Today’s tickers: VIX, XLF, GE, LEH, C, RIMM, AMD, STI, TLAB, ALO
VIX – CBOE Volatility index – It used to simply be the case that when markets plunged, volatility spiked and it was easy to lay the claim that the option market was the heartbeat of the investments world. But with the major indexes in virtual freefall today it’s far from a naïve to wonder why implied volatility is relatively low. Sure, the CBOE VIX index is 11% higher on the session but its reading of 20.88 is still towards the lower end of its two-month range. The reality is that many investors understand the root cause of current market mayhem to be found in the books of financial companies. This explains why investors seem happy to use today’s volatility rally to take in premium of 3.3 points in the November contract on the 22 strike calls. It’s not necessarily the case that they anticipate lesser volatility going forward; it’s simply that they now expect any blow-ups to occur explicitly in the financial sector alone. More than one commentator has predicted further major bank failures before the markets capitulate.
XLF – Financial Select Sector SPDR – Because the VIX reflects option trading and volatility in all 500 S&P index constituents investors seeking shelter from financial fallout have increasingly sought refuge in the XLF SPDR. This is the real eye of the storm and investors have stepped up trading of options here shifting their focus away from the VIX and into the XLF. About 12 months ago on any given day overall XLF options volume would be around 2-3 times that of the VIX. In the last six months volume in financial options has rarely been less than five-times that seen I the VIX. Frequently the volume figure has been in the 10-20 times region sending investors a huge hint as to the continued longevity of the crisis. In Monday’s trading an investor sold premium in the October contract where calls at eth 21 strike were sold at a premium of 1.11 as the underlying moved lower. But today we are seeing some contra plays in the XLF options. One investor is calling a floor under the market by January 2010 where a block of 8,000 puts were sold at the 18 strike for a premium of 2.50. That’s plenty of time to see the wounds heal although it’s entirely possible that the XLF could still be languishing beneath breakeven at $15.50, which would represent a decline from present of some 25%. Elsewhere the March at-the-money straddle at the 20-line was sold 5,000 times at a combined premium of 5.05. Such a play indicates that an investor currently seeks to take advantage of elevated implied volatility (38%) and expects the sector to remain hemmed in between $14.95 and $25.05 over the next seven months.
GE – General Electric – With a little over three weeks to go before September’s options expiration an investor seems to be less pessimistic over the prospects for shares in consumer-giant, General Electric, than today’s 2.7% share price decline otherwise shows. While we can’t tell if this is the action of one trader, but a look at the footprint left by time and sales data indicates to us that a premium seller is content to wear the risk of a further decline in shares at the conglomerate beneath $25.80. An investor appears to have sold almost 20,000 puts at the September 20 strike for 20cents earlier today, which would imply risk piling up in the event of a further 8.8% decline in the share price. There is also significant activity of 16,000 lots at the lower 24 strike where options were sold for just 8 cents premium. If we’re reading the direction properly today this is a fairly brazen risk to take unless the premium seller already has a short position in the stock and doesn’t mind buying at the $26.00 strike.
LEH – Lehman Brothers – Options implied volatility stands at around 156% on Lehman’s to start the week and once again its shares are one of the most actively traded options series at the start of the week. Financial shares are broadly lower and last week’s enthusiasm for Lehman’s has taken an 8% setback today. Early trading in options at the front September contract was perhaps indicative of some strangle selling across three strikes, before a clear trend emerged showing greater appetite for puts at the 10 and 13 strikes. There was again some buying at the 7.5 strike . In the deferred April contract an investor has traded 1250 puts at the 10 strike at a cost of 2.37, which is a little changed on Friday’s closing price. In the January contract the 15 puts have also traded close to 2,000 times at 4.75. Implied volatility there stands at 112%. If this investor is buying puts they clearly feel that the drama has longer to run and shares must move significantly lower to see this trade break even.
C – Citigroup Inc. – bucked the poor Wall Street start as its shares rose for most of the morning. The options data seemed supportive of this rise while a decline in options implied volatility also suggested a loosening of the stranglehold around the neck. Most options volume appeared at the September 20 and 22.5 strikes where almost 10,000 lots traded. Premium at the latter eroded 20% over the weekend and this investor was picking long equity rights here at just 8cents. Nevertheless shares in Citigroup would still need to rebound by 22.6% between now and expiration in three weeks time to break even.
RIMM – Research in Motion – After a positive start, which saw shares buck broad technology market weakness today, RIMM dropped 2.4% to stand at $128.00. It’s difficult to see any stand out trade here – calls outpace puts by 40% at this hour but no broad position sticks out to us just yet. RIMM’s share price is once again pushing up against resistance at $135, which represents a 2-month high. The at-the-money calls seem most active but volume profiles don’t suggest any sizzle above the 52-week high at $148.13.
AMD – Advanced Micro Devices – August has been a good month for AMD whose share price has risen 50% from a 52-week low at $4.00. Today its shares are defying gravity and are 3% higher at $5.95. Its options volume registering a reading of 20,000 by lunchtime is indicative of further bullish positioning in the coming weeks. Call trading is almost five times that of put trading today with September 5 and 6 strikes well sought after. The 7 strike is heavily traded in the October contract. Both options implied and historic volatility remain elevated and close to 70% on this company.
STI – SunTrust Banks Inc – An investor clearly believes that there is the potential for the share price at SunTrust Banks to head lower again. Its shares have rebounded sharply above the 52-week low of just above $25.00 back up to $47.50. However, today’s 5.8% slide to $40.26 was accompanied by what appears to be a fresh put spread at the October 35 and 40 strikes at a net premium of 2.00. Should its shares decline to $35 or below at expiration the investor would reap a maximum of $3.00 per contract on this bear play.
TLAB – Tellabs Inc – With shares neatly off a 52-week low, an investor has traded a tidy 8,000 block of September puts at the 5.0 strike for a dime. Shares are slightly lower today at $5.29, but this could be a closing trade judging by existing open interest numbers. The volume represents 13-times usual activity.
ALO – Alpharma Inc – With shares at $35.77 and standing proud by 3.7% today, options volume – although thin – is above average with a 750-lot trade in the December contract at the 25 line for 10.00. It’s a significantly in-the-money trade and could be a closing position.
