Today’s tickers: LEH, WM, RF, CNX, ACI, AKS, OXPS, FRP
LEH– Implied volatility in Lehman Brothers options rose 39.5% to 173.3% after analysts at Merrill Lynch widened their loss estimate for the bank, sending shares down 17% to $13.34 and once again dangling the broken brokerage to within a dollar and change of the gator’s jaws of its 52-week low. Thus far today the option activity has shown a privilege to puts by a factor of 1.2, with front-month put implied volatility at the at-the-money strike coming in at more than 230%. While volume is heavy at these strikes, the volume here so far is within open interest. Fresh buyers, meanwhile, have turned their attention to January puts, where the 16 put strike drew new long positions. Strikes of 2.50, 5.00 and 10 are also active in that month.
WM – Concerns about exposure to Fannie/Freddie stock may also be the culprit behind today’s 16.6% drop in Washington Mutual, where implied volatility has spiked nearly 36% to 165.9% – a fact which shows options traders looking for 37% additional risk of share price movement than has been shown historically in Washington Mutual shares, and reflecting this risk in higher option premiums, especially on the put side. Despite the dramatic downside for shares, we’re seeing heavy volumes in calls today, especially at the September 4.00 strike, which has traded more than 40,000 times.
RF – With early session euphoria in the financials turning to ambivalence, and now turning again into bald cynicism, shares at regional bank holding company Regions Financial are holding on to an 8.2% gain to $12.00. Analysts at Friedman Billings Ramsey upgraded the bank to market perform from underperform. Regions Financial shares have surrendered half their value so far this year. While activity showed some willingness among traders to position long of September 12.50 puts against two-way traffic in 12.50 calls, one trader positioned in favor of a die-down in volatility by November, by selling a 10/12.50 put spread for a 95 cent credit that he or she keeps if Regions shares are trading above $12.50 by November 21.
CNX – Shares in Consol Energy followed coal sector peers sharply lower with a 5.4% decline to $55.97 as option traders put more than 16,000 contracts in play. Call spreads appear predominant in the front month between strikes 55 and 60, where at least one 2,500 lot transaction went through this morning. Both sides traded to the middle of the market, so it is uncertain whether the trader in this case was making a contrarian bid on a quick recovery or seeking to take a credit on further declines. For a long buyer of the spread, the $2.85 spread represents a debit that would require a return to the $57.85 level in order to break even, but would cap any appreciation at $60, limiting the maximum profit on the trade to $2.15 – less than the money at risk. A seller of spread would take the $2.85 as a credit, looking for shares to continue below the $55 level.
ACI – Implied volatility in sector peer Arch Coal rose 13% to 88.2% today as shares declined more than 10% to $38.65. We should mention in this context that Arch Coal’s implied volatility has been in a thus-far inexorable uptrend over the past week, rising from 61% at the first of the month some 44% to the current reading, which represents the highest level in 52 weeks. Twice as many calls are trading as puts today, with active interest in the front month at strikes 40, 45 and 50 all trading to buyers and sellers within open interest. A look at open interest shows open call positions outnumbering puts by a factor of 1.6, a proportion that has remained more or less stable throughout the summer.
AKS – Calls in AK Steel have been active throughout the morning – outtrading puts by 6 to 1 – this morning, ostensibly on renewed takeover chatter, despite the fact that shares have reversed early, aberrant gains and are now trading 1.5% lower at $40.00. Front-month calls at out-of-the-money strikes 47.50 and 50 attracted buyers in excess of open interest, driving implied volatility some 17% higher to 92.5% – making it one of the day’s top implied volatility gainers and bringing the measure of anticipated share price turbulence to a 14% elevation above the historic record.
OXPS – Diffuse takeover chatter in optionsXpress has been cited as the reason behind a near-19-fold increase in options trading volume, as shares read 3.2% higher at $23.31. In activity consistent with the options of a stock responding to bullish rumors, traders have quickly sought long positions in September 25 and 27.50 calls, both strikes trading well in excess of open interest.
FRP – Fairpoint Communications – With shares up 4.8% to $8.86, fresh calendar put spread activity involving December and March 5.00 puts sent overall option volume to 24.5 times the normal level. A trader in this case either bought or sold 10,000 lots of December 5.0 puts in order to arbitrage volatility with a similar position in March 5.0 puts. Shares in Fairpoint have lost one-third of their value so far this year. Implied volatility at 55.9% rates below the historic volatility reading of 67.8%, which reflects the measured level of deviation on the underlying stock.
