Today’s tickers: WB, F, LEN, AAPL, XLF, C, MER, IYR, WLP, CCK
F – Implied volatility in Ford options is revving up ahead of the harried automaker’s Q4 earnings report tomorrow. Implied vol spiked 28.9% to 72.8% earlier today ahead of the earnings report, with the price of the at-the-money $6 straddle ringing in at $0.85, showing an anticipated 14% move for the $6.03 stock following earnings. With some 56,000 options trading 5 times as often to calls as to puts, it appears that option traders are favoring the upside on Ford given their inclination to buy heavily into front-month $6 calls for 40 cents apiece. Today 5.4% gain to $6.25 for Ford shares was the first close above $6 since last Monday.
LEN – News of a rise in weekly U.S. mortgage applications appears to be the only possible upside catalyst behind the surge in homebuilder stocks we’ve seen today. Interest in Lennar Homes, which builds homes in 18 states nationwide, and whose shares closed 13.4% higher at $14.92 today, was particularly keen as the company is due to report earnings on Thursday. A look at implied volatility shows the market bracing for extraordinary turbulence ahead of this earnings report, of a magnitude nearly 50% above the degree of fluctuation its shares have already shown. This is no small feat in a company that has surrendered three-fourths of its value over the past year. The view for Lennar shows option traders positioning long on volatility in the front month via buying 12.50 puts and 15.00 calls expecting breaks outside those strike prices. Heavy traffic in the May contract may suggest traders looking to sell volatility via those time-value-rich contracts at the 10.00 put and 22.0 call, taking premium as an advance credit in the expectation that shares will remain rangebound at or near current levels into the spring.
WB – Shares in Wachovia gained 11.7% today at $35.65, outstepping even the brashest gains in today’s broad rally for financial stocks. On the options front, more than 144,000 contracts traded this afternoon, making it one of the most actively traded tickers on our platform today, with twice as many calls moving as puts. Fresh, speculative volume was drawn to the February 35 calls, which traded with abandon at a price of $1.20 – tripling in value overnight and thus attracting both long and short positions. The volume of 46,000 calls at this strike, which confers the right to lock in Wachovia shares at current price levels represents 2 and a half times the open interest at this strike. Bear in mind that 5 days ago, barely 2,700 contracts existed at this strike.
AAPL – Yesterday’s earnings miss and an ominous ’08 forecast battered Apple shares, down 10.9% at $138.60 this afternoon as the market continued to work out its frustrations by slicing some of the lard from its share price. With more than 918,000 options in play this afternoon, Apple was one of the most liquid option families on our platform. Heavy volume was observed in April 120 puts, which was heavily bought on volume of some 21,500 lots. The $9.65 premium today was 155% more expensive than it was yesterday, and reflects a slightly better than 1-in-3 chance that Apple shares will continue their decline from current levels into April. A buyer of this position needs a test of $110 before generating a profit – another 13% off current levels. Interestingly, the densest positions in Apple options according to total open interest are these defensive April puts, notably these at strikes of 135 and 125, both profoundly out-of-the-money until quite recently. Front-month activity showed fresh action in February 140 calls, which traded to buyers and sellers at nearly 2 times the open interest.
XLF – Financial Select Sector SPDR – A wave of bargain hunters sent financial issues tearing up the carpet today, with even the likes of Citigroup basking in a 6.3% gain (more on that below). Shares in the financial sector ETF are 3% higher at $26.86. With 537,000 options trading as of 2pm, we observed calls and puts traded with more or less equal aplomb. Early action showed profit-taking in February calls – possibly an extension of the “sell rallies” mantra – on huge volumes going through in February calls. Calls at the February 29 strike traded more than 50,000 times this morning, as traders pocketed the 44-cent premium on the position to play against the 1-in-4 chance that the XLF can pull above 29 by February’s expiration. Calls at the 27 and 28 strikes also sold heavily to the bid. Heavy traffic also appeared in June puts at strikes 24, 27 and 30, which also sold off heavily.
