Today’s tickers: JPM, BBY, ACE, IRM, SHLD & CSCO
JPM – JP Morgan Chase & Co. – With the market in meltdown mode, investors are once again departing all shades of financial shares. There are new lows today at several major financial institutions including blue-blooded JP Morgan. The 52-week $28.87 low is a radical shift from the $50.50 52-week peak set three days into October. We’re not sure many financial companies can claim to have traded annual peaks and lows in such a short space of time, but this underscores the negative outlook for the economy and companies regardless of shade. Options on JPM are in play today with large buying of this week’s expiring 30 strike puts at 1.40 premium. Today’s investor interest at that strike is equal to the outstanding number of puts at the strike and shows how investors are desperate to hedge exposure or how speculators are targeting immediate profits in what is truly a desperate environment. However, a bullish play makes up the majority of today’s overall 136,000 volume and involves call activity at the March 37 and 47 strikes. The trades were both marked as purchases at price of 3.30 and 1.15. Given the lack of open interest at either strike, this jumps out at us and makes us wonder if such large positions are indeed naked longs. It’s likely that an investor has paid a net 2.15 premium in a bull call spread that could achieve a maximum gain of 7.85 per contract should JPM recapture $40.00 by expiration in four months.
BBY – Best Buy Co. Inc. – An S&P downgrade to Best Buy’s debt rating sent its shares to a six-year low and created healthy demand for puts. The warning that the retail environment continues to weaken means stricter credit standards for customers over the key holiday retailing season and propelled shares 11.7% lower to $18.52. In the November contract, which expires this weekend investors bought 17.5 strike puts on volume in excess of 26,000 contracts, which is far greater than the 6,098 contracts of established open positions at that strike. At the higher 20 and 22.5 strikes blocks of 10,000 puts were apparently sold by an investor for 1.0 and 2.75 premium respectively. In the 20 strike there is less open interest suggesting that this is a fresh position and possibly tied to a short sale of stock in search of additional yield income.
ACE – ACE Limited – Investors are certainly felling the chill Swiss mountain air at ACE, which recently relocated from its Bermuda HQ to new offices in Zurich. Companies involved in providing variable annuity benefits are coming under the kosh, rightly or wrongly for fear that they haven’t sufficiently encompassed sufficient risk into those investments for clients. These equity-based retirement products might not pay out even the minimum guaranteed returns they promise and so investors fear that legal claims might be just another shoe to drop in this credit crisis. Implied volatility rose 51% to 120% today accompanying an ugly 18.7% share price decline to $40.94. Investors sold calls at the December 45 strike line and established put positions at the same month’s 40 strike put line. Nearby put options in November were bought at the 35, 40 and 45 strikes on volume in line with existing open interest.
IRM – Iron Mountain Inc. – It’s hard to say what’s going on in options Buffett favorite data storage company, Iron Mountain today. Shares are lower by 4.9% at $19.51 and it’s not a million miles away from its 52-week low at $18.52. We see no news specifically about the company today but wonder whether an earlier article about the rising credit default insurance cost at Berkshire Hathaway isn’t encroaching on investor appetite for the stock. For various reasons from writedowns to currency translations the company has reported weaker earnings in recent quarters and perhaps investors see scope for unloading of Buffet’s weaker positions. The option activity involves three large trades, which each traded to the middle of the market – that makes it awkward to see exactly what direction a customer is taking if the positions are linked. In the January contract, an investor dealt in the 15 and 20 strike put options on volume of 6,000 lots. We note sufficient open interest at the 20 line to warrant rolling down a strike perhaps. On the call side, an investor dealt in 8,000 calls at the 22.5 line at a premium of 1.20. We can’t unravel this one, but a bearish tack would see calls sold to fund a put spread, which might otherwise have cost 1.60.
SHLD – Sears Holdings Corp. – An article in today’s Fortune Magazine urges investors not to touch shares in Sears with the proverbial barge pole. As a result implied option volatility on the stock is one quarter higher at 218%. The article suggests that failure by billionaire owner, Eddie Lampert to conduct usual upgrades to stores could mean that its owner simply wants to milk the cash from the cow rather than compete with its competitors. Lack of earnings guidance between quarters is another reason that the author suggests forthcoming earnings might be well off the mark. Analysts have recently lowered estimates but could still be too optimistic. Shares today are lower by 7.5% at $27.90. Investors today favored the November 25 and 30 strike puts.
CSCO – Cisco Systems Inc. – An investor played a 10,000 put ladder in the November contract today taking a net 55 cent premium to the account. The investor sold the 15 and 18 strike puts and bought the 16 and 17 strikes to create the so-called put ladder using blocks of 10,000 contracts at each strike. The idea is that the share price, currently at $16.09, departs the range earmarked by $15.55 and $17.45 in which case the investor keeps that net premium. The trade has until Friday to see a dramatic shift outside of the range.
