Today’s tickers: YHOO, MS, BAC, C, XLF, PRU, DHI & HOG
YHOO – Yahoo! Inc. – Watching Lehman’s stern chief, Dick Fuld in front of Congress recently was a tough gig to watch as he defended his decision to hold out for a better price from far eastern investors. Any trader knows that when the market thins out but a firm bid exists, you don’t mess around. One wonders what future fate lays ahead for Jerry yang et al at Yahoo! having failed to join themselves at the hip with Microsoft. Shares leapt from $17 to $29 overnight on the proposal before a bitter battle for independence say Yahoo! give up the ghost. The price is a five-year low for its stock as analysts mull the prospect of weaker online ad spending, which accounts for 62% of the company’s revenue. Worse still is that growth in search advertising display is likely to be the relatively stronger area for the industry, which plays right into the hands of competitor Google. Today we note courtesy of our market scanners that implied volatility relative to historic volatility has increased to a ratio of 2.4 times. Demand for October strike put options at the 12.5 and 5.0 strikes has been noted today. Curiously, the volume of 1,039 lots at the 5.0 strike is definitely fresh buying judging by the existence of just one contract of open interest.
MS – Morgan Stanley. – Morgan Stanley shares the dubious honor of being one of Thursday’s most actively traded option series as well as showing the greatest outright increase in implied option volatility today. Volatility added a further 49% to reach 319% while option volume reached 119,000 contracts before 11:00am. The single most actively traded strike today is at the October 10 strike put where 20,000 lots have been traded with a current premium of 2.50 creating protective coverage at a share price of $7.50. Almost three times as many puts have traded so far as the share price takes a further 22.75% drubbing to $12.94. The recent low of $11.70 is within reach given the resumption of fear in the market illustrated by rising volatility today.
BAC – Bank of America. – Put options were in demand at Bank of America today from wary traders watching its share price relatively unchanged at $22.04. Almost one quarter of the overall volume of 179,000 lots traded during the morning were done so at the October 20 and 25 strikes at premiums of 1.15 and 3.85.
C – Citigroup Inc – Some 167,000 option contracts keeps Citigroup as one of our most widely traded today. Its shares are 1.2% lower at $14.22. But it has to be noted that within today’s volume where puts are outpacing calls by a factor of 2.8, much of the volume has been initiated by put sellers. For example at the October 12.5 strike puts, 8,000 lots were sold at a 67 cent premium out of overall volume of 14,000 lots. In the December contract some 21,000 lots were sold at a premium of 1.60, which represents two-thirds of the volume at the strike.
XLF – Financial Services Select Sector SPDR – the 52-week low for the XLF was struck today despite an earlier Asian-inspired sense of returning stability to markets. The low was met by a fresh record reading of implied volatility at 98.8% – pretty high for a portfolio of financial stocks. Especially heavy volume was seen at the October 17 strike calls where 43,000 out of total series volume of 68,000 were bought at around 40 cents. Meanwhile at the 15 strike puts some 74,000 lots have traded at around 1.10 where 34,000 were bought.
PRU – Prudential Insurance. – It seems to be another bad day for financials and insurance companies as the PRU shows up as a large volatility gainer. Its implied volatility increase of more than half has taken the options implied reading to 267%. The precipitous demise of its share price to $26.95 is fast and furious with pit buyers in the ascendancy today. Almost four puts have traded per call with the October 30 and 45 strikes most active.
DHI – DR Horton Inc. – Another hot option series today is in this homebuilder where shares are 5.2% lower at $9.23. Yesterday the company rebounded from a fresh 52-week low. Today investors are looking at the put side of the ledger where activity in the November and January series is relatively heavy at the 7.5 strike price. Implied volatility at 127% matches the share price performance of late but the fact that such elevated volatility boosts option prices hasn’t stopped buyers especially at the January series who paid 1.20 to establish downside protection that would kick-in at a breakeven share price of $6.30 or 31% lower than the current share price.
HOG – Harley Davidson. – On Wednesday, shares of the Hogster hit a pot-hole, reaching a 52-week low of $28.00. Today they have rebounded and at the time of writing stand at $29.44 for a 1.4% rally on the day. It’s unsurprising that its shares have suffered in the current environment given the potential for weaker sales from the cash-strapped consumer in an environment of rising unemployment especially now that home equity withdrawal has been consigned to history. Our market scanners detected hotter than idling speed options volume today, courtesy of a bullish options play in the February 2009 contract. The trade was pretty straightforward and effused bullishness, which ever gear you happen to be in. The trade involved three legs of identical amounts. On the put side a credit spread was established underlining the seller’s confidence that the share price will recover meaningfully by expiration. The investor sold 7,100 lots at the 37.50 strike for 9.60 in exchange for the purchase of 7,100 contracts for a cost of 5.20. That means the trader will retain the net 4.40 premium should HOG shares rally to the upper strike. A tall order perhaps in the current climate, but one has to examine this in the current negative attitude towards both economy and consumer. Given the credit established from the trade, should the share price decline to $25.60 the trader will face the maximum loss of 3.10 on the trade (strike distance minus the net credit). On the call side the same investor stretched way up to the 45 strike February calls paying 75 cents premium. This combination is pretty bullish and the investor hopes shares will accelerate away from their recent torpor.
