Today’s tickers: MO, DIA, HD, BAC, XLF, WFC, JPM, MBI, USU, SHLD, VIX
MO – What about “Cokes and Smokes?” Shares in Altria, the holding company behind Philip Morris tobacco, closed 2.7% lower at $73.37, more than double the decline on the broader market and despite a great deal of favor from analysts and pundits favoring the defensive posture of tobacco-related stocks. Our attentions were captured, however, by a widening disparity between its 19.0% historic volatility reading, and the 31.4% implied reading weighing in at 1.6 times the latter gauge. This is the widest spread between historic and implied volatility in our records, and indicates option prices currently factoring in about 65% more price risk for Altria shares than they have shown historically. Also noteworthy was the degree of buying interest we saw in March 70 puts, which traded for $2.00 today – a 53% higher price than Friday. A buyer of this contract secures the right to sell Altria shares for $70 in March but needs to see a decline below $68 before the position becomes profitable. This means 7% more downside from current levels.
DIA – Options in the Diamonds Trust Series I, the ETF indexed to so-called “Dow Diamonds” including IBM, Boeing, Caterpillar, Coca-Cola and Johnson & Johnson, traded on volume of nearly 363,000 lots this afternoon, making the ticker the 6th-most liquid option family by volume on our platform. The action occurred against the backdrop of a 1% decline in the price of the underlying share to $119.25. With twice as many puts trading as calls today, it’s tempting to conclude that today’s market is simply seeking wholesale protection against declines in the blue-chip monoliths as recessionary fears tighten their grip, or hedging long positions in specific Dow components. A closer look shows some traders may be cleverly timing the closeout of prior positions – consider the most actively traded Diamonds contract today, the March 131 puts, which traded nearly 19,000 times to the middle of the market at $12.30. The volume, while certainly eye-catching, was within the bounds of existing open interest at the strike. Similar activity was last reported in this contract on December 13, when the same position could be had for $4.30 as the Dow Diamonds ETF traded 11% higher at $133.50.. A closing sale today would net the trader an 8-point profit – $800 per contract.
HD – A Sanford Bernstein analyst upgrade of a number of distressed retailers, including Home Depot, sent shares in the badly bruised home improvement chain 7.4% higher at $27.91. The move was curious indeed in a ticker that to many traders serves as a proxy for the U.S. economy writ large, and recent speculation on the state of the economy has found little in the way of rousing confidence. Still, its share price at present writing is still well above above the 52-week low of $41.11 set back on January 9. Implied volatility at 45% shows traders looking for 18% more share price movement out of Home Depot than it has already experienced, and the surfeit of buy-side interest in February puts and calls at the 27.50 strike suggests that the long volatility trade is gaining adherents. A long position at this strike costs $2.70 today and generates profit for the buyer in the event of a fall in shares below $24.80 (still above that early January low) or above $30.20. This is a bet on near-term turbulence in Home Depot shares quite unrelated to its earnings report, which is due to drop on February 26, coinciding with the March contract.
BAC – Shares in Bank of America gained 4.2% this afternoon at $37.50, in keeping with a trend in the broader financials today showing higher share prices but continued elevated implied volatility. Bank of America’s implied volatility rang in at 41.6% today- more than 5 full percentage points above its historic reading, and relatively unusual to observe in a company subsequent to the release of its quarterly earnings. Disclosure tends to make volatility dissipate, even in a company like Bank of America, which had the unenviable task of announcing a 95% drop in fourth-quarter profit. Option traders, however, were less swayed by the post-Fed rebound in share price and proceeded post haste to sell calls at the February 40 strike for a meager 45 cents apiece – the value of this position having eroded some 47% on the session.
XLF – Shares in the Financial Select Sector SPDR closed in positive territory, up 1.8% to $25.96 after buyers stepped in to lift the index from early morning lows. Earlier today, we observed heavy traffic in the February 26 calls, which sold off heavily on a sum volume of 74,000 lots. Evidence of contrarian position was observed in buying activity in the March 29 calls, which were bought on the offer at around $0.53, implying a buyer’s expectation that the XLF can recover to late-December levels by March. Elsewhere, in the June contract, it looks like a trader may have used a reverse collar position to protect a short underlying stock position in the XLF, using the out-of-the-money June 30 call and 21 put. The $0.95 price of the put in this case would have funded the $0.93 sticker price of the call, designed to protect the buyer against a squeeze in a short position on the underlying ETF.
WFC – We continue to monitor developments in Wells Fargo, which opened this morning 3.5% higher despite an infamous slump in the early minutes of trading. This morning’s action looks like a reprise of the JPMorgan takeover chatter that sent Washington Mutual higher on Friday despite an otherwise bearish bent to its quarterly numbers? Despite having been up as much as 9% earlier in the session, its shares reversed dramatically in late-day trading to close 2.8% lower at $24.75. With 88,410 options in play, traders appeared earlier today to be staking bullish claims on Wells Fargo, given an overweight of puts sold at the February 27.50 strike along with the purchase of cals at the April 25 strike. We would be remiss not to point out that the current 58.5% implied volatility is the highest reading we have on record for Wells Fargo, a figure that has continued to climb in the intervening week since its Q4 earnings report on January 16. This reading shows option traders looking for 15% price risk in Wells Fargo shares than it has documented historically.
