Today’s tickers: MER, AIG, LEH, XLF, GE, XLE, KR, CVH
MER– While Lehman’s multi-pronged “disclose-and-survive” plan provided a modicum of support to its share price (and brought implied volatility down somewhat), other brokerages were hard-hit by Lehman’s news, perhaps none more so than Merrill Lynch, where option traders appear to be positioning extremely defensively. Shares are down 6.6% to $23.11 – within a buck of its 52-week low and far outpacing the losses in other brokerages. Meanwhile, implied volatility in Merrill Lynch options blew past the previous July 15 highs with this morning’s 24% spike to 119.3% (versus 86.0% historic) as option traders put twice as many puts in play as calls. Current odds suggest a slightly less-than 1-in-4 chance that Merrill shares can break below the $20 level by September expiration, while the odds are 30% of a break of that magnitude by October expiration – and it’s been here at this strike, in October, that a large chunk of volume has traded at $2.30 per contract. For a long buyer of this strike, the premium here suggests a 23% drop just to break even. September options, meanwhile, current suggest that 16% of Merrill’s share price could be in play over the next 10 days.
AIG– Yesterday’s big loser, jumbo insurer AIG (which has taken more than its fair share of the hits from bad news in the financial space) found some terra firma today, trading flat at $18.36. It appears that at least one trader agrees that some of AIG’s extreme sensitivity to financial space gyrations is overdone. This as evidenced by a 23,000-lot call spread in January between strikes 25 and 30 that appeared to be a long, fresh position. If our take on the order flow is correct, this trader would have paid $1.09, looking for AIG shares to recover at least to $26.09 – a 42% recovery from current levels – but not exceeding $30 on January 16. Implied volatility at 135.7% remains elevated above the 93.6% historic reading on AIG stock.
LEH– Lehman Brothers’ announcement of the sale of a majority stake in its investment management unit and spin off billions in commercial real estate holdings seemed to served as a stopgap against yesterday’s snowballing declines. Shares are up 3% to $8.02 and implied volatility has come in by about 23% – still extremely elevated at 247.5% versus a historic reading of 145.6%. With more than 267,000 options trading in early market action, 1.8 calls are trading for every put – with front month action showing heavy volume in 7.50 puts and 10.00 calls. A large 20,000-lot position appears to have traded at the January 22.50 call line, although a look at the premium involved suggests this was sold, representing one-third the open interest at that strike.
XLF– The rush to defense also appeared starkly in options of the Financial Select Sector SPDR. While shares are down .71% to $21.07 in fairly moderated downside, we are observing large-scale put buying in September strikes of 18, 20, and 21, while call positions at the 21 and 22 strikes are being shed. The fact that the same tendency is appearing in October, with massive put-buying between strikes 17/21 and selling of 22-strike calls, suggests a large contingent of today’s traders positioning for persistent troubles out of the financial space.
GE– With shares in General Electric down 1.2% to $27.77, are shares in the blue-chip component gearing up to end the year at a new 52-week low? One trader placed a large bet in that direction, using a 15,000-lot put spread in the December contract between strikes 23 and 27 to express a bearish view on the stock. Based on the order flow, it appears that this was a long spread in which the trader paid a $1.11 debit representing the maximum amount of money and risk and the amount he or she needs to earn back on a decline in GE stock. This trade would be profitable with shares between $23 and $25.89, a range which almost certainly implies a new test of GE’s mid-July lows by year’s end. With shares trading in that range, the buyer of a long put spread in that combination would collect the maximum profit of $2.89 – 2.5 times the money at risk.
XLE– Shares in the Energy Select Sector SPDR, which is indexed to a basket of major energy companies, rose 2% to $64.55 today, but the theme of recessionary demand destruction remains a compelling one for some traders. Here we observed a trader take the opportunity afforded by lower put-side premiums to buy into a 10,000-lot December 60 put position at $3.25 per contract. This out-of-the-money strike implicitly suggests a break of the fund’s 52-week low by year’s end, but the $3.25 premium requires a break even further below that – 11% off current levels and 9% below the incumbent 52-week low.
KR – Implied volatility in options of grocery store chain Kroger Inc. set a fresh 52-week high at 44.2% (versus a 31.5% historic reading in the stock) with today’s glut of call buying ahead of its September 16 earnings report. Fresh buying interest in September 30 calls, extending to strikes 30 and 32.50 in the October contract sent overall volume to 6 times the normal level according to our market scanners. Shares have recovered $5 since bottoming out at around $23 in mid-April. Open interest shows the proportion of puts and calls at a virtual even split.
CVH – Buyout chatter was cited by earlier market reports as the reason for a boost in call volume in Coventry Health Care . With shares up 5.4% to $35.71, fresh and heavy call buying activity in September strikes 35 and 40 sent option volume to 4 times the normal level. Implied volatility at 47.34% is elevated above the 39.5% historic norm and a 21.7% gain from yesterday – all consistent with the activity of a stock moving on deal rumors.
