Today’s tickers: VIX, TGT, C, JPM, GE, HPQ, PRU & FDO
VIX – CBOE VIX Index – Implied option volatility as measured by the VIX or so-called market fear gauge rose back to those uncomfortable levels associated with a complete evaporation of investor confidence. Fatigued by relentless selling, led by intense pressure on key financial stocks, option sellers raised premiums today boosting the value of the VIX close to 80 for a gain of 7%. Looking at some of the jumps in implied volatility at stocks with a market cap in excess of at least $10 billion helps explain the ascent, but leaves one with a sense of bewilderment, wondering where this will all end. Our market scanners show a jump of almost half to a reading of 160% for JPMorgan Chase. A similar rise took implied volatility at General Electric to 141%. Bank of America’s option volatility jumped by almost one third to 184%, while at Wells Fargo a jump of around one quarter lifted implied volatility to 130%. Citigroup added 27% to 272%. Between them these companies are capitalized at $400 billion. No wonder the market is worried.
TGT – Target Corp. – Has activist investor and 10% Target stakeholder William Ackman been playing in the option market again today? That’s a question we suspect we know the answer to. A day after his ill-received plan to unleash shareholder value to Target shareholders, the stock was down in-line with the market. However, a sizable 20,000 bull call spread in the April contract seems to have spurred an about face in the share price, which now stands proud with a 6.2% gain to $28.70. Whenever we hear from Ackman either through presentations like this one or through SEC filings, we notice post-delivery options activity. Clearly an astute individual, he stands to make 7.30 per contract if today’s bull trade comes good – of course the trading could be someone riding on his coattails. The trade involved the purchase of 20,000 April 32.5 calls against the sale of the same amount of 42.5 strike calls for a net premium of 2.70. The motivation is in the proposal to spin off a REIT to include the real estate beneath Target’s stores. If Ackman’s plan is correct, the value of its real estate could be realized while simultaneously raising capital from an IPO spin-off allowing the company to streamline itself through debt pay down. The question is whether Target’s management will back the plan and even so, whether the shares will rally 50% from today’s trading price fast enough to make this option play come good.
C – Citigroup Inc. – Watching the demise in the share price at Citigroup has become as uncomfortable as watching a fox hunt. Earlier in the week we noted how option trading was gravitating towards the out-of-the-money 7.5 strike at various expiration dates. With a day to expiration option traders have blown the roof off the open interest at the November 5.0 strike puts where today’s volume in excess of 45,000 contracts currently predicts an expiration settlement price of $4.45 for shares in the bank. Looking at the December contract the 2.5 strike puts are also active on volume of 22,000 lots where investors are prepared to pay a 38 cent premium to sell the stock at around half its current worth within a month of today. The current open interest reading is 14,115 lots. At the 5.0 strike investors traded 37,000 lots while some 17,000 contracts changed hands at the same strike in January.
JPM – JP Morgan Chase & Co. – News attributed to Reuters suggests a 10% cut in JPM headcount. There was a similar article in London’s Telegraph at the weekend. We’re not sure that this tells us that JPM is in the same boat as other financial stocks, but one might be forgiven for thinking that they are dealing with reality rather than using the environment as an excuse to trim costs. Shares are 10% lower at $25.50, while as noted above implied volatility saw one of the largest rises across all US equities today. In the January contract investors bought put options reserving selling rights at 20, 17.5 and 12.5 strikes in notable volume of several thousand lots at each. At the lower strike they paid premiums of between 83 cents to $1.33 to lock in.
GE – General Electric – With only one day to go until the November option series expires, investors are not taking any chances with core investments at General Electric. Volume at the 10 and 12.5 strikes is elevated in hectic trading where investors are paying 17 and 47 cents premium for rights to sell at the respective strike prices. Since shares, down 6.5% at $13.51 are above the strikes they are currently worthless contracts. But earlier in the week pessimism that shares in Citigroup would remain afloat and above the 7.5 strike proved an astute and inexpensive trade. We guess that traders are taking that relatively inexpensive route today in the event that GE or the market tanks tomorrow.
HPQ – Hewlett-Packard – After pre-announcing quarterly earnings, which blew away expectations that HPQ would corroborate the weak economic climate, option investors seem to be doing some hedging today and are looking for some downside in coming weeks. While its shares are 1.3% better at $33.41 today, put option buyers have headed for the December and January 30 and 32.5 strikes today. In the 2009 contract investors bought 14,000 puts with selling rights at the $30 strike at 2.85 and 11,000 puts with rights to sell at $32.50 at a 3.70 premium. Notable today was the 12% rise in implied volatility to 84% despite the share price gain, which bucked the market in the morning.
PRU – Prudential Financial Inc. – A market rumor that the company was set to be removed from the focus-list at a tier one financial institution saw Pru’s share price decline early in the session. By 11:30 shares were 3.3% lower at $15.88. Some analysts have scoffed at the recent decimation of various insurance company shares noting that they are not only sufficiently well capitalized but also that any claims against them are likely to be far less than the damage suffered by recent selling. In the January contract one house appears to be dealing this scenario with a rebound play involving a 12,000 bull call spread between the 25 and 30 strikes for a net 1.0 premium. The trade will work to the maximum benefit of the buyer should Pru’s shares more than double to the upper 30 strike by expiration at which point the premium would be equal to the distance between the strike prices or 5.0.
FDO – Family Dollar Stores – Rebounding from an earlier intraday loss shares at the discount retail chain are now higher by 0.5% at $26.61. Investors earlier locked into protective put spreads aimed at defending against losses for the shares, which have actually performed rather well in the current climate. We’re sure not many companies can claim year-to-date appreciation for shareholders. In the January contract an investor bought the 15/20 put spread at a net 1.15 premium, which gives best amount of upside should the share price slip to the January low at around $15.00. At that point the trade will be worth 5.0 or a net 3.85 to this investor. In another trade suggesting near term optimism in the management of the company or perhaps in its ability to profit from the economic climate, an investor sold puts in the December contract at the 20 strike. In looking further at today’s activity, it could be the case that the same investor sold these closer-to-expiration puts in order to partially fund the put spread expiring in January.
