Today’s tickers: VIX, STT, VRSN, BAC, XLF, LEH, YHOO, EBAY, S, HOT
VIX– Stocks were trading mostly higher by mid-afternoon on Wednesday, sloughing off news of a possible Moody’s downgrade of bond insurers – a revelation that would have devastated the market just a couple of months ago. But composite S&P volatility as measured in the CBOE Volatility Index remained stubbornly above the 20% mark at 20.80 on today’s intimated Moody’s downgrade of bond insurers, conjecture about capital-raising strategies in play at Lehman Brothers, and ahead of brokerage earnings later in the month: all events with the potential to shake shares about the shoulders, as it were. While VIX option traders – essentially buying and selling the volatility of S&P volatility – appeared content to take profit in June 22.50 calls, the spate of call-buying we observed in July VIX calls at strikes of 20 and above (in fact, more than a quarter of today’s VIX volume lay in July calls at strikes 20 and above, most of which have been bought) suggests decent odds for a stay above 20 in the contract coinciding with the brokerage earnings reports. Equally interesting is whether option traders are positioning for a pullback in volatility after a “last stand” of summer, and to that end we are looking at call spread activity in the September contract between strikes 22.50 and 30. This 2,000 lot position was entered at a debit – meaning that the trader is bullish on VIX volatility against current levels heading into the fall – with the 22.50’s trading for $3.40 and the 30’s trading for $1.10. The trader absorbs this debit in a wager on the VIX remaining at least above 24.80, but not above 30, heading into September – a strategy that seems possible if the defensive trades we observed in, say, Bank of America, bear fruit.
VRSN – Shares in VeriSign, the network infrastructure company that offers not just its trademark security services but also operates the .com and .net internet domains, set a new 52-week high today with a near-6% gain to $42.22. The company was the subject of a raised price target (from $45 to $50) by Stifel Nicolaus, barely a month after reporting an $18.6 million Q1 loss but reporting sales that beat analyst estimates. Implied volatility on all VeriSign options rose 10% to 35.7%, making it one of the day’s top volatility gainers. Meanwhile, the increase in option volume to 14 times the normal level may be the result of traders who chose to sell VeriSign short at this elevated level, safeguarding the move against continued upside by putting on a 23,000-lot bear collar between strikes 40 and 45. In this case, the trader would have written the 40-strike puts for $1.05 per contract, more than covering the expense of long calls at the 45 strike at 95 cents apiece.
STT– Options in State Street, the provider of financial services to institutional investors, are attracting nearly 8 times the normal level of attention from option traders as shares pulled back .88% to $70.73 Earlier activity in its options appeared tied to State Street’s announcement of the pricing of a $2.5 billion offering of common stock at $70 per share. Since that time, reports have surfaced that the company has been upgraded to “buy” by a tier one firm, which may explain the proclivity among traders this afternoon to buy at-the-money front-month calls, and sell at-the-money puts.
BAC– This afternoon’s 2% decline to $31.97 had shares of Bank of America matching its 52-week low – the move lower follows revelations in a Merrill Lynch note that the next head of the credit hydra will hit Bank of America on its vulnerability to consumer and mortgage loans, exacerbated by the pain of a massive write-down on its acquisition of mortgage lender Countrywide. With implied volatility at 39% showing option traders pricing in more than a third additional price risk to Bank of America shares over the coming 30 days, the 149,000-strong option volume showed a surprising privilege to calls. While the buying interest in June 35 calls we observed this morning may be the upshot of traders looking to protect short positions in the underlying stock, the two-way traffic in low strike calls suggests traders playing both sides of the short-term outlook. Puts at the 27.50 strike were sold for 27.50, while puts at the 30 strike traded to buyers and sellers. August 30 puts, conveying the right to sell Bank of America shares for $30 by August 15, were bought on a volume of some 11,650 lots – more than 10% of today’s active volume – and with a 44% implied volatility reading (appreciably higher than the composite implied volatility reading for all Bank of America options), the demand for this strike is a telling commentary on the defensive mood on Bank of America’s late-summer outlook.
