Today’s tickers: VIX, MEOH, WSH, CORS, LEH, WM, XLF, CCRT, ETFC, BDK, GGP, XLNX
VIX– Declines in the tech and financial sectors bridled hopes of a very meaningful recovery in stocks today (despite a modest close higher), keeping the composite measure of implied volatility in the S&P 500 well above the 20% line to read 23.12 by day’s end. Late last week we noticed a strong current of VIX call buyers positioning for further turbulence in the S&P in June and July via call options near the 30-line. With today’s revelations out of Lehman Brothers keeping financials tethered to the downside and the spread of losses to other consumer-exposed sectors, traders have extended their volatility-bullish outlook by trading heavily calls at the August 27.50 strike on a volume 3 times the open interest. These contracts, which switched hands 16,000 times, commanded premiums of $1.50 per contract – a price reflecting about a 40% chance of VIX closing above 27.50 by August 19.
MEOH– With markets awash in red for much of the day, shares in Methanex, the world’s largest supplier of the petrochemical methanol, were conspicuous for gains. With shares up 3.4% to $29.52, it appears as though Methanex is making its fifth pass at the $30 line since last Halloween. It should be noted that while serious tests of the $30 line were observed around Halloween time, again in December, again in March, and again on Friday, it only managed to penetrate above the $30 line on that first occasion. Against that backdrop it’s particularly interesting to contemplate today’s 27-fold increase in option trading volume, as it occurs almost entirely in calls at the July 30 strike, extending into the October contract at the 35 strike line. Because all of this volume has traded to the middle of the market, it’s hard to tell whether this is a trader brazenly playing against the likelihood of a break of $30 for the wood alcohol maker by selling calls, a shareholder looking to enhance yield on an existing stock position by doing the same, or a bullish investor seeking long exposure to share price gains by buying these calls. Methanex shares have shown an almost unmitigated uptrend over the past 5 years, handily outperforming the Nasdaq Industrial Index by some 25 percentage points over the past year.
WSH– Shares in Willis Group Holdings Limited declined 6% to $33.72 after the London-based risk management and insurance intermediary announced a bid to buy sector peer Hilb Rogal & Hobbs in a transaction expected to double the company’s North American earnings. The deal, which effectively creates a newly merged entity known as Willis HRH, was billed on the company’s website as the largest insurance brokerage industry deal in a decade. What we observed on the options front was a surge in volume to some 141 times the normal level of activity usually observed in this sleeper of a ticker, with buying interest in October 30 puts, and selling interest in October 40 calls on disparate volumes that may suggest some long collars being deployed by traders eager to protect long positions in the stock. Willis Group has traded as high as $45 over the past 52 weeks.
CORS– Is decisive movement in the cards for Corus? Implied volatility in commercial real estate lender Corus Bankshares staged an unsettling 19% spike today to read 115.8% – an indication that risk perception as measured in options prices portends more than one-third additional risk over the next 30 days than Corus has shown historically. Shares today closed flat at $5.00, still lingering right around the 52-week low of $4.95 they’ve been circling for the past month. The decline in Corus over the past year has been virtually uninterrupted since topping out at $16.95 last June, and it is worth noting here that a look at short interest in Corus shares shows some 77% of its float is held by short sellers. Today’s active option volume, which adds up to 10 times the normal level of activity seen in this ticker, is observed on either side of the June $10 line, where a 4,250-lot position traded to the middle of the market on both sides, with the calls trading for 5 cents and the puts trading for $5.00.
LEH– Lehman Brothers’ announcement this morning of a $2.8 billion forecasted Q2 loss, together with plans to raise $6 billion in a stock offering, put the market in a mood of reflection on the pressures that continue to plague brokers moving from “mark-to-model” to “mark-to-market” and now, it seems, “mark-to-monstrosity” valuations of troubled assets. Lehman shares closed 8.7% at $29.47 today, and implied volatility shrank by more than 17% in afternoon action. With puts outmoving calls by a factor of 1.5, option traders continue to position defensively in Lehman Brothers, particularly in out-of-the-money July puts. It should be noted that while that month’s 17.50 put strike found buyers on a volume of some 11,000, volume at higher-strike puts from 20 to 30 were mostly sold.
