Today’s tickers: KRE, WB, M, VIX, XLF, WM, AMZN, CCE, PGB, CMG
KRE– With much of today’s selloff in the markets rooted in the regional banks, the KBW Regional Banking ETF sustained its share of downside, closing 9% lower at $23.16. Our option scanners detected a 10-fold increase in option trading volume, with traders turning to more economical put spreads as opposed to naked puts to express a defensive view. This occurred in the August and December contracts, implying a long-term bearish view on the sector, particularly in the latter spread, where a 4,000-lot position was opened between strikes 17.50 and 22.50. This appears to have been a long spread, with the trader buying the upper strike at $3.30 and selling the lower at $1.30 for a position that breaks even at $20.50 – another 12% to the downside from current levels. This compares to the 18% decline that would have been required to break even had the trader bought a 4,000-lot position at the 22.50 puts outright – deploying spreads can mitigate some of the cost burden here, especially when premiums are high due to elevated implied volatility.
WB– Shares in Wachovia shed more than 13.8% of their value to $9.95 today amid broader anxieties in the banking sector and conjecture about which banks, if any, might be next to collapse. Implied volatility is ticking in at more than 193% today, this against a historic reading of 98% on the underlying stock – which suggests to us that the options market is currently pricing in 96% added risk to its options over the next 30 days than Wachovia shares have shown historically. With twice as many puts trading as calls the consensus today appeared to favor vulnerability to the downside, with heavy buying pressure in August puts as low as 5.00 – the 60-cent premium on this position indicates about a 9% chance of Wachovia shares trading below $5 by August 15, but the elevated implied volatility on this position (286% on this contract versus 189% for all Wachovia options) suggests keen demand for these protective positions nonetheless.
M– In somewhat cheerier news, Macy’s shares advanced 74.5% to $16.28 on an analyst upgrade from JP Morgan Chase. This panned out in an 8-fold increase in option trading volume that showed calls trading more frequently than puts by a factor of 2.5. Traffic was most crowded in the August contract between strikes of 15 and 20, though we noted some selling interest at the upper strikes, and combined with a 3,000-lot position that sold to the bid in the November 20 calls, indicates to us that some traders may be writing covered calls to enhance yield. Calls still outnumber puts by more than 2-to-1 in Macy’s.
VIX– This weekend’s announcement by Treasury Secretary Hank Paulson of sweeping measures to instill faith (and funding) in the country’s cornerstone mortgage financers, Fannie Mae and Freddie Mac, was expected by many to un-ruffle some of the fraught mood in the financial space…at least in the short term. Reaction in the market this Monday morning has been largely dispirited – financial stocks have dragged the S&P lower, implied volatility in most financials remains well above the fever pitch of March 17, and the CBOE Volatility Index closed with a marginal 3.6% increase to 28.48. All of the above would suggest that the “stricken” mood of investors that seemed to reach crisis levels early Friday afternoon has scarcely been abated in the short-term, much less resolved for the long-term.
The market’s behavior for much of today showed that the effect of Fed backstop has been effectively discounted –yet still the financials traded lower. Earnings are on tap for most financial issues, an end to the write-downs is still to be discerned, and one fine day, the regulation of much of the U.S. financial system will have to be re-jiggered in such a way as to prevent these calamitous bleed-outs from ever happening again. One can hardly fault the market for its fatigued indifference at the prospect of more road to travel on this despicable journey.
VIX option activity earlier today showed heavy call-side volume in strikes as high as 37.50, but selling pressure in these upper strikes (without corresponding volumes in August puts that might imply the rollover of existing positions ahead of tomorrow’s expiration), coupled with buying pressure in strikes of 25 and 27.50 suggests that many traders may be using call spreads to predict VIX action remaining above 25 but stopping short of any cataclysmic move higher, even with the nervous backdrop in financials still intact.
