Today’s tickers: XOM, TXN, KEY, AXP, CSCO, GRA, C & CRK
XOM – Exxon Mobil – With oil shares underperforming the declining price of crude oil in the face of an outright economic slump, we watched intriguing investor psychology in action today. Shares of XOM reached an intraday low at $69.21 while an option trader took the opportunity to unleash a short straddle in the January 80 series. Typically an investor sells volatility when selling a straddle and retains the gross premium, which in this case sums to 15.60. The investor is likely looking at the daily gyrations of the share price over the last three months and has concluded that peak volatility has already been seen for Exxon. Less than two weeks ago its shares reached $56.51 and in early August stood at $85.00. So a current reading for imply volatility of 59% is apparently enough to see the trader weather the storm through the next three months. If Exxon shares settle at the $80.00 strike by expiration, the trader keeps the premium, but still makes money so long as its shares remain within the range boundaries created by the premium of $54.40 to $96.60.
TXN – Texas Instruments – Analysts pulled in their horns following a disappointing profit reading from TI accompanied by a lack of optimism for the foreseeable future. Shares slipped 8% to $16.50 although the consensus seemed to be that the problems facing TI are the same as those faced by the broad economy. So while current prospects are not good, management remains competent. In early trading options activity was twice as brisk as normal and there was a notable flurry of interest at the January 20 strike where 20,646 contracts were bought at a 51 cent premium.
KEY – Keycorp – Option traders sold implied volatility on Keycorp today with the overall reading down by 37% to 90% as its shares rose by 6.25% to $10.35. The drop in volatility shows up as lower premiums on both calls and puts, which in the case of the November 10 straddle (call and put premium) saw a decline from 3.25 to 2.35 today. THe company announced a quarterly loss as reserves for bad loans increased, but the tone of preparedness from CEO Henry Meyer apparently assured investors that the 58% share price decline in 2008 was overdone. Elsewhere investors took interest in the May puts at the 7.5 strike where 2,825 lots changed hands trading to sellers most heavily at premiums of 2.5 and 2.70.
AXP – American Express – A rally to $25.75 for Amex helped deflate implied volatility on options by one third to a reading of 71.9% in early trading after the company reported weak, but not too much weakening in profits. Put sellers came out of the closet and either took in premium or decided to quit their open positions given dashed expectations for a lower share price.
CSCO – Cisco Systems Inc. – Activity involving a 13,000 straddle transaction in the January contract helped put shares of Cisco on our ‘options most active’ scanner today. Its share price was 2.5% lower at $18.50 and option volume reached 83,230 lots by mid-morning. Shares rose yesterday after a broker upgrade noted the abundance of available cash that would allow its continued investment during the downturn. A straddle strategy involves the simultaneous purchase (or sale) of both calls and puts. The strategy is a common volatility play with buyers looking for increased volatility sending the share price outside of a range implied by the total option premium. Today’s trade took place at a mid-market premium of 3.75 inferring breakevens at $16.25 and $23.75 at expiration.
GRA – W.R. Grace & Co. – Chemical producer Grace & Co. saw relatively heavy option volume in Tuesday’s session. A 2.5% share price gain to $10.40 was supported by the purchase of a fresh position at the 10 strike call in the January contract. Few existing option positions exist at the strike price and today’s 2,600 volume at a premium of 2.4 is high in comparison to typical average volume on the options. Only 58,140 contracts of open interest exist. The premium indicates the expectation of continued share price recovery over the winter months of around 22%. Implied volatility on the company’s options is running at a high level of 114% – but still beneath that on the stock, which reads 129%.
C – Citigroup Inc. – Analysts at Goldman Sachs pointed out a few opinions today that didn’t bode too well for Citi and sent its shares down by 6.5% to $14.09. Goldman added the stock to its ‘sell’ conviction list noting that the bank might not be able to return to the black until the second half of 2009. The investment bankers noted that lower levels of capital market activity wouldn’t help boost Citi’s bottom line especially in an environment of deteriorating credit quality and the likelihood that they might need to write down additional assets. We noted a decent proportion of today’s put activity in the December contract went to buyers where some 16,111 contracts had traded ahead of lunch.
CRK – Comstock Resources Inc. – There was heavy volume in this oil exploration company, whose shares were a smidgeon higher at $43.02 today. With very little existing open interest, which amounts to only 14,380 contracts, today’s volume of 6,708 is very heavy. The activity occurred at the November 55 strike, where only 79 open contracts of open interest exist. Shares are rebounding for the fourth straight day, and recently hit $24.34 as the price of crude hit a funk. Even today, they stand at less than half the price they stood at when they peak earlier in 2008. The delta at the 55 strike indicates that the investor has a one-in-five shot at landing in-the-money at expiration at present.
