Today’s tickers: GM, YHOO, SYY, VIX, CFC, WM, XLF, CSCO, HMY, RL
GM – This morning’s news out of General Motors of a record 2.2 million in European auto sales last year fell on deaf ears with investors, sending prices down 2.3% to $22.78, a fresh 52-week low. Afternoon market action brought news that implied volatility in General Motors has topped 70%, 1.7 times the 40.7% historic reading, hitting its highest level since mid-November and well past the elevations seen in the runup to the September auto workers strike. The news coincided with option volume of 123,000 lots, trading twice as often to puts, and with buyers at the January 20 put strike attesting to the likelihood of GM breaking below half its 52-week high in the next week. Long volatility positions appeared at the 22.50 line in the February contract, undeterred by the $4.07 price of this position which profits from a recovery bounce above $26.57 or continued doldrums below $18.43.
YHOO – A look at the 58% implied volatility reading in Yahoo! shows traders expecting 1.7 times as much volatile share price action from the “second-place” search engine than it has shown historically. And the 1.2% decline in its share price to $22.32 – yet another 52-week low, broadly underperforming the Nasdaq and its arch-rival Google – shows investors simple disinclined to get onboard, despite the bells and whistles it’s unveiling at the ongoing Consumer Electronics Show in Las Vegas. Today’s 133,500 active option contracts ranked Yahoo! among the most heavily trafficked tickers on our platform, with buyers flocking to the January 22.50 puts. This strike is the third largest in the Yahoo! family by sheer open interest – and with the rest of January’s option density favoring calls at strikes of 30 and above, it looks like the only one likely to land in the money by next Friday’s expiration. The price of this January 22.50 put rose 58% today to $1.09.
SYY – Yesterday’s slash in earnings guidance by supermarket chain Supervalu seemed to infect most of the retail grocery space, putting today’s 2.6% decline in wholesale food maker Sysco in broader context. With shares at $28.78, a new 52-week low, its options traded at 9 times the normal volume, with nearly 8 times as many puts trading as calls. Of this, we observed bear put spread trading in the January contract at strikes 25 and 30. Interest in long put positions carried over to the February contract, with puts at the 30 and 32.50 strikes bought freshly.
VIX – Yesterday’s meltaway in U.S. stocks came as investors were double-teamed by bearish news out of the financial space and mounting evidence of a slowdown in consumer-driven stocks, including the high-immunity technology space. Volatility on the VIX bounded 7% higher to 25.43, its first close above 25 since November 27th, with nearly half of its option activity localized in January calls at strikes of 22.50 and above. This afternoon’s late-day stock recovery resulted in a 5% pullback in the volatility index, closing at 24.12. Perhaps taking a lesson from the previous VIX passes at the 30-level – VIX option traders appeared to put the news to work via the February 22.50/30 strangle, where much of today’s 142,000-strong volume was localized. A seller of the position would take the $2.50 premium anticipating a possible pull above current volatility levels, but failing to penetrate the daunting 30-reading in the month of February before receding back into the range.
CFC – Implied volatility in the country’s biggest mortgage lender, Countrywide Financial, jutted ever upward 17.2% this morning to exceed 276% – now twice the historic reading. This occurred as its share price took another 7% wallop to $5.08. With some 263,000 options trading this afternoon, option action in Countrywide showed traders expecting continued volatile devaluation in its share price. Puts at lowest available strike in the January series – $2.50 – attracted buyers once again today after a huge volume churn involving more than 30,000 lots at this same strike yesterday. We also observed strangle buying involving 20,000 lots in the January 5/7.50 combination, anticipating a break outside those strike prices. With the outlook for this year’s housing market looking as moribund as the last, and fresh scrutiny in the form of a Pennsylvania court case cast over its business practices, virtually no one in the market is willing to cast a vote of confidence in this company’s ability to extricate itself from its current heap of trouble.
