Today’s tickers: MFA, RCL, FRE, LEH, NLY, XLF, GE, EWH, XLP, SGR
MFA– Fever-pitch volatility spilled over into options of leading mortgage REIT’s today. While we’ve been following the action in Annaly Capital Management throughout the day, the afternoon session brought unusual volume in MFA Mortgage Investments, where the options market’s barometer of perceived risk rose more than 45% to read about 105%. This is about twice the level of historic volatility already observed in the stock. Its options are trading on volume of just over 2,100 lots, which is modest in absolute terms, but represents 20 times the normal level of activity we usually see in MFA and equals about 20% of its open interest. The activity here appears less rudely directional than it does in Annaly, and a look at the order shows buyers and sellers of July 5 calls and August 5 puts placing two-way bets on MFA’s share price direction above and below that strike over the next month. Shares in MFA Mortgage Investments currently read .34% lower at $5.92.
RCL– Elsewhere, we’re seeing unusual activity this afternoon in options of holiday cruise liner Royal Caribbean. Earlier today it was announced that the company’s managing director was leaving the company. The activity in its options appears disproportionate to that announcement, with a 16% spike in implied volatility to 72% that would suggest the options market pricing in nearly twice as much risk to Royal Caribbean shares over the next 30 days. Puts are outmoving calls by 3-to-1 – the highest level in 3 weeks – and this is showing up in fresh buying activity in July 17.50-strike puts implying a more than 18% drop in the value of the cruise liner’s shares over the next week (bear in mind that the delta on that position reflects only about an 8% probability of that coming to pass). Otherwise, much of today’s volume appears in August puts at strikes of 20 and below, in seeming pre-emptive defensive position ahead of Royal Caribbean’s July 25 earnings report.
FRE– In some sense, it seems nothing short of a small miracle to see major indices trading modestly in positive territory, given scuttle out of the financial space that on another day might spark an across-the-board panic (indeed, we feel compelled to note here that the CBOE Volatility Index, which tends to trade inversely with the S&P 500, is also trading slightly higher and remains above a reading of 25). First out of the gate were remarks from St. Louis Federal Reserve President William Poole, who dropped explicit hints of a government-sponsored bailout of mortgage financiers Fannie Mae and Freddie Mac. Shares in Fannie and Freddie predictably plummeted, with Freddie Mac shares now down 21% at $8.11, and implied volatility coming in about 21% higher at 213%. Front month option activity showed selling pressure at the July 10 line in both puts and calls, which could indicate traders selling volatility at these elevated levels – a treacherous strategy in the current news environment – and seemingly offset by two-way traffic in July 7.50 puts at the 5.00 and 7.50 strikes. Put spreaders appear to be out in force in the August contract between strikes 5 and 10.
LEH– The market also received a no-bones reminder of the extreme flammability (not to mention staying power) of negative rumors in the brokerage space. Rumors that Pimco might suspend its trading activities with Lehman Brothers finally sent implied volatility in Lehman options rocketing near March 17 levels, up as much as 61% earlier this morning. The panic was quelled somewhat after a Pimco spokesman issued a statement that the firm was continuing to trade with Lehman, but implied volatility is still 32% higher at 155%, as Lehman shares crash 14% to set a new 52-week low of $16.96. With more than twice as many puts as calls, we’ve seen prodigious two-way traffic in July puts at the 20 strike and below, as the value of these positions doubled and redoubled during the panic. About one-third of today’s active volume in Lehman Brothers options (more than 343,000 lots as of 2:15 p.m.) appeared in July puts between strikes of $5-20. Fresh positioning extended into the August contract, most glaringly at the $10 strike, which traded on volume 4 times the open interest at around $1.00 per contract (up more than 138% from yesterday’s levels).
