Today’s tickers: TWM, GE, CX, MTL, XLI & CROX
TWM – Proshares Ultrashort Russell 2000 – Looks like someone might be taking the view that a bottom might be in place for stocks judging by some activity in options on this Ultrashort ETF. The apparent option activity appears to be in January and April strangles, and it’s less important that the activity is in this fund, which offers double the inverse performance of the Russell 2000 index, what is important is tone of the trading pattern. The ETF is currently trading down 2.4% on the day at $93.50. This tells us that the Russell index should be higher on the day given the inverse relationship between the two. Volume patterns in both months indicate that an investor has sold strangles at the January 75/130 strikes, at the 76/125 and the 77/120 strikes. The pattern is similar in April also. When you look at the chart of the performance of this ETF you can see that its recent peak (that is market bearishness) was at $148.14 while the low (when the market peaked in September) is at around $60.00. Today if indeed we’re looking at sold strangles, the combined premium at the two central strikes here would create a combined premium of 18.40, which means the trades enter loss-making territory above a share price of $143.40 and below $57.60. Maximum profit would occur at any point between the two strikes and is equal to the premium received. With implied volatility running at 105% on the ETF it’s hard to see someone positioning for further downside at this point.
GE – General Electric – It’s hard to gauge the tone on shares at General Electric using option activity today, despite the 0.7% gain in shares to $19.64 in what is really a very quiet market. Option activity in the December contract is clearly centered on the 20 strike calls where some 26,000 lots have traded by 12:30. Around half of that was traded to the bid, which would indicate pessimism on the industrial and financial conglomerate. However, if calls are being sold in conjunction with a long underlying position in the stock the position would be a covered call. This seems odd given the proximity of current share price to the strike most frequently being played today. Having said that the 1.77 premium represents a 9% yield if stock is called by expiration and that’s without counting a further appreciation of 1.7% if its shares rally to $20.00.
CX – Cemex SA – ADR – On Friday ratings agency Fitch downgraded the debt rating at the world’s largest cement producer to below investment grade. Its shares are nevertheless 4.2% better today at $7.89. Fitch cited economic weakness in the areas that the company operates along with weak operating results and high leverage as rational for the bite out of its armor. It appears that an investor sold implied volatility on the company today using options in the December contract at the 10 call and 7.5 puts. If that’s indeed the case the combined premium of 1.65 protects the seller against a swing within the range marked by $5.85 to $11.65.
MTL – Mechel OAO – ADR – A 2% share price decline to $9.00 has brought out a 32,000 lot call trade in the January 20 strike. As one of Russia’s major coal and steel producers, it’s lost a major amount of its value during the credit crunch suffering from the twin blows of a hammering for commodity prices and a downturn in global demand. Many comparable companies have bled some 80% of their peak market cap. There are only 70,835 options contracts outstanding on this ADR and some 32,142 exist at this specific strike. Shares recently plunged to around $3.85 but will still need to more than double to be close to the strike price in play today. The 45 cent premium reflects a one in five chance of shares reaching that goal by expiration, while option implied volatility at 188% is still just coming off the boil. Today’s calls were bought at around 55 cents.
XLI – Industrial Select Sector SPDR – In the November contract it looks like volatility was once again sold at the 25 strike where uneven amounts of calls and puts traded, but the intended tone of the trade still stands. Implied volatility on the option series came in around 9% to 48.7%. Elsewhere it could be the case that option investors are speculating on a more buoyant start to 2009. We’re looking at sold puts at the 23 strike in the January contract versus bought calls at the 25 strike in today’s trade.
CROX – Crocs Inc. – When you look at the share price at Crocs, which shrank from a peak at $46.80 to a 52-week low at $1.67 recently, it’s tempting to ask provoke a buying opportunity given the fact that people will always need footwear. However, the Crocs fad will need to revitalize its appeal if it’s to succeed. Today, its shares did indeed rally by around 25% taking shares to $3.14 and we noted an abundance of call buyers over the front three option contracts at the 3.0 and 4.0 strikes. Implied volatility of 191% makes the options expensive, but today’s jump in the stock is precisely why. We see no reason in the news for the jump and must conclude that we need to look elsewhere to discover what is afoot.
