Today’s tickers: VIX, BEAS, RF, XLB, C, XLF, HBC, MRX, SGP, AAPL, EMC
VIX – Wilting investor sentiment on back of Citi’s killjoy writeoff and soft retail sales numbers made a dent in the Dow – down 280 points heading into the close. In bygone days, we might have expected a sharp move higher in the Volatility Index, which being tied to the S&P, tends to couple inversely with movements in that index. Surprisingly, the index read just 1.35% higher this afternoon at 23.21, having failed to register a close above 25 in a full week. This would seem to corroborate that even as the economic picture sours, it continues to gain clarity, cooling the volatility outlook considerably. With January VIX calls due to expire, it was little surprise to see heavy traffic at the January 25 calls as investors rushed to close those out-of-the-money positions. A look at the February contract shows call-spreaders out in force at that month’s 27.50 and 30 strikes. This looked to us like bear call spread activity, with a trader selling the 27.50 calls at around $2.00 apiece, buying the February 30 calls at $1.15 in a generally volatility-bearish play and pocketing the $850 premium per contract in the expectation that both strikes will expire worthless in February.
BEAS – One of a handful of tickers to close in positive territory, e-commerce software maker BEA Systems closed .90% higher at $15.61 today on no apparent news catalyst. Calls outmoved puts by a factor of 7 and a half, with total options trading at more than 12 times the normal level. Liquidity was drawn to at-the-money calls in February and March. Particularly interesting that this seemed to involve fresh short positions in the March contract, possibly anticipating a leg down for BEA Systems shares in the next two months. Implied volatility at 51% is sharply elevated above the 33% reading, indicating that premiums reflect 54% more volatile price action in BEA Systems shares than they have shown historically.
XLB – This week’s news of a decline to 19-year lows in the reading of the Baltic Dry Index, which measures commodity shipping costs on international trade routes and is interpreted as a indicator of economic growth, coincided with a decline in the value of the XLB, the materials select sector SPDR. Components of this commodities-rich ETF include Monsanto, Freeport-McMoRan Copper, Alcoa, and Newmont Mining Company. With the underlying price of the XLB closing 2.7% lower at $40.18 – down 2.6% for the year to date, but following a year in which it gained more than 15% in value – XLB options rate among the top-20 tickers according to our “Most Active by Option Volume” scanner. This volume appeared in fresh long positions in February 40 puts, which traded more than 38,000 times for about $0.40 apiece. A position at this strike gives the buyer the right to sell the underlying ETF share for $40 in February, anticipating a break below current levels.
RF –On a day of such unmitigated bloodletting in the financial space, we were surprised to see not just a 10-fold increase in trading activity according to “Hot by Options Volume,” but also very restrained price action in Regions Financial Corp. The company closed .34% lower on the session at $20.34, having traded in plus territory for much of the day. This multi-bank company provides mortgage banking, credit life insurance, securities brokerage and other services over the South, Midwest and Texas. Lest one conclude that flyover country is somehow “pass-over” country for financial losses, bear in mind that Regions has given up nearly 47% of its share price over the past 52 weeks, underperforming even the S&P financials index. The company is currently trading at 7.5 times its earnings. A look at implied volatility shows investors looking for 28% more share price fluctuation than it has already shown. Despite today’s relative scot-free share price performance, option action suggests that this risk is to the downside. It appears that traders sold puts at the January 25 puts, closing out for $5.10 options that may have been bought on November 27 for $2.80, taking the 82% profit and possibly reinvesting in fresh longs at the same strike in the May puts.
C – Traders were treated to a wake-up cup of a $10 billion Q4 loss at Citigroup – nearly double street estimates – and news that the company will cut its quarterly dividend and eliminate up to 4,200 jobs. Some market pundits had pointed to Tuesday as the day to buy Citigroup, arguing that no matter how bad the news today, it was bound to be terminative and that as of today, the baddest of the bad news would be cooked into its share price. While we can’t speak to the prudence of that recommendation, as we write this, Citi shares closed 7.6% lower at $26.84 – 34 cents above the 52-week low set back on January 9. Earlier today, we saw calls at the January 30 strike sell off heavily despite being worth only about 4 cents today. Open interest at this strike had accumulated by nearly one-third on pro-Pandit pundits, while puts at the 27.50 strike traded mostly to the middle of the market, worth 76% more today than they were yesterday. As a sign of brighter times ahead for Citi, we would offer up the high level of activity seen in February 30 calls, open interest having more than doubled over the past week, while in March we’re seeing signs of call spread activity. Traders here appear to be buying the 27.50 calls for $1.73 against the sale of the 32.50 call for $0.42 in a credit spread that would see Citi’s share price rebound from current levels, not to exceed $32.50 in March. Put another way: if a recovery is in the cards for Citi, it’s likely to be a slow, limping crawl into March.