NLY – Shares in mortgage REIT Annaly Capital Management suffered mightily after St. Louis President Poole’s comments on Fannie and Freddie, slipping 10% to $13.55 to set a fresh 52-week low. Our first indication of trouble at Annaly came in the form of a spike in its implied volatility, which is now 47% higher at 109.9% – even higher than the spikes registered in Fannie and Freddie themselves – and more than twice the historic reading on the stock. With the equivalent of more than one-third of its open interest in play today, the heavy volume is a compelling cue to the level of conviction that option traders have in the likelihood of Annaly’s share price to move significantly. While the volume of puts traded to calls shows a relatively narrow margin between the two (puts trading on slightly higher volume), it is discomfiting to note the level of abandon with which option traders are betting on further losses for Annaly even before its July 30 earnings (which correspond to the August options contract). A 7,000-lot position traded in July 12.50 puts for 85 cents apiece, in excess of open interest, and reflecting a slightly better than 1-in-4 chance of Annaly shares failing to trade above $12.50 over the next week. Two-way traffic was drawn to the August puts at the 13 strike, while we did notice a degree of buying interest in the 14-strike that may be evidence of hedges against a short position – or a wager on some post-earnings stabilization. For further confirmation of the level of pessimism in Annaly Capital Management today we point to the October 15 calls, which traded more than 13,000 times today where open interest at strikes numbered only about 1,400 lots prior to yesterday – these sold heavily to the bid in an apparent bet against Annaly returning to yesterday’s closing price by mid-October.
XLF– Given the relentless battery of bad news (and worse expectations) out of the financials today, it’s also quizzical to see shares in the Financial Select Sector SPDR hold up so admirably, despite reversing early gains to read .57% lower at $19.25. Yesterday we observed early in the session that option traders seemed to be wagering on a losing battle for the XLF with the $20 level for the remainder of the year, and that sentiment appears even more prescient today. In addition to heavy selling in July 21 calls and two-way traffic at lower-strike contracts to buy XLF shares, heavy buying activity is seen in July puts at strikes 18 and 19. August 20-strike calls, meanwhile, appear to be selling off heavily, meshing neatly with a general expectation that XLF won’t make a meaningful recovery past $20 for at least the next month.
GE– GE shares found a pittance of support after announcing the spinoff of its consumer and industrial group to shareholders. Shares are up .85% at $27.43, still only about a buck and change above the 52 week low. While the move seemed a nod to shareholders who have urged CEO Jeff Immelt to pick up the pace of divestitures of lagging-growth businesses, option traders have responded defensively to the news, which comes a day before GE’s hotly anticipated quarterly numbers. With implied volatility now sitting at a fresh 52-week high of 42.4% (comparing to a historic volatility reading of 27.9% on GE stock), we saw evidence of a 15,000-lot straddle go through at the July 27 line. This position is currently priced at $1.85, implying about a 6% move priced in to tomorrow’s numbers. Front-month put buying extended to strikes 20 and 24 in the front month, and we also registered heavy buying pressure in August 25 puts at 31 cents apiece, implying erosion below the lows in GE over the next month.
EWH– In yet another ETF play on the Asian market (yesterday we pointed to unusual spread activity in the closed-end fund indexed to Taiwanese shares), shares in the iShares MSCI Hong Kong Index are trading .86% higher at $16.38. A 4-fold increase in option trading volume to 4 times the normal level appeared in a long collar in the December contract between strikes 16 and 19. Here it looks as though the trader bought December 16 strike puts at $1.15 against the sale of 19-strike calls at 30 cents. The motive here would be to protect an underlying stock position in the ETF.
XLP– Solid retail sales numbers from discount outlets like Wal-Mart, Costco, and BJ’s Wholesale Club failed to provide much support to the Consumer Staples SPDR, which encompasses not just big-box retailers like Wal-Mart but also producers like Kraft and Altria. Shares in the closed-end fund are trading flat at $27.04. Option volume tripled however, in activity that seemed to show option traders position for declines in the consumer staples space over the next month, with the apparent sale of a 3,000-lot position in July 27 calls for 30 cents, and fresh buying on volume of more than 7,000 lots in August 27 puts at 65 cents apiece.
SGR – Shaw Group – Shares rose 8.7% to $60.15, one day after reporting a slight loss in Q3 earnings owing to its stake in Westinghouse Electric. Options are trading at 7 times the daily average level, and most of this appears in calls, first at the front-month 60 strike but extending into fresh positioning at the August 65 call strike at $1.65 per contract. Implied volatility at 49.7% still shows a slight elevation above the 46.0% historic reading.