XLF– The financial sector ETF showed remarkable resilience today, closing .78%% lower at $24.12 despite having traded higher for much of the early session. The 458,000 active contracts as of this writing are biased to calls by a factor of 1.3. Heavy volume was centered in the front month, with contracts trading to buyers and sellers at the 25 calls, the 27 calls selling mostly to the bid, and the 24 puts being bought heavily. Determining the directionality of these trades is difficult at present dispatch – what’s possible is that traders are deploying call spreads at the 25/27 strikes, or using the long 24-strike puts and short 27-strike calls in collars to protect underlying share price positions. While both of these strategies are hallmarks of cautious traders, neither is nakedly bearish. Calls have been freshly bought at the July 30 strike, while heavy call buying in the October contract contrasts with put buying at strikes as low as 20 and 22 as traders take opposing views on the fabled autumnal volatility.
LEH – Lehman closed 2.3% higher at $31.30 today, paring earlier gains, after yesterday’s rout for shares, as media outlets weigh in on the brokerage’s likely course of action, from equity capital raising efforts abroad, to – as the Wall Street Journal suggested this morning – an actual sale of the company, possibly even to a private equity company. While it’s shrunk back a bit from yesterday’s angriest elevations, with implied volatility on all Lehman options ticking in at 108%, we can deduce that the option market is pricing in about three-fourths more price risk over the next month than it has shown historically – this echoing the sentiment of an early-morning spike in the price of Lehman credit default swaps. With twice as many puts trading as calls on a volume of more than 365,000 lots, it is instinctual to consider today’s early trading defensive, but it must be stated that a brisk two-way trade is occurring in many of these lower put strikes, notably the June 17.50’s and 20’s. Early buying and selling at the June 25 and 30 put strikes suggested spread activity occurring here.
YHOO– – Shares in Yahoo closed 2.8% higher at $26.88 on news appearing in today’s Wall Street Journal that Carl Icahn’s disdain for Yahoo’s response to a scuttled bid by Microsoft goes straight to the top, and that the activist shareholder is angling for the ejection of co-founder Jerry Yang – a move he considers essential to drawing Microsoft back to the bargaining table. With more than 193,000 options trading in the first 2 hours of the market, Yahoo is one of the most active tickers on our platform, where in addition to perky volume in June calls, we observed a trader roll a 10,000-lot position from the July 25 put strike to the same strike in October, where heavy volumes also are being observed in calls at strikes 27.50, 30 and 32.50.
EBAY– Shares in eBay are up 1.8% to $29.81 despite news of a conviction in a precedent-setting French court case involving the sale of counterfeit goods. According to French news agency AFP, the French court ordered eBay to pay a lightweight $20,000 in damages to luxury bag maker Hermes. With implied volatility in eBay options at 35% still elevated above the 31% historic reading on the share price, it appears that a trader may have taken advantage of the disparity between implied and historic volatility to sell the July 30 straddle, taking in $3.12 in premium per contract – no mean sum on a 22,000-lot position – on an expectation of minimal share price action over the next 6 weeks.
S– Shares in Sprint are showing flattish price action, down 1.4% at $9.25, with some interesting call spread activity in the August contract sending overall volume to 4 times the normal level. It appears that a trader entered an 11,000-lot call spread between strikes 9 and 10, buying the 9’s for $1.20 and offsetting the cost in part via the sale of 10-strike calls for 75 cents, implying a narrow range for Sprint shares around current share price levels. For some reason the trader in this case opted to take a 45-cent debit rather than sell an at-the-money straddle or strangle.
HOT-Shares closed 3.5% higher at $47.87 this afternoon, and a 4-fold increase in option trading volume accompanied by an 11.7% spike in implied volatility suggests that takeover rumors involving the hospitality chain may have resurfaced. While calls outmoved puts by more than 6 to 1, the heavy buying and selling of 50-strike calls on volume 3 times the open interest suggests a measure of cynicism among traders who’ve seen this kind of pop and fizzle before. Volume at the June 55 strike has traded mostly to buyers, however, and with the equivalent of some 15% of its open interest seeing regular action today, Starwood is a trader’s destination today.