XLF – Late in Monday’s session we observed a massive run on January 28 calls in the XLF, the Financial Select Sector SPDR – trading primarily to buyers on a volume of a whopping 203,210 lots. This appeared to be a late-session bet in favor of that “kitchen sink” scenario we described above. With financials bleeding once again today – shrugging off news of a $6.6 billion cash infusion for Merrill Lynch to empathize with Citi woes instead – the underlying share price of the XLF declined 3.5% to $26.90. Once again today the January 28 calls were a fertile battleground for bets on the financials, with traders in yesterday’s buying bonanza possibly taking some of the position off the table. Put-buying was observed in the front month at strikes of 25, 26, 27 and 28. Further out, we observed heavy trading in March calls at the 31 strike, which traded to the middle of the market at $0.42. This may have been closing purchases of calls shorted weeks ago when the price was $2.20.
HBC – Options in HSBC Holdings Plc, the holding company of Europe’s biggest bank, HSBC, attracted 3 times the normal level of volume today as its shares slid 4.4% to $75.90 – a new 52-week low. Earlier today Goldman Sachs resolutely downgraded the stock, arguing that the bank may need to boost its U.S. loan-loss provisions in a recessionary environment. Despite the immediacy of the downgrade, the brunt of this afternoon’s 48,600-strong option volume was remarkably parochial, located in March puts at strikes of 75, 80 and 85 with a strong bias to sellers. This could be a well-timed bet in favor of price stabilization by March in HSBC shares – a company whose shares have lost 21.5% over the past 3 months but didn’t break below the $85 level until late December. It should be noted, however, that option traders are currently holding twice as many bearish put positions as bullish calls.
MRX – Options in Medicis Pharmaceuticals – the maker of dermatologic drugs including the popular cosmetic dermal filler Restylane – are trading at 4 and a half times the normal level today. Shares in the company set a fresh 52-week low, losing nearly 11% of their value, after Impax Laboratories sought FDA approval for a generic version of Medicis’ best-selling anti-acne drug, Solodyn. Implied volatility in Medicis options quickly surged 52% to more than 56%, making it the morning’s top implied volatility gainer at 2.6 times the historic reading. Front-month puts at the 25 strike sold mostly to sellers, and within the bounds of existing open interest, possibly sellers taking profit from a 1700% rise in premiums at this strike, which conveys the right to sell Medicis shares for 23% more than their current market value on Friday. Buyers, meanwhile, flocked to February puts, entering fresh long positions at strikes of 20, 22.50 and 25. The April 25 straddle may also have been in play, trading to buyers and sellers in a directionally neutral volatility play.
SGP – Shares in Schering-Plough were down 5% at $24.26 today, one day after the company released data showing that its cholesterol drug Vytorin (developed and marketed with Merck) showed no greater results in treating patients with a family history of high cholesterol than two other drugs already on the market. Puts in Schering-Plough are trading at their highest volume in at least a year – trading 4 times as often with puts – as total option volume currently at more than double the normal level. Implied volatility in Schering-Plough options is elevated at 42.8%, indicating that option contracts are currently pricing in 23% more volatility than its shares have shown in the past. The most heavily traded contract under the Schering-Plough ticker is the January 25 put, which is selling off heavily at around $1.10 given the imminent expiration and the 266% gain in value overnight. Open interest in this strike may have built up on December 12, when the position could be bought for 30 cents as Schering-Plough shares were 20% more expensive at $29.67. Today’s precipitous drop in share price would have generated a handsome .80-point profit for the investor.
AAPL – A case of “wizard fizzle” for Apple! Speaking at the MacWorld conference earlier today, Apple CEO Steve Jobs did indeed unveil a new, ultra-thin laptop model and an iTunes-compatible movie rental sphere that would pit the tech giant against Netflix. It seems that Jobs’ earned failing markets on the covet factor, failing to whet appetites for new gadgets that might help the company defy a slowdown in consumer spending. Shares closed 6.5% lower at $167, while Apple options traded on volume of more than 741,000 lots, about 1.5 calls trading for every put. Earlier today we noted that month volume showed possible buyers and sellers of the 170/180 strangle on volume of about 20,000 lots at each strike. The mood also appeared to favor selling of the 175 straddle, a position which costs $9.75 in premium today – a seller of this position pocketing rich premium in the expectation that Apple’s shares will close back around the $175 level at Friday’s expiration.
EMC – Some traders on last night’s episode of CNBC’s Fast Money suggested long positions in data storage giant EMC Corp as a way to play Apple’s product unveiling. Whether it’s this sterling recommendation or news that it’s become the first storage vendor to introduce solid state Flash memory via its new Symmetrix Storage units (these reportedly 30 times faster than the industry standard) that led EMC shares to buck the trend in the broader tech sector for much of the day, we can’t say. Ultimately its shares reversed to close 2% lower at $16.48. Still, about 5.6 calls traded for every put on our platform this afternoon, with 82,000-plus contracts making it one of the most active tickers of the day. Implied volatility, that measure of anticipated future share price fluctuation, is showing traders expecting 25% more turbulence for EMC shares than they have shown historically. Heavy buying interest is observed in February calls at strikes of 17.50 and 18 – which would lock in prices for traders looking for upside in EMC Corp shares, not just through Macworld, but into its earnings announcement on January 29.