XLF– Financial Select Sector SPDR – Despite opening higher on news of the Fannie Mae and Freddie Mac lifeline, the financial sector ETF quickly turned tail to close on a 4.6% downtick at $17.82. Implied volatility on all XLF options remains extremely elevated at 68.3% against a historic reading of 39.4% on the stock – that’s still in excess of March 17 highs. The more than 1 million options trading by day’s end showed almost twice as many puts trading as calls – earlier today we noted heavy buying pressure in July 17 and 18 strike puts, which would imply further declines for the remainder of the week.
WM– Option implied volatility in Washington Mutual rose 120% today to 310.6% – more than any other ticker on our platform today –on concerns following the collapse of IndyMac Bancorp that its own exposures may be troublesome. Compared to the 103% historic volatility reading on the stock, this implied reading suggests 3 times the price risk to Washington Mutual shares over the next month. While the sentiment surrounding WashingtonMutual is undoubtedly grim, earlier today we observed many traders are playing the volatility angle to take advantage of high-calorie front-month volatility – earlier today by selling July 5.00 calls at 9 cents apiece to bet against a recovery rally in the stock, and since by deploying calendar put spreads, selling a 25,000-lot position in July 4.00 puts for 89 cents and buying the same position in the August contract for 99 cents. In this case the trader wants to avail himself of the more rapid time decay of the July put and the likelihood that the August contract will increase in value (if Washington Mutual shares continue to suffer), so that the position can be closed at a profit.
AMZN– Amazon.com – A 2.7% decline in shares of Amazon.com to $66.65 corresponded with option trading volume of about 129,500, qualifying it earlier today for our scan of top-50 movers. This showed up in exorbitant put trading in the front month at strikes as low as 62.50, where the volume of this position has risen 205% overnight. It is useful to note that Amazon is due to report earnings on July 23, corresponding with the August options contract, but this morning’s volume seems to indicate some expectation of downside movement before that report. Implied volatility at 83% compares to a historic reading of 43% on the stock – that’s a 19% increase from Friday’s closing levels on no apparent news catalyst, and suggests nearly twice as much risk to Amazon.com shares over the next 30 days.
CCE– Shares in Coca-Cola Enterprises tracked .37% higher at $16.42 following on from an increase in option trading volume to 52 times the normal level, owing to what looked like a 25,000-lot put spread in the November contract between strikes 15 and 20. Both of these transactions were booked to the middle of the market, making directionality hard to clinch either way, but a bear would have gone long of the spread at a $3.00 debit that would first break even at $17.00, while a bull would take the $3 as a credit in anticipation of a pull above $20. Implied volatility on all Coca-Cola Enterprises options weighs in at 41.4%, comparing to a historical reading of 25.8% on the underlying stock.
PBG– Option activity in the major cola bottlers tracked together today, as shares in Pepsi Bottling Group showed a .41% gain to $26.62, and its options traded at 5.4 times the normal level. Here it looked like a trader may have rolled a 5,000 lot position in September 30 puts to the December contract at the 25 put line, showing a keen sense of timing in doing so. It looks like the 5,000-lot September position may have been opened for $2.05 back on June 16 – by cashing out at $3.70 today the trader would have realized an 80% profit per contract, which it looks like he then rolled into a new 5,000-lot position at the even lower December 25 strike for $1.75. This suggests an outlook for continued downside action – even below the $26.32 52-week low – heading into year’s end.
CMG – Finally, shares in Tex-Mex-inspired eatery Chipotle Mexican Grill have taken a beating this year – down 52% since January alone – and the extreme elevation in the implied volatility of its options (75.6% versus a historic reading of 44.4% on the stock) suggest even more turbulence to come ahead of its July 23 earnings announcement. Today, with shares closing 4.3% lower at $69.46, it looked like one trader may have picked this moment to wager on a comedown in implied volatility by week’s end by selling a 6,000-lot out-of-the-money straddle at the July 80 line for $9.10. The positioning here is well in excess of open interest on both sides, and given the risk of exercise on the July 80 put, it seems that the trader wants to capitalize on rapid time decay in this position – depleting the value of the premium sold so that the position can be closed out at a lower combined price.
