Today’s tickers: CMA, LEH, SPLS, AMLN, XLF, RKH, XLE, DIA, COF, TASR, GEOY
CMA – Unusual option activity in Comerica Incorporated on Tuesday drove overall option activity to nearly 15 times the normal level. This occurred against the backdrop of a 4.3% decline for shares to $28.06 that still has the stock nearly $9 above its mid-July low. With so many dyspeptic headlines surrounding financial stocks great and small these days, it’s no surprise to see many traders turning to put spreads in order to express bearish views while keeping trade costs low. Tuesday’s trader, however, settled upon a long put butterfly spread in the October contract between strikes 15, 20 and 25, in an approximately 10,000-20,000-10,000 combination. This struck us as a somewhat unexpected strategy, given that the long butterfly with puts is traditionally a volatility-bearish, directionally-neutral trade – hardly the descriptor for the grinding losses and unsettling outlooks attached to much of the sector these days. However, the trade is constructed so that the short position at the middle strike – the body of the butterfly – is the price that the trader wants to target, and by deploying the out-of-the-money 20 strike in this instance, we can conclude that the trader is bearish on Comerica over the next two months. A close at this level by October 17 would give back most of the stock’s gain since July 15, while keeping it slightly above that low – remember, the trader is short 20,000 lots at the middle strike. Comerica shares have lost about half their value over the past 52 weeks, consistently underperforming the S&P Financials in a difficult year. The company’s next earnings announcement coincides with the expiration of that October contract on the 17th.
LEH – Tuesday’s 13% selloff in Lehman Brothers shares to $13.10 had the stock price within $2 of its 52-week low – but implied volatility is still well off its mid-July highs. One option trader may be looking for that to change in the coming weeks. Implied volatility in all Lehman Brothers options is up 40% from Friday’s levels and now reads 145% – still well below the 240%-plus highs of mid-July – and it looks like at least one options trader feels there room for more volatility upside. He or she expressed this view via a diagonal calendar put spread in which 1,500 lots of October 5.00 puts were sold and an equal number of September 10 puts were bought. The trader does this in expectation of a near-term spike in put implied volatility that would see the premium increase sharply in value if Lehman shares continue to wilt lower. The 95-cent price tag on this position reflects about a 19% probability ascribed by the options market of a break below $10 by September 19. Buying interest in out-of-the-money extended to strikes as low as 7.50 in the January contract.
Later in the session, however, one trader took an unorthodox approach to the Lehman story, buying a 20,000-lot call spread in the January 2010 contract between strikes 20 and 30. While any sort of bullish positioning on Lehman stock seems anathema to the current fashion, this trader timed the transaction carefully, choosing the 2010 contract to give Lehman stock plenty of time for a grueling recovery. In this case the trader paid a debit of about $2 on the trade, which first breaks even with a recovery of about $9 to the upside. The sale of the $30 strike caps any upside as far as this trader were concerned, but even if shares were to break that level, it would still yield this dogged optimistic a profit of $8 per contract – 4 times the amount paid.
SPLS – Shares in Staples ended the day 5% lower at $23.32 following this morning’s Q2 profit warning. One trader opted to play against the warning, effectively picking a near-term bottom for Staples shares by selling an 18,000-lot strangle in the front month between strikes 22.50 and 25. The trader in this case essentially took a $1.60 credit in the expectation of rangebound share price action over the coming weeks – a move that may seem counterintuitive to some given the nature of this morning’s warning. This would also appear to rule out (in the mind of this trader) a break below the 52-week low of $19.36 set last November. A comedown in volatility in the coming weeks would likely deplete the price of that strangle and allow the trader to close the position at a profit.
AMLN – Options in Amylin Pharmaceuticals continue to see unusually heavy action amid yet another slump for shares – down 4% to $28.55 after yesterday’s report linking the company’s diabetes drug with fatalities caused by pancreatic inflammation. Options traded at 7.5 times the normal level as traders continued to seek long positions in out-of-the-money front-month puts at the 20 and 25 strikes that could suggest a fairly imminent break below the 52-week low of $23.75. Earlier today we also saw a trader use calls to express a bearish directional view by selling the October 35/45 call spread for a 60 cent credit.
