Today’s tickers: AIG, UBS, CIT, GE, DIA, DELL, GGP, TROW
AIG– The morose waiting game continues for AIG after today’s decision by the Federal Reserve to leave rates unchanged. Just prior to the announcement, we had noted a pullback from earlier highs in implied volatility and a slight paring of losses. Post-Fed, the higher implied volatility spiral and downside in the share price appears to have picked up where it left off and we now find shares down 44% to $2.63 and implied volatility at 596.4% (versus 144.0% historic volatility) With around 500,000 trading by late afternoon, the price of the front month straddle at $2.60 is virtually indistinguishable from the share price – and indeed, when shares were trading at their lowest pall of the day at less than $2 the cost of option protection exceeded that amount. In contemplating AIG’s fate, we’re reminded of nothing so vivid as the thread of the spider’s web keeping the falling rock at bay in Jonathan Edwards’ “Sinners in the Hands of an Angry God” – which could explain why so many calls are trading today (outtrading puts by 1.8) as traders relinquish the company’s destiny to something larger. Directional calls on the stock seem pitifully inadequate, as ultra-low-strike puts and calls trade with relative balance to buyers and sellers at the 2.50, 5.0 and 7.50 strikes in September and October.
UBS– A momentary trading halt in UBS shares during the European session, owing to precipitous declines in the stock, has colored much of the trading action today. Implied volatility in UBS AG’s options is up some 35% on the session to 126.4% – more than twice the historic reading on the stock – as traders seek long positions at the 15 strike in the front month on both the put and call sides. Open interest up to now has favored the call side by the slimmest of margins in UBS. Shares are down 13.2% to $14.71.
CIT– Shares in CIT Group, the corporate and trade financing outfit whose shares have lost some 63.5% of their value this year, rose 10.7% to $8.85 on some positive analyst attention. While the share price has managed to remain above its July 15 lows, short positions in the stock have billowed seven-fold this year, and now total about 15% of the float. This suggests that some of the upside may be exaggerated by short covering. With options trading at 3 times the normal level, we observed heavy put buying in September 7.50 puts at 75 cents per contract, suggesting a continued measure of defensiveness into this contract expiration. The total volume at this strike totals more than twice the open interest. Implied volatility at 172.4% compares to a historic reading of 91.3%.
GE– General Electric, terribly chastened lo these many sessions, recouped early losses but appear to have resumed their downside trajectory post-Fed, currently reading 3% lower at $24.20. Implied volatility is off its highs and now reads 98.2% versus 34.3% historic volatility on GE stock (the implied volatility reading was as high as 106% earlier in the session). Buyers and sellers of September 22.50 puts are observed, but October traders are positioning for continued erosion below the lows, with buying in puts at strikes 21 and 24.
DIA– Shares in the Dow-indexed Diamonds Trust Series are nursing a 1.4 % decline to $108.43 as earlier gains on hopes of a relenting government-financed bailout of AIG hit some ambivalence around noontime. For much of the session we’ve seen heavy buying in front-month calls at strikes 108 and 109, these strikes trading at 4 times the open interest, suggesting that some traders may be hedging short positions on Dow components with long positions in the ETF to protect against a snapback in the index.
DELL– Weaker forecasted demand for personal computers sent shares in Dell to multi-year lows with a near-12% smack to $15.82. Option volume in excess of open interest appeared in September 17 calls and puts, with interest extending into the October contract at strikes as lows as 15. This week alone, implied volatility in Dell options has risen about 27% as option traders have battened down for a recessionary shrinkage in demand that has put a premium on downside protection for Dell shares.
GGP– Losses in the real estate investment trust space continue to accumulate, as evidenced by General Growth Properties. Shares have recovered from some early losses, posting a 7.4% decline to $22.00, occurring as options trade at 2.8 times the normal level amid what appears to be keen buying interest in October 20 puts along with 25-strike calls. Implied volatility at 84.3 is well off the highs for the session, but still robustly elevated above the 68.3% historic reading.
TROW– Finally, we observed highly unusual options trading activity in investment management firm T. Rowe Price. Shares have pulled ahead from a flat opening to read 2% higher at $55.05, but fresh buying interest in deep out-of-the-money January 30-strike puts has driven options volume to more than 3 times the normal level today – suggesting traders positioning for a drop of nearly half the company’s share price by January 16, 2009. Implied volatility at 65.7% is elevated against the 48.0% historic reading.
