Today’s tickers: VIX, C, NLY, FRE, FNM, AA, EWZ, JNPR, YHOO, WB, XLF
VIX– The lowly levels of late in the CBOE Volatility Index – despite gathering economic headwinds and grinding losses for stocks – have flummoxed and frustrated many market observers, who count spikes higher in the VIX for cues to capitulatory selling in the S&P that would signify a near-term bottom for stocks. Since late March, a capitulatory spike in the VIX has not been forthcoming, and even the option activity – which is useful in tracking traders’ best guesstimates at timing such a spike – has not yielded many clues. While interest has been keen, and traders have been sitting tight, on VIX calls in the mid-20’s strikes, positioning in mid-30’s strikes has been dim in recent weeks. This afternoon’s 7.8% move higher in the VIX – bringing the composite measure of volatility in the S&P index above 26 for the first time since March – may finally have sparked some expectation of a substantial move higher for the index over the next week. Heavy call buying this afternoon was noted at the July 32.50 strike, a position trading for 30 cents per contract, would require another 20% upside in the volatility reading to break even in just 8 days’ time, but switched hands more than 16,000 times this afternoon, with most demand recorded on the buy side.
C– Today’s midday reversal in stocks was attributed to very generic bearish sentiment on financials – sentiment that’s been circling the financials for months now like a black crow that occasionally swoops down to peck. And it’s pecking today. Shares of Citigroup sank 4.4% to $16.08, setting a new 52-week low as option traders positioned defensively for declines below the $15 mark over the next two work weeks. The July 15 put has traded mostly to buyers at 52 cents per contract today on volume of more than 11,000 lots, while August 15 puts have traded to the middle of the market at 96 cents. The options market is currently pricing in only about a 30% chance of that magnitude of decline by July 18, while the odds of a break below $15 before August 15 (the contract coinciding with its July 30 earnings release) are slightly better than 1-in-3.
NLY– Option implied volatility in Annaly Capital Management rose more than any other company on our platform this afternoon (surpassing even Fannie and Freddie), with a 68% rise in the perceived risk barometer to its shares, which are down nearly 9% at $14.26. Implied volatility now reads 86.5%, more than twice the 36% historic volatility in Annaly shares, and with puts outmoving calls by 4-to-1 it’s safe to conclude that option traders feel this risk lies principally to the downside. July puts at strikes of 15 and as low as 12.50 are being bought heavily this afternoon on no specific news catalyst. Annaly Capital Management shares have traded as low as $10.52 over the past 52 weeks.
FRE, FNM– Shares in Fannie Mae and Freddie Mac dove 17.4% and 19.7% (to read $15.51 and $11.69, respectively), crashing below their 52-week lows, after Fannie announced the issuance of $3 billion in two-year notes and Freddie confirmed that it had sold $2 billion in three-month reference bills. Implied volatility in both tickers skyrocketed, with Fannie Mae’s measure of perceived price risk up 48% to 147.8% – making it one of the day’s top volatility gainers. Freddie Mac bested even this dubious achievement with a 50% rise in implied volatility to 166.4%. Front month puts were bought heavily in both companies, with traders favoring Fannie Mae’s July 18 puts at 95 cents per contract, while the July 12.50 and August 15 puts in Freddie were also heavily bought. A 2,200-lot put spread in Fannie Mae’s September series showed a trader pinned to the 10 and 17.50 strikes, and while the order flow cannot be established given that both sides traded to the middle of the market, a bearish trader would initiate the trade with a $2.25 debit that first breaks even with a decline below $15.25, while a more optimistic soul would take the $2.25 spread as a credit in hopes that Fannie Mae can recover at least to within a dollar or so of its previous 52-week low.
AA– With Alcoa on deck to report earnings tomorrow, becoming the first Dow component to unmask its quarterly numbers, shares are holding on to a .40% gain to $32.91 (seriously parsing earlier gains). Aluminum prices hit a record in London trading earlier today, a move attributed to a production halt in China due to power shortages – power shortages being a pricey x-factor that has historically kept production costs high for Alcoa. According to a Bloomberg article out today, energy costs swallow up some 30-40 % of the cost of producing aluminum. While a look at the price of the closest-to-the-money straddle today shows option traders currently pricing in a potential $3.18 move on back of the numbers – that’s 9% of the current share price – a look at today’s order flow shows relatively more calls being sold at the July 35 line and relatively more being bought at the 37.50 line. The same tendency extended to these strikes in the August 35 and 37.50 strikes – which may suggest short calls spreads going through as traders position for share price declines. Put-buying at the July 30 strike certainly speaks to the earnings shortfall/long volatility scenario.