WM– Washington Mutual succumbed to a new 52-week low today, extending Friday’s battery of losses that were widely attributed to bearish jobs data and fears of a more protracted U.S. recession. Today, analysts at UBS forecast $22 billion in mortgage-related losses on the way – well in excess of the $12-19 billion that WaMu has already guided – further undermining the market’s confidence in WaMu’s ability to pull itself from the tar. What’s astonishing here is the extreme elevation in implied volatility, which at 155% is more than twice the historic reading on the stock and the highest level seen in Washington Mutual since the keyed-up days of mid-March. Besides heavy volume in June puts at strikes of 5 and 7, we were interested to see a glut of buying interest in out-of-the-money calls at the July 12.50 strike for 10 cents – a position currently pricing in a 1% chance of landing profitably. It’s possible that this volume represents closing purchases of calls written previously. Some may also be trading long in concert with July 10 puts, which were bought heavily for $2.84. A buyer of this strike is positioning long of volatility in the July contract, looking for a sustained break below $7.06, or a pop higher past $15.44. Washington Mutual shares closed 17% lower at $6.25.
XLF– Shares in the Financial Select Sector SPDR, which tracks the money-center banks, were down 1.3% at $23.03 at day’s end, with more than 706,000 options trading twice as often to puts as to calls in concert with the market’s aggrieved mood on the financial space. A jaw-dropping 188,000 lots traded at the June 24 put line – more than a quarter of the total volume in the XLF – trading mostly to sellers at $1.19, a slight discount from Frida’s levels. Calls at the June 25 strike level attracted buyers at 17 cents apiece. Elsewhere, traders appeared keen to position in September puts at the 21 and 25 strikes, though on disparate volumes.
CCRT– Option activity in CompuCredit corp tapped our “Hot by Options Volume” with a boost in activity to 6 times the normal level. This occurred against a 3.5% decline in the value of the underlying to $8.76. Shares in CompuCredit have had a spectacularly drawn-out plummet over the past 52 weeks, down from the $36 level in June 2007. The company, which originates and purchases credit products for consumer segments traditionally “underserved” by traditional banking, including fee-based life insurance and card registration, is thought to be “partially vulnerable” (as an Associated Press story put it last week) to payday loan legislation, besides its unusually risky exposure to subprime client segments. The option activity here looks indicative of synthetic short activity, with traders selling June 10 calls for 5 cents per contract, and buying puts at the same strike for $1.05, creating a $1 debit on the transaction that breaks even at $9.00.
ETFC – Shares in E*Trade lost 4.5% in Monday’s session to close at $3.80. The company is still clearly reeling from last November’s 59% drop in value following heavy writedowns on an asset-based securities portfolio and concerns about its solvency. Not to mention its 52-week high of $25.21, E*Trade has failed to make a serious pass at even the $5 mark since February of this year. What caught our attention this morning was a 21% spike in implied volatility to 76.7% which shows the options market pricing in some 65% additional price risk to E*Trade shares over the next 30 days than has already been demonstrated by this eminently storied ticker. This appears to follow no particular news catalyst – particularly striking given that its earnings are first scheduled for release on July 25, fully a week after the expiration of the July options contract, where most of today’s volume in E*Trade is situated at the $4 put line, trading mostly to sellers at 45 cents apiece.
XLNX– Options in Xilinx traded at 5 times the normal level in afternoon trading against a .15% decline in its share price to $27.25. Volume was concentrated heavily in July calls at the 27.50 and 30 strikes, with the latter strike switching hands more than 14,000 times – representing virtually all of the open interest at that strike. Implied volatility at 38% shows option traders pricing in 25% more price risk than is already charted in the stock.
BDK-Shares in hammered-down power tool maker Black & Decker also set a fresh 52-week low today with a 1.7% decline to $61.04. The development follows no particular news catalyst within the company, which is more than $35 off its 52-week high, and has lost 12.6% of its value for the year to date. A drilldown of the volume shows option traders deploying put spreads in the August contract, possibly in advance of Black & Decker’s July 24 earnings report. Puts at the 60 strike sold for $3.10 while contracts at the 65 strike traded to the middle of the market for $6.00 in what looks like a spread involving a $2.90 debit that breaks even for the trader with shares at $62.10, but apparently doesn’t portend further declines below the $60 line, given the short put position at that strike. The volume here was enough to represent a 6-fold increase from the normal level usually seen in Black & Decker.
GGP– General Growth Properties – A 3% decline to $38.55 for this real estate investment trust, which is the second-larger owner of regional shopping mall properties in America, coincided with option trading volume of nearly 12 times the normal level. This appeared mostly in put activity, with traders gravitating to June 45 puts for $5.05, and then entering put spreads in the October contract between strikes 30 and 40. Both ends traded to the middle of the market, the lower strike for $1.23 and the higher strike for $4.87, making directionality difficult to ascertain, though it should be noted that the chips have been stacked bearishly in General Growth Properties for some time, as evidenced by the skew toward puts by a factor of 2.5 in overall open interest. Implied volatility at 44.2% shows a marked elevation above the 34% historic reading. Late last week the company’s management confirmed that it is working on two debt financing deals to make good on obligations that come due this year and next.
