Today’s tickers: VIX, XLF, MER, WM, ADLR, MBI, UA, XLV, AMD, CREE
VIX – Yesterday’s ecumenical equity selloff sent the Volatility Index at long last higher, closing above 28 for the first time since mid-November. The spike followed several sessions of relative inactivity in the volatility reading – despite choppy action in stock indices – that left many market observers at a loss to explain. On Friday afternoon the VIX showed the same penchant for retraction, pulling back 3% from its high to close at 27.57, despite a down day for stocks. Option action on the index shows the February 30 call is still the most actively traded strike on the calendar, with more than 34,000 lots trading there today – more than a third of today’s total volume. Our attentions were also captured by the fact that more than 15,000 option contracts traded in February puts at strikes from 19 to 27.50. However, more of these positions appear to be selling to the bid, at strikes with abundant levels of open interest where today’s volume could represent the taking off of some existing volatility-bearish positions. At least some traders remain skeptical that VIX can shatter that magic-30% reading, given some evidence of February call spread activity at strikes of 25.0 and 27.50, a position that would imply the VIX remaining above the 25 level but not breaking 27.50 by next month’s expiration.
XLF – Earlier this week we observed a mad rush to buy January puts in the Financial Select Sector SPDR at the 26 strike, which were then trading for a nickel apiece. The fact that this occurred on a huge volume – some 140,000 contracts – on a strike with ample open interest, just two days before contract expiration, led us to conclude that it was likely the closing of a large institutional position. Still, a five-cent insurance policy against a slide in the broader financial sector was a compelling possibility. On Friday, expiration day, the XLF did indeed close below $26, down 1.5% on the session to $25.37. And those January 26 puts gained 83% in value since yesterday’s close, now worth $0.68 despite expiring today. But what about the outlook for February? Traders appeared to seek fresh short positions in puts at the February 25 puts, while calls in the same month at strikes of 26, 27 and 28 traded mostly to buyers. This would seem to imply some prospect of price stabilization in the XLF heading into the next month. However, just one month hence we spotted a 30,000-lot trade in March puts at the 24 strike. The fact that these traded to the middle of the market at $1.14 makes it hard to ascertain for certain whether they were bought or sold, but the $1.14 premium reflects about a 35% chance of this strike landing in the money by March. Fighting odds? Consider those January 26 puts whose 5-cent premium two days ago priced in a less-than-10% chance of exercise today.
MER – Yesterday’s writedown culprit, Merrill Lynch, recovered 4.6% of its share price to close at $51.75 today, despite trading at a $3.50 discount to its level heading into Thursday’s earnings. With nearly 166,000 options in play today it was one of the most actively traded tickers on our platform, with puts outmoving calls by a factor of 1.6. Implied volatility in Merrill Lynch options has receded to 53%, below the 56% historic reading, which is an indication to us that option traders are more or less comfortable with the current level of price movement and not pricing in a higher likelihood of extraordinary swings now that Merrill’s Q4 numbers have been served up for public consumption. Our attention was grabbed, however, by some unusual put buying in the April contract at the deep out-of-the-money 45 strike, which traded for $3.40. In order to break even, Merrill shares would have to plunge to $41.60 – 12% below the 52-week low it set back on January 9 – just to break even.
WM – Shares in Washington Mutual showed an unusual 6.7% gain on the day to $13.306, despite reporting a nearly $2 billion loss for the fourth quarter that included a $1.6 billion after-tax writedown on its home loan exposure and a credit downgrade from Standard & Poor’s. Options in Washington Mutual were among the most actively traded on our platform today, with implied volatility at 128% remaining sharply elevated above the 100% historic reading. A look at the volume today showed brisk traffic in January calls at strikes of 12.50, 15 and 17.50, with buying interest carrying over into the same strikes in the February contract. Speculation on further consolidation in the beaten-down financial space gathered speed earlier this week when JPMorgan chief Jamie Dimon reported that he was “open” to possible acquisitions, with Washington Mutual tipped in the media as a potential target. Today’s earnings report may have served to bolster speculation that the company will be unable to carry on without the intercession of a buyer.
ADLR – Shares in Adolor Corp. closed 5.4% higher at $4.25 this afternoon, after an FDA review of its drug Entereg, a remedy co-developed with GlaxoSmithKline for the treatment of post-surgical constipation, was inconclusive in finding links to heart attacks and abnormal cell growth. FDA officials will convene next Wednesday to discuss the review’s findings. In the meantime, Adolor options traded at 13 times the average volume as its implied volatility has bounded 27.7% higher to 251%. This compares to the 91% degree of turbulence that Adolor shares have documented historically. Given the high implied vol reading and its inflationary effect on call-side premiums today, it appears that some traders took the opportunity to play against sustained gains for Adolor shares by selling April 5.0 calls for $1.00 apiece.