EWZ– You’ve probably heard of the “running of the bulls” in Pamplona – in a similar vein, current sentiment would suggest that most of the bulls have been run out of America. Where’ve they gone? Brazil, it seems – with the BRIC complex, and Brazil in particular, drawing guarded kudos from some analysts as a pocket of strength in a challenging global market, due to the fact that what inflationary pressures it has are being driven by economic strength. Shares in the iShares MSCI Brazil Index, ETF indexed to Brazilian stocks reversed early gains to read 1.8% lower at $81.65 today as volume in excess of 59,000 options qualified the fund for our scan of top-50 most actively traded options. Notable here was a 5,500-lot put spread that a trader opened at the July 80 and 85 strikes, selling the higher strike and buying the lower in a short strategy that allows the trader to bet on further upside between now and July 18 while taking in a $2 credit concurrently. This $2 premium represents the maximum realizable profit if shares in the EWZ trade above $85, leaving both put options to expire worthless.
JNPR– Shares in Juniper Networks held on to a .44% gain to $23.30 today after analysts at Piper Jaffray upgraded their recommendation on the stock from “neutral” to “buy.” While the move lent vivacity to Juniper’s options – its more than 31,000 active lots qualified the company for our scan of top-50 most active option families earlier today – a breakdown of the volume shows a not-insignificant measure of ambivalence to the trading. Out-of-the-money puts at the July 20 sold mostly to the bid for a measly nickel apiece, possibly representing traders closing out those positions in anticipation of stable price action over the next few weeks. But fresh buying in the August 21 puts at 54 cents apiece suggests a degree of defensiveness heading into Juniper’s earnings on July 24. Shares in the company, which makes firewall security systems to protect against computer malware like Trojans and viruses, have declined nearly 12% over the past month, double the underperformance of the S&P information technology index, of which it is a component.
YHOO– Shares in Yahoo! gained 10% to $23.51 on news out of this morning’s Wall Street Journal that Carl Icahn and Steve Ballmer are holding reciprocal talks on the future of Yahoo; Icahn venturing so far as to state that a Microsoft takeover of the search engine company is still possible if the current board is dumped. Meanwhile, Yahoo calls traded out the wazoo, with bullish call positions trading at more than twice the volume of puts, principally at the July 25 strike, where more than a fifth of the morning volume is situated, this position gaining 146% in value from Thursday. Bullish interest has extended to the 27.50 call strike, where the 20-cent premium reflects only about a 13% likelihood of it landing profitably by July 18. Implied volatility at 69.2% compares to a historic reading of 57% on Yahoo stock.
WB– The slow grind lower for Wachovia continues today with a 8% decline to $13.65. With more than 122,000 options in play it qualified for our scan of early market movers, and a breakdown of the action earlier today showed some evidence of straddle selling at the July 15 line – possibly evidence of traders looking to play against Wachovia’s extremely elevated 108% implied volatility and its invigorative effect on option premiums. Further evidence, however, of waning confidence in its ability to hold current support levels was seen in put buying at the July 10 and 12.50 strikes. Overall open interest shows puts and calls evenly split.
XLF – After trading flat for most of the morning, the Financial Select Sector SPDR succumbed to doldrums in the sector to read 4% lower at $19.17, setting a new and ignominious 52-week low. With nearly 550,000 options trading late in the session, we’re seeing a slight privilege to calls by a factor of 1.3. This morning we noted that front-month order flow seemed to indicate call spread activity between the July 21 and 22 strikes, with traders buying more of the lower strike and selling more of the higher. While August 21 calls sold to the bid, we also noted what appeared to be a 10,000-lot straddle sell at the August 22 line. If our read of time and sales is accurate, the trader would have taken in a $2.85 premium on the position, representing the maximum profit achievable provided that XLF shares close at $22 by August 15 – a 10% upside move from current levels.
