Today’s tickers: VIX, GM, SNDK, MF, HRB, WB, XRT, MER, C, PMCS, NRG
VIX– Today’s close in the Dow Jones Industrials south of 12,000 (for the first time since the troubles of March 17) was ascribed to a welter of factors – high oil prices, a wan demand outlook for tech stocks, and hemorrhaging losses for financial stocks. The CBOE Volatility Index, which tends to move inversely to the reading on the S&P, returned to the 23 level for the first time since last Thursday. While today’s intraday movement in the index was modest, we observed that VIX has traded at an average of 20.67 over the past month, against which it is useful to consider the considerable selling pressure we observed in put contracts conveying the right to sell VIX at 20 over the next month. The volume at this strike (33,529 lots) added up to 80% of the open interest already in place here, and whether traders were simply closing out long positions or cynically taking in the 50-cent premium on speculative selling, taken in combination with heavy call-buying at July strikes of 25 and up to 30, the upshot is that traders are confident that this return to the mid-20’s will persist into July and beyond as this vortex of equity-bearish factors continues to swirl. Buying in 30-strike calls was also observed in the August contract, at $1 per shake
GM– Shares in General Motors continued their downward trek after S&P announced that all big-three automakers were being placed on CreditWatch with negative implications, amid challenging headwinds for the auto industry. Shares closed nearly 6% lower at $13.92, distancing itself further from the 52-week low. Implied volatility on all GM options jagged more than 31% higher to 91%, the option market pricing in 84% additional price risk over the next 30 days than has already been charted in the stock. With more than twice as many puts trading as calls this afternoon, the defensive mien among traders was obvious, and the overweight of bearish bets is one we’ve been following throughout the week. What we did see, however, were some bold souls going against the grain in the September contract by deploying spread plays that would seem to defy the prevailing bearish view for the auto industry. It looks like a credit spread play involving 15,300 lots was used in the September puts between strikes 15 and 17.50, with a trader selling the higher strike puts for $4.30 against the purchase of the lower strike for $2.65. The resulting $1.70 credit represents the maximum possible profit on a spread that the trader hopes will narrow with a rise in price. Similarly, we noted what appeared to be long call spreads between strikes 15 and 20 in September, with traders buying the lower strike calls for $1.68 and selling the 20 strike calls for 47 cents. The strike prices implicated in these spreads still represent less than half the value of GM at their 52-week high, but do suggest some traders betting on stabilization come fall.
SNDK– Shares in SanDisk, the maker of flash memory products, reacted violently to a Citigroup downgrade of the stock in anticipation of “demand erosion” in key markets in Asia and Europe. Shares closed 7.8% lower at $21.62, rounding off a week that saw giddy call volume in the company’s options, and we continued to see runaway volumes on the call side despite this leg lower for the stock. The equivalent of almost all the open interest at the July 25 strike was in play today, with more contracts bought than sold, though this was tempered by long interest in July puts, especially at strikes 20 and 22.50. But the outlook for year’s end for SanDisk appears considerably more bearish. At least one trader opted to use out-of-the-money calls in a spread expressing a dour outlook for the stock. This occurred in the January ’09 contract, where about 8,000 lots were sold at the January 30 line for 1.24 while a similar amount were bought at the 42.50 line for 30 cents apiece. The resulting 94-cent credit would be money in the bank for a trader if SanDisk shares failed to trade above $30 by January, rendering both contracts worthless. Further buying interest involving 5,000 lots at the January 25 put-line for $5.80 hammered home the notion that some traders are simply not confident that the upside is going to materialize for SanDisk over the next 6-7 months, and putting their money behind Citi’s case.
MF– Options in the country’s largest futures and options broker, MF Global, saw a 30% spike in implied volatility today amid yet another ruinous selloff for its shares, down almost 20% to $6.90. With the reading now in at 158%, option traders clearly feel these are choppy waters for the brokerage, with more than a third added price risk to its shares over the next 30 days. This latest turbulence came after the company priced a pair of $150 million debt offerings, but after a cut in its price target by analysts at Deutsche Bank and still reeling from Wednesday’s Q1 credit warning. A relative balance was seen in the trading of calls and puts this afternoon, with a brisk two-way traffic in June 7.50 calls in excess of open interest suggesting speculative wagers on a close above or below that level in the final hours of the June contract. The activity in the July contract looks extremely pessimistic, with what looks like credit call spreads occurring at strikes 7.50 and 10 – traders selling the 7.50 strike for 95 cents and buying the higher strike for 35 cents to take a quick 60-cent credit in hopes of both contracts expiring worthless. Heavy buying, on the other hand, was observed at the July 5.00 put line at 50 cents per contract.