C – While call sellers found their carpe diem moment in the XLF, market ne’er-do-well Citigroup eked out an 8% gain to $26.45, and with nearly 300,000 options trading, did manage to attract a contingent of call buyers. This occurred in the February contract at strikes of 25 and 27.50. Open interest at that lower strike has swelled in recent sessions, from 6,770 contracts just 5 days ago, increasing more than 7-fold to 52,000 positions. Implied volatility in Citigroup shares, meanwhile, has pulled back appreciably, and at 51% shows option traders actually expecting about 9% less turmoil from Citi shares than they have already weathered.
MER – Shares in Merrill Lynch have recovered to pre-earnings levels and then some… gaining 6.7% on the session to $58.06. The gain in its share price follows a steeplechase week for Merrill that saw an 8% drop on back of its outsized writedown and swift rebound on weird rumors pairing it with JPMorgan Chase in a possible takeover scenario. With more than 75,000 options trading, Merrill Lynch is one of the most active tickers on our platform this morning, with options trading 1.3 times as often to puts as to calls. A look at implied volatility shows the same gap below the historic reading that we outlined in Citigroup, with option prices currently reflecting a market expecting about 14% less volatility from the likes of Merrill than it has already shown. This lower volatility environment makes it cheaper to buy volatility outright for those who believe that Merrill Lynch still has a trick or two in store before the February option period is through. Call buying at the February 55 strike, combined with buying in the same month’s puts at strikes of 55 and 50 would support that view. The 55 straddle, for example, costs $5.90, or 10% of the current share price, and would generate profit for the buyer in the event of a break above $60.90 or below $49.10.
IYR – This morning’s Merrill Lynch forecast of a further 25-30% decline in U.S. house prices over the next 3 years didn’t seem to dent immediate sentiment in the iShares Dow Jones U.S. Real Estate index. This ETF, whose components include shopping mall giant Simon Property Group, commercial real estate manager Vornado Realty Trust, apartment rentals company Equity Residential, and Host Hotels and Resorts, gained 6% this afternoon to close at $64.85. With some 50,000 active options representing roughly 1 of every 5 open positions in play, the IYR rates among the top-25 most actively traded option families on our platform. Traders appeared to seek fresh short positions in February calls at strikes 65 and 66. Given the tendency to sell puts in the same contract at strikes of 54, 58, 59 and 60, we may surmise that some of the volume may indicate strangle selling, in anticipation of rangebound near-term price action in a stock that has traded as low as $56.80 and as high as $94.97 over the past 52 weeks.
WLP – WellPoint Inc. – Options in WellPoint, the health care benefits provider for some 34 million Americans, traded nearly 4 times the average volume this afternoon. Shares fell 3.7% to $75.78, after the company reported a 7.2% rise in Q4 net earnings that still fell short of street estimates, and downscaled its year-end revenue and subscription guidance for ’08. Interestingly, WellPoint posted its standing 52-week high of $90 barely 2 weeks ago, but is now trading just $2.41 above its 52-week low. Perhaps sensing that the company is in some sense oversold, traders today appeared to sell puts at the February 75 strike, taking advantage of the 70% increase in premiums, while calls at the 80 strike have been mostly bought for a quarter apiece. Open interest heading into this earnings announcement was largely defensive, however, with more than twice as many open put positions as calls.
CCK – Crown Holdings Inc – Shares in the soda-pop can maker reversed early declines, having set a fresh 52-week low early in the session but closing 2.3% higher at $21.85. Earlier today we observed option traders seek quick protection from further declines, as evidenced by fresh buying in February 20 puts. This position, which at $1 is 66% more expensive than it was yesterday, generates profit for the buyer once shares dip below $19. Implied volatility at 55.3% is sharply elevated above the 37.1% historic reading, and shows traders looking for nearly 50% more turmoil from its share price than it has documented historically.
