Today’s tickers: MS, GS, VIX, XLF, C, UYG, GG, XRX
A massive selloff in financials, a flight to safe-haven instruments, and a gain in volatility militates against the Fed’s best intentions with last night’s reluctant AIG bailout
MS– Early reports following news of the government-led bailout of AIG brought percolations that Morgan Stanley might be in the market for a merger. The news came one day after the investment bank expedited its quarterly earnings numbers, which strongly outperformed street estimates, and a leak (if that’s what it was) which may have been contrived as a pre-emptive PR measure to assure investors that CEO John Mack was not suffering the same kind of gold-plated delusion that appears to have sent Lehman Brothers’ CEO Richard Fuld down with the proverbial Hesperus. CNBC news reported this morning that while Morgan Stanley was not in merger talks, the company was taking the situation “day by day,” and that Mack was (unlike Fuld) open to the possibility of seeking a merger if forced by irrational market activity into such action. Even with the market bridling against the sense of moral hazard that arose from the AIG bailout and that institution’s failure to secure a private-sector solution, the report had an immediately counterintuitive impact on Morgan’s share price. It was as if investors, in the space of a few days, got wise to the notion – post-Lehman, Merrill, AIG debacle – that well-capitalized buyers of strategic assets in the financial space may have become loath to offer premiums, or even book value in some cases, but may be willing to bide their time and swoop in to cherrypick valuable assets when a company is in proverbial thumbscrews.
The fire-sale implications and share price downdraft were further intensified by news that the SEC would impose new prohibitions against short-selling due to take effect tomorrow. Shares in Morgan Stanley are down nearly 40% to $17.80 as the urge to put protection has driven implied volatility some 90% higher to 343.5%. Puts are outmoving calls by nearly 3 to 1 today with fresh buying interest in front-month puts – which expire on Friday – at strikes as low as 15. Current options premiums suggest as much as a $5.70 move, or one-quarter of Morgan Stanley’s present value, in play between now and Friday.
GS– Similar action was observed in fellow survivor Goldman Sachs, whose shares are down 22% to $102.40. Puts are outmoving calls by a factor of 1.6 as the implied volatility move has been relatively more pronounced, up 107% today to 178.5% (more than triple the historic reading on the stock). Again, puts are predominant, outtrading calls by a factor of 1.6 and on hefty volumes in the front month. Premiums in this September contract are so pumped with volatility that a buyer of a long straddle would need to see Goldman shares rise or fall by some 22% just to make back the debit.
VIX– Needless to say, the landslide in financials was emphatically bullish for volatility, with the CBOE Volatility Index rising 14.5% to 34.70 and surpassing the Nasdaq measure of volatility, the VXN, for the first time since the “troubles” of August 2007.
XLF– Shares in the Financial Select Sector SPDR shed nearly 12% of their value to read $18.20 amid the broader market route. With options volume just under 500,000 lots, earlier today we noted a 40,000-lot call spread in the October contract between strikes 24 and 26. While we have no information on the trade direction and cannot confirm that this was an opening transaction, a long buyer would have paid a 12 cent debit, while a seller would have taken the spread as a credit, expecting shares to remain below $24. But there was no shortage of bearish position in the fund, either, with buying interest in September puts south of the $20 line, with the 16-strike trading more than 10,000 times, the 17’s more than 20,000 times, and the 89’s more than 30,000 times – all on premiums inflated some 300% in value overnight. Implied volatility at 83.6% compares to a historic reading of 49.8%.
UYG– Shares in the Ultra Financials Proshares dumped 16.4% of their value to read $16.43 over the noon hour – about $2 and change above the 52-week low. Large-scale put spread activity involving deep-in-the-money puts on a volume of about 10,000 at strikes 22 and 26 could indicate a trader closing out an existing position. Selling the puts outright would generate a spread of about $4 today.
C– Citigroup shares dumped 15% and finally set a new 52-week low of $13.41 today, as more than 330,000 options traded twice as often to puts as to calls. Earlier today we also noted a strong inclination to put spreads owing to sharply higher volatility, with a 25,000-lot spread in the December contract between strikes 12.50 and 17.50 trading for a spread of $2.10. We were unable to confirm the trade direction to establish whether this was a trader’s attempt at picking a bottom of $12.50 for Citigroup shares and standing to gain $2.90 if the range prediction were correct – or taking in premium in anticipation of a return above the $17.50 by December expiration. Implied volatility at 145.7% compares to a historic reading of 65.1% – about what you’d expect on a day like today.
WB– Shares in Wachovia lost 20% of their value today, dropping below the $10 level to read $9.15 over the noon hour. With implied volatility at 296% coming in at nearly three times the historic reading on the stock, earlier in the day we’d observed a trader using bearish put spreads in the October contract between strikes 10 and 17.50 for a $4.90 premium.
GG– Today’s panicked flight to quality sent the price of gold, the traditional safe-haven instrument, sharply higher, a trend that carried through to major gold miners. Shares in Goldcorp are up 6.8% to $29.45 as calls outtrade puts by more than 3-to-1. Front-month call volume is pronounced between strikes 27.50 and 35, with interest in these strikes extending into the October contract.
XRX– Implied volatility in Xerox hit a fresh 52-week high today in step with a 1.4% loss on the day to $12.60. Now at nearly 41%, the composite implied volatility is dramatically elevated above the 28.9% historic volatility reading on Xerox shares and is up from about 30% at the top of the week. Meanwhile, an increase in options trading volume to 4 times the normal level appeared to indicate buying activity in January 12.50 puts, which traded for $1.10 apiece.
