Today’s tickers: MS, STT, LM, NAL, GGP, PLD, KG, DO
MS– The market has greeted news of acutely troubled brokerage Morgan Stanley ‘s “advanced” merger talks with Wachovia with a degree of ambivalence. While the Dow struggles to cling to upside following coordinated liquidity injections by multiple central banks, investor skepticism of the likelihood or compatibility of a Morgan/Wachovia matchup has been a dogged drag. Early losses have picked up the pace, with shares down about 19% to $17.63 (having been down as much as 40% earlier in the afternoon), and with options volume of 400,000 lots showing a skew to puts by a factor of 1.5. While some traders sought earlier today to trim positions in September 15 puts, as premiums seemed to have lost 28% of their value, a late-morning pickup in implied volatility to some 322% (versus 189% historic volatility) has renewed interest in that position. Volume here now exceeds open interest, and the implied volatility reading has topped 800%. We’ve also seen a major pickup in buying interest in October 7.50 puts, which have traded more than 34,000 times (8.5 times the open interest) at $1.55 per contract – indicative of traders positioning for the absolute worst that the market can throw at this stock.
VIX– One sign of foreboding this morning even as Wall Street was still parsing gains on back of the liquidity measures was the stubbornness of the fear gauge to retreat. On Wednesday, its close at 36.26 predicted peril in the morning. Early on the VIX began to pull ahead and by early afternoon topped out 41.44, easily its highest reading of the past year. The reality is that there is so much uncertainty that it’s hard to call anything resembling a top (for fear). Yesterday we noted activity in the Nov 50 strike call at 15 cents in significant size. That position has increased in value sharply in today’s rollercoaster ride. On a more positive note for the broad market is the fact that the VIX futures strip is easing out as far as the March 2009 contract. Regardless, at readings of 25 and above those futures still indicate extremely volatile conditions for the foreseeable future.
STT– Shares in State Street slumped dramatically, down 25% to $48.57 on no apparent news catalyst, sending option traders into fresh, long put positions in the September and October contracts at strikes 50 and 55, and catapulting implied volatility higher than any ticker on our platform. The measure of perceived risk rose 110% to 157.2%, significantly dwarfing the 55.7% level of historic volatility on the stock. Options are currently trading at 9 times the current level as the momentum in puts continues to pick up. State Street shares are down nearly one-third so far this year.
LM– We’re continuing to keep a watch on options in Legg Mason, whose shares have eversed some earlier losses, now down 3.4% at $34.40. A drive to buy front month puts, which expire tomorrow, at strikes as low as 25 (these trading for $1.50 apiece – and thus requiring a break below $23.50 for a long buyer today) earlier today drove implied volatility some 31% higher to 137.5%.
NAL– Shares in New Alliance Bancshares are holding on to a 4% gain to $14.90 – still within a dollar of its high – as it looks like a long 5,000 lot strangle in the January contract drove overall volume to 20 times the normal level. Implied volatility in New Alliance Bancshares has moderated significantly from its mid-July level of 64% area. Now at 43.7% the composite reading on all its options rates below the 48.5% historic reading on the stock. A buyer of the long strangle today would pay a combined premium of $2.65, looking for a break outside the range of those strikes either above $17.65 or below $9.85. Intriguingly, today’s active volume matches up to half the total open interest in this financial ticker – interest that is otherwise evenly divided between puts and calls.
GGP– Real estate investment trusts continue to be a target of negative attention from option traders, amid persistent doldrums for the sector. A case in point is General Growth Properties, the developer of regional mall properties. We profiled this stock earlier this week when its options were moving briskly on back of a 4% decline – today, $3 more to the downside at $18.94 (off 7% from yesterday’s closing level), we’re seeing traders position for continued losses into the first of the year with puts active in the January contract at strikes 15 and 17.50, the former strike in excess of open interest. The interest in puts fueled a 69.5% spike in implied volatility earlier today to 181% – eclipsing the 89.2% historic reading on the stock.
PLD– A similar setup was observed in options of Prologis, whose shares are down 6.7% to $39.65. A 7-to-1 overweight of put activity sent implied volatility 22.6% higher to 85.4% earlier in the day (versus 59.5% historic deviation on the underlying stock), and option volume to more than 9 times the normal level. The total active volume trading in Prologis today adds up to one of every 4 open contracts in active deployment. Again this appears in January puts, where a trader may have closed out a spread position at the 45/55 strikes.
KG– Shares in King Pharmaceuticals are down 1.3% to $10.06 today, but one trader appears to have used the dip in shares to position long of a January call spread between strikes 10 and 12.50 – activity that sent the measure of volume to 10 times the normal level. The trader here would have paid an 80-cent premium, and collecting a little more than twice that amount if King Pharmaceuticals regain the $10 level, but don’t venture above $12.50 on January 16. Should King shares surpass that upper strike, the trader’s losses here are limited to the initial 80-cent debit. We should note that King’s 60,000-strong open interest is populated by 5 times as many bullish calls as bearish puts.
DO– Shares in Diamond Offshore Drilling, a share that has lost more than a quarter of its value so far this year, has shown sharply limited losses with a .22% decline to $104.09. A bullish, 5,000-lot call spread in the January contract between strikes 120 and 140 (in what appears to be an opening transaction) shows a trader looking for Diamond Offshore to be in the swing of a recovery by the start of the year. The trader here paid a $4.05 debit to initiate this trade, which represents the maximum amount at risk but pays off to the tune of $15.40 if shares read within that range by January 16. The near 4-to-1 risk/reward ratio may have attracted the trader in this case, who would have noted that Diamond Offshore Drillers last traded above $120 in late July.
DTV– DirecTV shares are trading .81% lower at $24.61 as we register an increase in options trading volume to 3 times the normal level. The activity here looks like a 2,000-lot fresh strangle in the October contract between strikes 22.50 and 30, a position that for a buyer of this long-volatility position would 50 cents to enter. Implied volatility on all DirecTV options at 41.5% ticks in below the 43.8% historic reading on the stock.