MBI – Shares in the country’s largest municipal bond insurer MBIA closed 7.7% lower at $8.51, repairing slightly after having been down as much as 20%. Catalyst today appeared to be this morning’s news in a Bloomberg report that credit default swaps are currently pricing in a more than 70% likelihood that it and fellow bond insurer Ambac will go bankrupt. Prices on credit-default swaps rise as confidence in a company’s solvency declines. So too does implied volatility on a company’s options, and MBI implied volatility rose steeply by 16.6% to read 327.7% earlier in the session. The volatility reading reflects even more ingrained fears over MBIA’s counterparty risk than has already been made evident in the 200% degree of fluctuation its shares have already shown. With more than 65,000 contracts trading today, MBIA options were among the day’s most liquid, with heavy activity in calls and puts at the January 7.50. Because this traffic exceeded the level of open interest, we could see that this was fresh volume as traders waged speculative bets ahead of today’s expiry. February puts traded at strikes as low as 2.50.
UA – Selling pressure continued to mount in shares of sportswear maker Under Armour. Shares closed 24% to $28.12, a new 52-week low, following an analyst downgrade of the company. Yesterday we observed a similarly steep selloff , with attendant rise in trading volume, on concerns that Under Armour may have socked too much money into an ambitious Super Bowl TV ad campaign. Once again its options traded at 4.6 times the normal level according to our “Hot by Options Volume” scanner, with the equivalent of 1 out of 4 of its open option positions actively traded. We gather there are least some contrarian bets on a Super Bowl upset for Under Armour shares, given the volume we observed in February 35 calls, which traded to the middle of the market for $1.55 – a 73% discount from yesterday’s level. Prior to today, Under Armour’s 52-week low was $34.80, so a buyer of this strike would take advantage of lower call-side premiums today to play on a rebound back to that previous low before February’s expiration.
XLV – It’s been a dicey week for health care stocks, what with doubts over the efficacy of a Merck/Schering-Plough cholesterol drug , and an article in the New England Journal of Medicine scrutinizing the effectiveness of prescription antidepressants. Shares in the XLV, the Health Care Select Sector SPDR, closed 2% lower at $34.50 as a result. Components in this exchange-traded fun include Pfizer, Merck, Pfizer, Eli Lilly, and Bristol-Myers Squibb. Our market scanners detected an increase in option trading volume to more than 9 times the normal level, as the equivalent of more than a quarter of its open interest was traded. This was heavily localized in February puts, where puts at the 35 strike were bought for $0.70 against the sale of puts at the 36 strike at $1.10 for a transaction credit of $0.40. Open interest at both these strike levels accumulated from virtually nothing to 10,000-plus contracts this week alone, suggesting that today’s volume may have been a trader taking some of a prior position off the table.
AMD – Shares in number-two PC chipmaker Advanced Micro Devices basked in an-11% recovery to $7.05 today – this as its arch-rival Intel headed yet lower, loitering at the $19 level for most of the day. A lower-than-expected Q4 loss in AMD’s after-the-bell earnings report yesterday corroborated early signs that the company’s badly-distressed share price may have turned a corner. The report added to insult to Intel’s recent injury, with AMD stating that Q4 demand remained strong and consistent with seasonal patterns (Intel’s report earlier this week suggested lagging economic growth could dent demand). With 80,000 options trading today, AMD was one of the day’s most actively traded option families, but a look at volume and volatility suggests option traders don’t think the company is out of the woods quite yet. Implied volatility came down 25% after the earnings report, but at 80% it’s still sharply elevated above the 68% historic reading and suggests traders pricing in about 20% more share price turbulence from AMD than it has already shown. Holders of the January 9.0 put may have looked to close out their positions by buying back positions for $2.07. February traffic occurred in calls at strikes of 6.0, 7.0 and 8.0, with the delta on that latter strike suggesting a barely 30% chance of AMD shares closing above $8.00 in February. The chance of a close about $7.00 are currently better than 50/50.
CREE – Unusual activity was observed in another component of the semiconductor space – Cree, the maker of light-emitting diode chips used in digital camera flashes and cellular phones. Cree shares closed 2% lower at $25.77 ahead of its earnings report next Tuesday. Having delivered downside surprises the past two quarters, tension is building in anticipation of the report, as is clear from the 13% increase in implied volatility. Now exceeding 100%, this is the highest reading we have on record for Cree options. Positioning earlier today appeared to show traders looking for more downside into the month of March, with calls at the March 30 strike selling for $1.35 against the purchase of puts at the same March strike for $7.00. The high premium on this strike would require Cree shares to decline another 10% from current levels by March just to break even. Selling the call at the March 30 strike defrays the initial cost outlay somewhat, and is also an indication that the trader doesn’t expect a return to $30 levels that would result in the call being exercised.