WM – Options in Washington Mutual, the country’s biggest savings and loan, saw a steep 42% incline in implied volatility today to 133%. While the company is due to report earnings next Thursday after the market close, a report that WaMu may report additional charge downs for loans appears to have fueled volatility a little ahead of the game. WaMu options appeared on our “Most Active Options by Volume” scanner this morning, with fresh buying in the February 10 puts as the price of this position increased 125% overnight. The January 12.50 straddle – which at a price of $2.55 represents a whopping 22% slice of its current share price, and reflects the degree of volatile price action that the market is bracing to see out of WaMu – attracted buyers and sellers. The volume we observed in January 10 puts traded to buyers, however, even as the current $0.70 premium reflects a slightly better than 1-in-4 chance that its shares will erode below $9.30 by next Friday’s contract expiration.
XLF – Options in the Financial Select Sector SPDR, traded on a volume of nearly 450,000 lots this afternoon as its underlying share price eked out a 1.6% higher close at $26.88. With puts and calls trading at more or less even clip, earlier today we observed a conspicuous level of buying in January 27 calls as the price of this contract came off 10% on the session. Calls at the 28 strike attracted buyers and sellers, some possibly selling the 28 against the purchase of the 27 in a debit spread. Buying interest at the 28 strike extended to the February contract, where open interest has increased nearly 18-fold from 1,175 five sessions ago to 21,000 today.
CSCO – Shares in Cisco, the world’s largest maker of Internet networking equipment, advanced 3% this afternoon to close at $26.17, a bounce bringing Cisco’s share price to $1 above its 52-week low. Cisco shares have given up $3 of their value since December 13. Today’s move shows Cisco’s share price sloughing off a Goldman Sachs profit downgrade for a number of tech companies this morning, citing “continued indications of softer capital spending” in Cisco specifically. Yesterday the company announced at the Consumer Electronics Show in Las Vegas that it is shifting its focus to consumers to offset slower growth in corporate orders by selling integrated set-top boxes that connect televisions to the internet via cable television routers. While a look at Cisco’s 41% implied volatility reading shows option traders bracing for about 21% more volatility in the near-term than its shares have shown historically, today’s 126,500-strong volume was heavily localized in April options. Traders moved the April 25/30 strangle on volume of some 22,000 lots – with a buyer looking to capitalize on either a break above or below those strike prices, and a seller using the current higher implied volatility environment to pocket premium at the outset and bet on Cisco shares remain bound at the low end of the 52-week range.
HMY – Options in the world’s fifth-largest gold producer, Harmony Gold, are trading at quadruple the normal volume today. While its shares closed 1.7 % higher at $12.17, the distribution of volume in the 25,000 options in play showed traders entering long positions in at-the-money and out-of-the-money calls in the January and February contracts at strikes of 12.50 and 15.00, looking to lock in on upside share action over the next month. Last week the company announced that its acting CEO since August, Graham Briggs, had been appointed to the post on a permanent basis. Harmony’s share price suffered a disastrous rout last summer after a faulty estimate of production costs, and a look at open interest shows a residual defensiveness in the form of an overweight of put positions over calls by a factor of 1.8.
RL – Shares in preppy clothier Polo Ralph Lauren closed 1.3% higher this afternoon, having been down as much as 3% earlier in the session and setting a new 52-week low on no apparent news catalyst. Our attentions were seized by an upswing in option volume that amounted to nearly a quarter of its total existing option position being deployed. Fresh positioning was observed in puts at the January 55 strike, which traded to the middle of the market at $1.75 – appearing to favor a continued volatile decline in its share price below $53.25 by next Friday, even though the company isn’t due to report earnings until February 7. Implied volatility is sharply elevated at 52.3%, showing traders expecting 41% more volatile future price action in Ralph Lauren shares than they’ve proven on paper. Last month, Barron’s magazine reported a curious spike in inside selling in Ralph Lauren shares over the month of November.
