Today’s tickers: EMC, XLE, USO, GS, WB, C, CROX, LOGI
EMC– News of the departure of VMW founder and CEO Diane Greene and a sharp cutback in its year-end sales guidance had a predictably awful effect on VMWare (whose shares paid a 25% penalty to $40, crashing through the 52 week low, and implied volatility spiraled by a nearly identical percentage rise). But it was downright deleterious for VMWare’s parent company, EMC Corp, where the perceived risk measure rose 28.9% to 51.2% -a six-month high. Compared to the 30% volatility shown by EMC shares in the past, we can conclude that the news out of VMWare has led option traders to ascribe about 61% additional price risk to EMC Corp shares over the next 30 days, with a pronounced bias to the downside. Even with its earnings report scheduled for July 23 (coinciding with the August options contract), we observed traders sell out of July 15 calls, the value of which have plummeted 86% to just 7 cents today. Fresh put buying at the August 13 and 14 strikes suggest further declines past these newest lows in the aftermath of earnings. Evidence of stability in EMC Corp’s share price surfaced further out in the option calendar, notably in January calls, where calls at strikes 12.50 and 15 were heavily bought on the offer.
XLE– An early-session pullback in crude oil futures and confident forecast by oil investor Boone Pickens that lower demand for oil will bring prices back to the $100 level over the next 2 years led to a degree of froth being blown from the top of the Energy Select Sector SPDR. Shares are 2% lower at $81.08 and the fact that puts are outmoving calls by nearly 3 to 1 indicates a defensive drift in the market today. One notable trade here involved a 3,200 lot put spread in the July 18 contract, with a trader buying 85 strike puts at $4.05 and concomitantly selling 80 strike puts at $1.40 for a position that first breaks even for the trader at $82.35, but sharply limits any substantial near-term downside.
USO– For further confirmation of the pullback thesis in the options market, we took at look at action in the US Oil Fund. Shares in the fund responded to the paring of oil futures with a 4% decline to $110.37. With about 100,000 options in play by the noon hour it qualified for our scan of top-50 most active option families with heavy buying in July puts at strikes 104 and 105. If these trades are involved in credit spreads with puts at strikes 107, 110 and 115 (where most of the volume was sold to the bid), it would imply residual firmness in oil prices for the remainder of the July contract, but the overwhelming preponderance of puts traded relative to calls (contracts to sell the fund are outmoving contracts to buy it by a factor of 3.5) tells us that the mood today favors protection against further downside. Just how low will it go? Our option scanners detected heavy, fresh buying in January 80-strike puts, which traded for $4.40 today – that premium requiring a break below $75.60, or 31% below current levels.
GS – Solacing words from Fed Chairman Ben Bernanke this morning, who opened up the possibility of extending investment bank access to the discount window into 2009, failed to patch through to brokerage shares today. Shares in Goldman Sachs – long considered the least dingy of these dogs – declined 1% to $168.23. On the options front we actually registered an increase in its implied volatility of more than 14% to 46.7%, where one might impulsively expect a slight pullback in the risk barometer. With more than 71,000 options trading as of the noon hour, calls and puts are showing a relative balance, but it’s worth noting that the most actively traded Goldman options today are the August 160 puts, commanding $6.30 per contract – a position that requires Goldman shares to chip away at least another 8% over the next month or so. Option traders currently see about a 1-in-3 chance of that coming to pass.
WB– Where Bernanke wisdom failed to shake brokerage shares out of their doldrums, his promises of a clampdown in subprime and exotic mortgages at least seemed to stanch some of the bloodletting from the now-anemic shares of Wachovia . Shares rose 3.1% to $14.32 as of the noon hour, and with more than 72,500 options trading, Wachovia is among the top volume movers on our platform. Significantly, this has been due mainly to the 36,000-strong volume in July 12.50 puts (representing virtually all of the open interest at this strike), which is selling off this morning, following a one-third decline in the value of the position since yesterday.
C– Citigroup shares also managed to wring a tiny advance out of Bernanke-speak, up 1% to $16.58. But a look at the 155,000-strong volume as of the 12:30 hour shows evidence of option traders looking for Citi shares to fight a losing battle with the $20 threshold for the remainder of the year. Earlier today we observed what looked like a 1,000-lot call spread go through in the September contract between the 12.50 and 20 strikes earlier today, a position that given current premiums would require Citi shares to trade between $16.31 and $20 to be profitable for the buyer, but it should be noted that the 20-strike calls have traded on much heavier volume, and most of this is trading through the bid. December 20-strike puts have mostly been bought.
CROX– Will Crocs finally catch a break…? Shares in the fad clog maker – which have taken a 80% in value this year alone – rose 5.6% to $7.30 today – coincidental to the fact that Republican presidential candidate John McCain is said to have stumped for Colorado-based Crocs in a campaign speech in Denver yesterday. A writeup of McCain’s speech quoted the presumptive nominee as saying, “Building barriers to Crocs or any American company’s access to foreign markets will have a devastating effect on our economy and jobs, and the prosperity of American families.” So has Crocs achieved the equivalent of a “McCain put?” Implied volatility the shoemaker Crocs rose 15.8% to 125.4% – towering over the the 57.4% historic reading in the stock – and what’s more, we observed some 25,000 lots of fresh volume bought on the offer in September 7.00 calls. Crocs reports earnings on July 25.
LOGI– Logitech – Shares in the maker of computer mouse trackballs, game controllers, keyboards and other digital miscellany are down 3.6% today at $25.18. An increase in option trading volume to 9.5 times the normal level appeared in an interesting 3,000-lot put spread in the front month, where it looks like a trader sold the upper-strike 30 puts for $4.60 against the purchase of 25-strike puts for 80 cents, taking in a $3.80 credit to wager on the spread between those strikes narrowing over the next week and a half in the event of a rebound for Logitech shares. Implied volatility on all Logitech options reads 51.5% against a historic reading of 38.6%.
