Today’s tickers: VIX, NRG, LLTC, XLF, MS, WYN, DSW, DHR, MAS & MIR
VIX – CBOE VIX Index – The VIX index reached an early morning peak at 61.23 and is still 8.7% higher at noon as it reads 59.93. Watching the market reverse course from lunchtime yesterday was like watching glaciers cracking over the edge of the mountain in the heat of the summer sun. It has been a slow but obvious process as investors finally see beyond the recapitalization of the banking system and gather their thoughts on the prospects for earnings as punctuated by impending recession. Next week sees expiration in the October VIX future and we still note investors stretching for protection at higher strikes. Today the 65 and 75 strikes saw volume of around 6,000 lots each. The cost of seeking protection at the upper strike today costs 55 cents. In the November contract put premiums lower by more than one-fifth saw buyers at the 40 strike. In the December contract volume in excess of 1,000 lots at the 60 strike calls was more than twice the volume of current open interest indicating some fresh positioning here.
NRG – Energy Inc. – We saw heavy call volume on this independent energy producer, which mirrored activity on September 18th. Our market scanners picked up this activity in two places. The overall volume of 86,000 contracts makes the contract one of today’s heaviest traded, while the activity surfaced in our ‘hot option volume’ scanner since it trades heavily in comparison to a 10-day moving average option volume. Today’s activity was at the November 30 and 35 strikes where volumes traded were 50,000 and 35,000 lots respectively at premiums of 35 cents and 5 cents. This smacks of replica positioning by an investor who sold similar volume in September but at premiums of 2.55 and 1.00. According to time and sales, today’s volume was also sold and as such will show up as additional open interest tomorrow. It would not have been a surprise to learn that the investor was buying back this open short position and taking a handsome profit since the stock is lower by 5.4% ay $18.48 but that’s not what time and sales tells us. Instead it looks like the investor is prepared to double-down his bet on weaker energy earnings as oil prices slide through $75 per barrel for the first time since August last year.
LLTC – Linear Technology Inc. – Heavy put buying is compounding a steep 14.6% share price decline to $22.03 at LLTC, where an open interest reading of 201,800 contracts compares to healthy volume today of 29,146 contracts according to our data. The put/call ratio of 4.8 leaves us in no doubt that the action is stilted towards puts. The fact that the 20 strike puts have been bought across November, January and February contracts indicates that investors are bracing for further downside. The premium paid in the near contract here infers a share price decline between now and expiration of 15.7%. The company, which makes consumer electronic chips, announced softness across all product lines yesterday and predicted a revenue decline of as much as 20% in the current quarter.
XLF – Select Financial Sector SPDR – With the broad market turning ugly and with the honeymoon apparently over for the banking sector, investors returned to selling the XLF financial sector sending shares lower by 5.25% to $16.42. While there was heaviest activity in the front soon-to-expire contract there was an interesting slug of volume involving the purchase of 20,000 put options at the November 17 strike where an investor paid 1.73 premium in search of downside protection against a worsening of the storm. That’s a higher price by 20% on yesterday’s close while the position is new since existing open interest stands at only 12,868 contracts at this series. As the storm clouds gathered implied volatility rebounded from 66 to 71%.
MS – Morgan Stanley. – Investors also took issue once again with Morgan Stanley forcing its share price down 12.6% to $19.18. There was fresh positioning in the November puts at the 10 and 14 strikes where around 2,000 lots traded in each. The likelihood of shares landing below each of these strike prices at the time of option expiration is 10 and 20% respectively according to a reading of delta. Overall option volume of 76,000 contracts is enough to place Morgan Stanley in the top 10 most actively traded contracts today as its volatility inched higher to 147%.
WYN – Wyndham Worldwide Corp. – A 6% decline in its shares to $9.00 was enough to bring on a bullish call spread by one investor today. The trade involved 9,000 contracts at each strike and we show that the 10 strike calls were purchased for 90 cents against the sale of the same volume at the 12.5 strike. This investor would benefit from a rise in the share price and faces rising gains from a share price of $10.65 and a maximum profit if the rebound exceeds $12.50. The hotel and motel chain recently printed a significant low at $7.50, which is ugly for a stock that was trading at $32.50 one year ago.
DSW – DSW Inc. – An investor appears to be digging his heels in with the declining share price at shoe-tailer, DSW, where shares have recoiled from a $15.00 peak in September to stand 9.2% lower on the day at $11.06. Its option implied volatility has surged from 87 to 105% overnight and from reading the tea-leaves we think we’re watching bullish positioning. Today’s volume is again raising a red flag within our scanning tools given the healthy 20,000 volume against open interest of 50,733 lots. An investor has traded an 8,000 lot strangle in the January 12.5(Put)/15 (Call) contracts. In addition the surrounding 12.5 and 17.5 calls appear to have been purchased around 1,000 times each. The strangle appears to have been traded at a gross premium of 3.41 and would give break even values of $9.09 and $18.41 for a volatility buyer. Meanwhile a seller of this strangle would be looking to take advantage of the fact that implied volatility has risen so sharply today.
DHR – Danaher Corp.– With earnings due Thursday for this diversified manufacturer and a recent $65 to $50 range (this week!) option investors have been busy today. Around one quarter of the existing open interest is in play Wednesday and we have identified two of the larger plays. First, an investor appears to have bought 1,636 October 60 calls while the direction of the 5,000 lots at the higher 65 strike are hidden by the fact that they traded to the middle of the market. But a similar size put spread took place at the 60/55 October strikes at a net premium of 2.65, which offers maximum downside gains of 2.35 should shares fall further from the current $58.31 (down 3.2% today).
MAS – Masco Corp. – Wood manufacturer Masco slumped 3.5% to $13.50 today but once again we’re observing interesting option activity. The stock has 166,775 contracts of open interest and 21,949 in play today. An investor appears to have sold 1,000 at the 20 and 5,500 calls at the 25 strike calls in the January contract today at premium of 65 and 35 cents. Meanwhile long put positions were also established in similar size at the 10 and 12.5 strike puts at 1.0 and 1.95. Implied volatility of 96.3% compares to movement on the underlying share price of 75.3% during the last year. Shares have plunged from above $20.00 in just the last month.
MIR – Mirant Corp. – There is more furious action on another energy producer today. This time it’s Mirant whose shares have slipped 5.6% to stand at $15.75. The pattern looks identical to what we reported above regarding NRG. Today the December 25 and 27.5 strike calls each traded on large volume to the middle of the market. The January 25 calls did so too. These strikes contain large open interest roughly amounting to today’s trade size and we can also see that similar positions were originally established the same date as NRG positions were established on September 18th. Looks like an astute investor in the energy patch called this move right.
