huge-volume transaction – some 106,000 lots – shorted in the February 40 calls, a level twice the existing open interest. Our immediate observation is that this sizable transaction could be covered call writing by a holder of underlying shares, positioning for a non-event ahead of CVS earnings on January 31. Calls otherwise outnumber puts in the open interest stakes by a factor of 1.3.
BUD – One of the chestnuts of the looming U.S. economic slowdown is the defensive proverb (last spoken on CNBC) admonishing traders to seek exposure to “Cokes, Smokes, and Drugs.” In that environment, one would assume that with home values down, a weaker dollar, low job growth, what better time to crack open a Bud? Shares in Anheuser-Busch, the world’s second-largest brewer, reported a 3.4% increase in U.S. shipments to wholesalers, specifically its craft and imported labels such as Aussie classic Beck’s and Belgian brew Stella Artois. The current share price of $53.76 – a .72% decline on the session – represented a slight pullback from a fresh 52-week high set earlier in the day. Meanwhile, options volume surged early in trading, accompanied by a near-10% gain in implied volatility to 27.3%. The positioning shows 9 times as many puts in play as calls, which is a curiosity given the bullish fundamentals. Volume in the March 50 puts may have been the result of traders making closing purchases for $0.90 of positions shorted at around $3.00 earlier in the fall. Action in the February puts at strikes of 50 and 55 was made up of fresh longs, which would protect the buyer against a decline in its share price into the spring.
DFS – Options in credit card Discover Financial Services were an early mover on our market scanners, with contracts trading at 2.6 times the average level as its shares declined 5.5% to $13.59, a new 52-week low for a stock that has shown a more or less unabated decline since its spinoff from Morgan Stanley last year. Earlier today, an analyst note pointed to tougher U.S. economic conditions in the coming as a likely profit-poacher for major U.S. credit card issuers. Option traders responded by appearing to sell off January 15 calls, and entering fresh strangle positions in the April contract between the 12.50 and 15 strikes, anticipating volatile price action for Discover come springtime.