XLF – Smoke signals about the state of credit in the broader financials – in the form of a Goldman Sachs warning on AIG, a JP Morgan warning on Lehman, and predictions by an ex-IMF chief economist of another “whopping” bank failure in the next few months – sent bank and brokerage shares broadly lower, adding to yesterday’s swoon on concerns about GSE solvency. It’s at a 3% decline to $19.92 that shares in the Financial Select Sector SPDR closed today, and with nearly twice as many puts trading as calls, the defensive tone to trading was prima facie. Early market action showed traders favoring long September put spreads at not just the 18/20 but also the 14/18 strikes, the latter combination costing about 37 cents and implying a possible break below the 52-week low of $16.80. The tendency to hunker down in long put positions was clear from activity at the October 22 put line, where the current $2.75 premium carries with it a break-even at current share price levels (so that further declines are necessary to generate profit for the buyer), at the 20 put line in the December and January contracts. The fact that these are large-volume block trades speaks to the conviction with which traders are positioning defensively in financials – and indicates that it’s well-capitalized individuals or institutions seeking the positions.
RKH – The unsentimentally bearish mood toward the financials carried over into the Regional Bank HOLDRs Trust, where shares dropped 3% to $96.73 and option volume rose to 4 times the normal level. A large 15,000 chunk of volume traded at the November 125 call line at $1.25/1.30 per contract, which may or may not be closing purchases of calls shorted back on July 31, the last date for which heavy volume in this contract was registered. There’s certainly little support in the popular consensus for a recovery past those levels by mid-November (current premiums put the odds at 12%).
XLE – Crude oil for October delivery closed the day higher, bringing shares in the Energy Select Sector ETF up 3.5% to $72.37. But there’s still a sizable contingent of traders looking for the fund to probe downside in the coming weeks. Earlier today it appeared that a 43,000-lot put spread was entered in the front month between strikes 64 and 70. Both ends of the spread were credited to the middle of the market, so our analysis of the order flow is based strictly on the premiums paid, but we surmise that this was a long put spread put on for a $1.85 debit, which would require a decline in the energy ETF of 3% below current levels, not to exceed $64 – which would keep the fund’s 52-week low intact.
DIA – Dow Diamonds turned Dow Defensive today, with shares in the Diamonds Trust down 1.2% to $113.52. Option traders appeared to be looking for yet more bloodletting out of the Dow-indexed fund, as puts outpaced calls by a factor of 1.3 on a volume just south of 100,000. Some of this put activity earlier today was centered in the front month at strikes 111 and higher – notable activity includes a long put spread at the 111/116 strikes in September, which a trader entered for a $2.13 debit, looking for downside movement from current levels to as low as the 111 line.
COF – Out-of-the-money put spread activity in credit card and auto loan servicer Capital One Financial Corp shows option traders looking for declines above and beyond the 4% drop to $40.10 that the share price sustained today. A trader entered a long put spread at the 25/35 lines for a debit of $2.90 that would require a decline of at least 20% below current levels to break even. This would further deepen the decline that Capital One shares have weathered over the past 52 weeks, shorn of 41% of their value during that time. Since the first of the year, as the decline has continued to take hold, accumulated put positions have outnumbered those of calls by nearly 2-to-1. Capital One’s next earnings report is due out on October 17, which could explain the positioning.
TASR – “More lethal” volatility hit shares of “less lethal” weapons maker Taser International this morning. Shares in the maker of the eponymous stun-gun rose 5.8% to $6.30 today as rumors circulated online of a possible GE buyout. The rumors also drove implied volatility on all Taser options higher by nearly one-third as traders rushed to buy September 7.50 calls on volume exceeding open interest. Fresh activity at the same strike in October traded to buyers and sellers. Today’s pop higher notwithstanding, Taser shares have been zapped of nearly 55% of their value so far this year, and while short interest in the stock has declined some 26% from the highs of mid-February, it’s still comparably high at 26% of the float.
GEOY – Shares in GeoEye Inc., the maker of high-res satellite imagery products, lost 1.2% today to close at $23.67. What’s eye-catching about GeoEye’s option activity is the huge disparity between its implied and historical volatility readings. Since June 23, implied volatility (which reflects the option market’s anticipation for future share price swings) has shown a steady upward divergence away from the historic reading (which reflects how much shares have actually deviated). As a result, the current reading of 106% weighs in at nearly twice the historic reading. This dissonance between implied and historic volatility tends to enliven option premiums, making them more expensive to buy and more rewarding to sell. It looks here like a trader played on this relationship by selling a September call spread at the 17.50/22.50 lines for $3.50. Bear in mind here is that the spread generates the maximum profit for the trader if GeoEye shares remain below 22.50 by expiration – a strike that’s still currently in the money. The activity here pushed overall option trading volume to nearly 3 times the normal level.