HRB– Option traders may be positioning for a break below $20 in tax prep and financial advisory giant H&R Block for the first time since March when it reports earnings on June 30, if not before. Shares in H&R Block dove 10% to $20.75, but the company is still trading at the positive end of its $7 52-week-range. On the options front, contracts to buy and sell H&R Block shares at determined strike prices traded at nearly 14 times the daily average. Implied volatility on all H&R Block options gained 50% – more than any other company on our platform today and now ticks in at 59.8% – a 3-month high. Today’s volume was heavily concentrated in July 20 puts, which were bought heavily at 30 cents per contract early in the session as traders bid up the price some 450% over yesterday’s price levels to $1.10 by day’s end. H&R Block shares are up 22% for the year date, delivering largely static returns over the past 52 weeks.
WB– This morning’s characterization (by a Merrill Lynch analyst) of the mood vis-à-vis regional banks as “capitulatory” elicited a response consistent with what has been seen in the sector over the past week or so – namely, it wobbled the highest head on the totem-pole, super-regional bank Wachovia. Shares deteriorated another 1.5% to $17.50 in afternoon trading, with some 128,000 options in play making it a popular destination for option traders. Similar volume in the 7,000-lot range was observed in the July contract at put strikes 15, 20 and 30 earlier today, leading us to suspect initially that there were put ladders going through, but a check of time and sales suggests that these trades are not related – and that volume traded to buyers and sellers at the middle strike, while buyers clung to the lower strike.
XRT– Options in the XRT, the closed-end fund that tracks S&P-listed retail stocks from Costco to Tiffany, are trading at 6 times the normal level against a 4% decline in the value of the fund to $30.84. Implied volatility on XRT options at 36.6% shows a pronounced elevation above the 29.5% historic volatility over the fund – from this disparity we can infer a general 23% added risk premium to all XRT options against the historic norm. This is being parlayed primarily through puts, which are used to express a bearish view on the sector en masse or to hedge a position in one of its components. At-the-money July 31 puts were bought in a 10,000-lot gross, it seems, for $1.30, implying a pull below $30 over the next month. Another 7,500 lots traded at the September 28 put line, but it appears that these were sold for $1.00 per contract in what would seem a gesture of confidence by a trader who doesn’t feel the current sector woes will merit a new trip below the $28.55 52-week low. .
MER– Merrill’s taking its turn in the profit-warning rumor hotseat, with its shares 4.7% worse for wear at $35.90, within a dollar of its 52-week low. Implied volatility on all Merrill options reads 75% against a 48% historic reading, and with puts outmoving calls by 6 to 1 the defensive posture is clear. Of note here was significant volume at the July 32.50 put line trading for $1.85 in seeming anticipation of near-term price declines, while the outlook for sustained downside was noted in September 32.50 put-buying at $3.30.
C– Citigroup shares declined 4.2% to $19.31, making a significant draw below the $20 line today as option traders buckled up for downside volatility – a look at implied volatility on all Citi options shows the 60% reading elevated sharply above the 41% historic gauge on the stock. Besides two-way traffic at close to the money puts and calls in the July contract, we observed a sizable 7,000 lot position opened today at the September 17.50 put line for $1.23, positioning for substantial erosion below the $17.68 52-week low by September.
PMCS– PMC Sierra Inc – Shares closed 1% lower at $8.79 as an increase in trading volume to nearly 20 times the normal daily average showed up in the November 10 puts, which traded to buyers and sellers. What’s interesting here is the fact that the sheer size of the trade amounts to nearly a quarter of the total open interest in PMC Sierra. Implied volatility at more than 54% is elevated above the 46% historic reading on the stock, and calls and puts up to today have shown a virtual even split.
NRG– On the upside minority, shares in NRG Energy Shares closed .85% lower at $43.10 this afternoon but an 9-fold increase in option trading volume showed not just the closeout of June 40 call positions, but outright buying of December 42.50 calls bought for $4.50, implying a break of the 52-week closing high set back in mid October by year’s end. Implied volatility ticks in roughly on par with the historic reading, and a look at open interest shows a slight overweight of bullish call positions, edging out the puts by a factor of 1.5.
