Today’s tickers: SKF, GS, KRE, X, GDX, SIL, SWY, TTWO, AUXL
SKF – News this morning Morgan Chase that it plans to write down $1.5 billion in mortgage backed assets amid “substantially deteriorated” trading conditions – coupled with an analyst downgrade of Goldman Sachs – didn’t just provide a terse lesson on the laggard performance and troubling vulnerabilities that continue to plague the financial space . It used its star pupils to deliver the lecture – namely the two institutions that up to now have seemed inured to much of the fallout. Downside continues to grip most financial stocks this afternoon, and shares in the XLF are down nearly 3% to $21.67 with puts outtrading calls by a factor of 1.4. Shares in the contrarian Ultrashort Financial Proshares fund rose 5% to $116.34 with calls outtrading puts by a factor of 1.6. The action here indicated traders positioning for a new round of upside in the contrarian fund (and downside for the financials en masse) into September, with some traders buying September 125 calls at $9.50 apiece – a premium requiring another 15% upside by September 19 just to break even.
GS – Shares in Goldman Sachs slid 3.4% to $171.87 after respected Deutsche Bank analyst Mike Mayo forecasted weaker-than-expected Q3 earnings from the longtime star pupil of the brokerage space, due to its vulnerability to slowing U.K. and Eurozone economies. The sheer geographic diversity of Goldman’s equity exposures has served as a kind of trump card for Goldman since the early days of the credit crunch, lending the brokerage luster as a kind of “artful dodger” of the worst of the carnage. But with economic woes coming home to roost across the Atlantic, Deutsche Bank’s report suggested, the gold-plated investment bank may find itself unceremoniously cut down to size. On the options front, implied volatility on all Goldman Sachs contracts has risen about 20% since Friday, suggesting a rising current of risk awareness in the market. Today, with more than 52,000 options trading, we’re seeing not just two-way traffic in August contracts as they near expiration, but a willingness to buy September puts at strikes 175 and 165 – the latter strike priced at $8.28 per contract to require another 8% drop from current levels. Today’s premiums suggest a slightly better than 1-in-3 chance of Goldman shares doing so by September 19. We’re observing very little interest in put strikes nearer the 52-week low level of $139.47, suggesting that this level remains sacred for now.
KRE – Abiding fears that yet more bank failures may be in store in the US led to the kind of defensive positioning that has become old hat for option traders in the KBW Regional Banking ETF. An increase in option trading volume in the regional banking ETF to 1.5 times the normal level appeared due to a 6,000-lot long September put spread between strikes 25 and 30. Here it appears that the trader took an 80-cent debit on the trade, suggesting that shares in the closed-end fund may trade at least as low as $29.20 but likely not lower than $25 over the next month. Shares in the ETF are down 1.8% to $34.16.
X – U.S. Steel shares are up .28% to $128.81, and it looks as though some traders are jockeying for more upside where that came from – positioning in a 2,000 bull call spread in the September contract between strikes 130 and 145 for a $6.00 debit – and possibly funding the position in part via the sale of September 115 puts at $4.85.
GDX – Market Vectors Gold Miners – Shares are up 1.2% to $34.86, as brisk option trading volume approaching 40,000 lots in the first 30 minutes of the market appeared due to call spread activity in the September contract between strikes 36 and 39. Consistent with what has been generally bullish options activity in gold mining companies despite irksome losses for the stocks in recent sessions, this looked to us like a bullish call spread, with the trader buying the 36-strike calls for $1.90 and selling the 39 strike for $1.10. Implied volatility at 55.2% is elevated above the 45.1% historic reading – suggesting additional risk for the kind of moves that could make that long spread profitable in the coming month.
SIL – Earnings from Apex Silver Mines caught option traders off guard, sending shares down more than 38% to $3.47, plunging (as can be imagined) below the standing 52-week low. Implied volatility on all Apex options more than doubled from yesterday’s levels and now at 197.3% weighs in at nearly two and a half times the historic reading on the stock – a strong indication that option traders do not feel that the full exertion of the earnings has been absorbed into the stock price. An increase in option trading volume to 13 times the normal level indicated heavy buying interest in September 2.50 puts at 30 cents apiece, a move that suggests a continued descent into the tar pits for Apex – a stock that, incidentally, hit its apex of the past 52 weeks at a price of $21.33.
SWY -Shares in supermarket chain Safeway rose 1% to $28.36, as an increase in option trading volume to more than 25 times the normal showed a trader confidently positioning long of a 24,000-lot position in September 25 strike calls at $3.50 apiece. Safeway shares hit a 52-week low back on July 17 with a precipitous drop to $25.67 after lowering its year-end sales guidance. Since then the shares have battled back $3 and the size and direction of the call-side positioning today indicates one trader confident that current levels will hold at least another month.
TTWO – –Option traders are looking for an upside breakout past the 52-week high next spring for video games maker (and parent of the “Grand Theft Auto” franchise) Take Two Interactive – sending option volume to the highest level in at least 52 weeks today. The current share price of $24.74 shows a .73% uptick from yesterday’s close, and about an 11% discount from the standing 52-week high of $27.95 set back on June 6. An increase in options trading volume to 5 times the normal level today showed traders selling September 20 puts for 60 cents and buying 27.50 calls on signs of confidence heading into Take Two’s September 10 earnings report. What caught our attention was some diagonal calendar call spread activity at bullish strikes further out. A trader here appears to have bought freshly into March 30 calls at 75 cents apiece (a price indicating about a 1-in-4 chance at Take Two shares breaking the $30 threshold by mid-March), and funding this position with the sale of 35-strike calls in the January ’10 contract for 45 cents apiece. Option traders have long felt that Take Two is a stock with an unusual propensity to big moves – the fact that the share price is up 34% so far this year is reflected in its 34.7% historic volatility reading, but implied volatility ticks in at 54.7%: a disparity that has remained more or less stable since early July but suggests Take Two options are being priced to reflect about 57% additional risk over the next month than is already charted into the share price.
AUXL -Elsewhere, option traders are taking a bullish stance on urology drug maker Auxilium Pharmaceuticals. Shares set a new 52-week high today despite a marginal .58% gain from yesterday’s close to $39.99. An increase in option trading volume to 14 times the normal level appeared due to a diagonal calendar call spread in which a trader looks to have sold January 50 calls at $2.30 to defray the cost of September 40 calls bought for $3.00 apiece. The trader in this case is looking for continued gaps above the 52-week high into September. Implied volatility at 51.2% is elevated above the 45.9% historic reading.
