Today’s tickers: VIX, XLF, BAC, C, MS, EXPE, RHT & JCI
VIX – CBOE VIX Index – Today delivered a perfect explanation as to why implied volatility is set to remain stubbornly high regardless of both the surge overnight in Asian benchmark indices and an early 440-point rally for the Dow industrials average. By mid-morning, indices were lower despite the positive response to the Paulson Plan, which sent banking stocks into the stratosphere. The bottom-line is that while the banking system might have finally found room to breathe, it’s still extremely premature to predict that the measures taken will lead the economy out of a highly likely recessionary scenario. The VIX was almost 0.5% higher by noon at 55.24. Call options, whose price increases as does investor fear, were actively bought at the October 50 and 55 strikes, and indicated sustained demand for option premium. It also appeared that investors had interest to sell a credit spread at the October 70/75 strikes. The larger premium available at the 70 strike creates a credit to the investor while losses are limited by the purchase of the higher strike. As long as the VIX index is below the lower strike at October’s expiration the investor retains the credit. On the put side – where investors would seek long strategies in the expectation of a lower reading for the VIX – there was appetite for November 25, 30 and 40 strikes.
XLF – Select Financial Sector SPDR – Option implied volatility had declined only marginally to 71.3% from around 75% yesterday by 10:15am with 125,000 options in play. The bias was neutral in terms of call and put activity while shares are around 4.4% better at $17.00. The October 15 puts appear to be flavor du jour and trading to the 19 cents (down from 47 cents yesterday) asked premium on volume of around 11,600 contracts. The 17 and 18 strike have also seen double-digit volume. The 18 strike call, expiring Friday commanded a 40 cent premium today, an increase of 74% overnight, and infers a continuation of the rally into the weekend by a further 8.2% from the current price.
BAC – Bank of America – A 14% share price gain at BoA was met with elevated option activity this morning and with 120,000 contracts exchanging hands it was the most active individual equity security according to our market scanner. With slightly more calls in demand than puts, the single most active series was the October 25 put where 22,000 lots changed hands by 10:30, while premiums had slipped by 1.90 to just 80 cents. At least half of the volume was initiated by active buyers in this case. Implied volatility slid by around one quarter from Monday to stand at 77.7%. Much of the 5,000 call options at the November 30 strike appear to have been bought today.
C – Citigroup Inc. – The $250 billion Paulson Plan announced over the last 12 hours is being well received by banks’ share price. Citi shares are higher by 13.4% at $17.86 while expected volatility in the days ahead fell sharply. Implied volatility declined from 106% to 88%. The impact on the at-the-money straddle – a good gauge of how much fear option market makers need in terms of compensation to take the trade – fell from 2.78 to 2.41 premium today. Option volume rang up 108,000 contracts by 10:30am.
MS – Morgan Stanley. – Implied volatility on MS option fell 20% 133.7% as its share price recovered once again. Shares stand more than 222% higher than at Friday’s darkest hour when shares traded $6.75. Today they stand at $21.75 while option traders have sent 130,000 contracts into play today. The most active series amongst these was at the October 20 strike call where 19,000 contracts traded and appear to have been largely sold. With premium at the strike higher by 190% and with almost 43,000 contracts of open interest in play, it would be no surprise to see an investor reaping gains on this trade.
EXPE – Expedia Inc.– Some 13% of existing open interest is active in the tech fund today where option volume of 51,319 lots has traded ahead of noon. The fund is 6% higher at $16.85 and mirrors the performance of the tech sector. Around 73% of the open interest is found at the October 21 strike puts and there are no surprises to find that all of today’s action was located here. Some 55,000 contracts traded earlier at the strike – likely indicating an investor taking off established protection.
RHT – Red Hat Inc. – Applications software provider Red Hat, saw a 6% decline in its share price to $13.88 draw out a rather large option trade at around 11am, when 20,411 calls at the January 22.5 strike were traded. With Red Hat trading at $14.00 these calls commanded a premium of just a quarter, but we await time and sales data to confirm a sale of a stale long position. Shares reached a 52-week low Friday at $12.41 – almost half of their August level. The company announced an amendment to its earlier share repurchase deal earlier today, but we don’t see how this logically adversely affected its share price. Implied volatility increased a smidgeon today to read 71%.
JCI – Johnson Controls Inc. – It’s no time to get cozy in the car seat these days – the largest maker of automotive seats announced a potential 16% slide in annual profits thanks to a global slowdown in the car production. In response investors slammed the brakes on its share price sending it down by 6.5% to $22.50. Meanwhile option traders took the opportunity to play volatility by implementing short strangles at the November 22.5 strike (at-the-money). The 10,000 option volume was picked out by our scanners since it is elevated in comparison to the overall open interest in options on the stock reading just 44,832 lots. If the trade was established as early time and sales data indicates, it was likely sold as a fresh position at a net credit of around 4.40. In a short strangle the seller expects the share price to remain located around the central strike price and is cushioned by the range implied by the total premium, which the investor received. In this case the option trader hopes that the shares will remain within a range of $18.10 to $26.90 over the course of the next month through expiration. Implied volatility as measured by option prices declined 6 points to 73% today.