JPM – First Washington Mutual, now Wells Fargo, and even talk (we’re told) of Merrill Lynch. Everyone, it seems, wants to know who JP Morgan Chase is taking to the proverbial prom. Shares in this dashing swain gained 3.2% to close at $40.87, recovering nearly $3 after brushing a new 52-week low in the premarket. With some 555,000 options trading this afternoon, calls outstripped puts by 2 to 1, with calls at strikes of 40 and 42.50 selling off, possibly in combination with the sale of February puts at the 37.50 and 40 strikes. Selling volatility like this implies a trader looking for price stabilization in JP Morgan Chase over the next month, despite broader market sturm und drang, but with implied volatility edging barely 3% above the historic norm, there’s not much of a spread to play here.
MBI – Shares in bond insurer MBIA rallied 36% after a Barron’s article pointed to MBIA’s relative resilience to subprime debt exposure, comparing it favorably to market peer Ambac. Implied volatility in MBIA options came off sharply, down more than 32.7% overnight, but still reads 196%. Given this setup, we observed that that many option traders appeared to seize the opportunity to enter long front-month volatility positions in MBI, with February puts at strikes of 10.0 and as low as 7.50 being bought in combination with calls at those same strikes. MBIA shares have nearly doubled in value since striking a new 52-week low at $6.75.
ING – Writedown rumors dogged American depositary receipts of Dutch financial services giant ING today. Shares closed 5.2 % this afternoon to $32.35, cratering below the incumbent 52-week low, this after an analyst downgrade hinted at imminent writedowns in the company’s Alt-A mortgage exposures, subprime and leveraged finance holdings. With nearly 20,000 options trading according to our platform, option activity surged to more than 20 times the normal level. Most of this was caught up in fresh put buying at the April 35 strike, where today $4.30 premium is 53% more expensive today than it was on Friday. A buyer of this position secures the right to sell ING shares for $35 in April, but needs the share price to fall another 3% below today’s already-distressed levels before the position begins to generate a profit.
USU – Shares in Usec, the producer of so-called “Low-enriched uranium” (LEU) for nuclear power plants, slid another 2.8% to $7.28 this afternoon. Usec shares were trading as high as $25.65 in May of this year but have steadily declined amid downside earnings surprises from the company. Today we observed option traders move en masse to freshly short February at-the-money calls at the $7.50 strike, taking the 40-cent premium in apparent confidence that its shares will not make a new pass above current levels before February’s expiration. Heading into today, option traders held more than twice as many call positions as puts, which is often a sign of prevailing bullish sentiment, but the cataclysmic erosion of its share price – and the fact that option traders are pricing in 25% more price risk to Usec shares than is already apparent in that price erosion – tells a different story.
SHLD – News of a sweeping structural revamp of Sears Holdings, the Eddie Lampert-owned holding company behind broadline retailers Sears and Kmart, found favor with the market today. The new re-org will divide the company into five distinct units – including a separate division for its coveted real estate portfolio – designed to increase autonomy and accountability. Shares gained nearly 12% this afternoon to close at $100.00 – 18% above the 52-week low it set one week ago today. Shares in Sears Holdings, despite losing virtually half their value over the past 52 weeks, have in fact narrowly outperformed the S&P consumer discretionary index by 3 percentage points for the year to date. The move has clearly sent investors into a tizzy over the implications for Sears’ forward share price action. Where implied volatility was roughly neck and neck with the 59.3% historic reading to close out last week, this week it’s gapped 20% higher at 71.6%. Perhaps feeling that the current market outlook remains too treacherous for front-month recovery bets, we observed buying in out-of-the-money calls deferred to the March contract at strikes of 105 and 110. These strike levels were last in the money in late-December. Fresh positions in the June 120 calls traded to the middle of the market for $3.40, indicating either a brazen bet for a pull above $123.40 by midsummer, a covered call writer looking to pocket the $3.40 premium, enriched with time value and at least a short-term bounce, to enhance yield on an underlying stock position, or a bearish call seller declaring a ceiling on further appreciation for Sears Holdings into the summer.
VIX – An abrupt surge past 35 at the opening sent the Volatility Index careening to levels not seen since the dog days of early-subprime, circa August 2007. Coming as it did after an extraordinary 75-basis-point intra-meeting Fed rate cut, the move seemed an acknowledgement that Fed intervention (the promise of which has kept a lot of volatility at bay despite bearish sentiment) might not be able to keep major indices from unspooling. A late-morning wave of bargain hunters after the Fed’s emergency rate cut yielded some normalization in the volatility reading, which closed 14% higher at 31.01. Given the tendency of recent sessions is any cue, we were somewhat surprised to see a close above 30 at day’s end. The inclination to recede has seemed strong in the VIX these days, even with stocks closing consistently lower or pulling off very shallow recoveries. February calls were heavily traded today, with buyers seeking protection from spiraling volatility through long call positions at strikes of 25, 30 and 35.
