Today’s tickers: XLF, GS, VIX, CX & T
XLF – Financial Select Sector SPDR – Shares in this financial portfolio are off to the races this morning and stand 10.5% higher at $10.10. Heavy option activity doesn’t confirm the relief with which investors have greeted the so-called “bad bank” plan, which would help remove the bind of lending due to toxic assets clogging up financial companies’ balance sheets. Within the 81,000 call volume at the February 10 strike, where average premium was 74 cents today, 45,000 calls were sold while 26,000 were marked as bought. At the March 12 strike call, which saw most volume in that contract, more call volume appears to have been initiated by sellers where premium of 38 cents was achieved. In the February puts, it appears that a 19,000 lot put spread was traded accounting for most of the volume at the 8.0 and 9.0 strikes. In this trade, which we can’t tell was an opening or closing transaction, the investor sold premium of 32 cents at the upper strike in exchange for the payout of 16 cents at the lower strike. This could be simply a credit put spread aimed at taking the net 16 cents in the event that financial shares stay afloat, or it could be the closing side of a trade in which the buyer has now lost confidence. Implied volatility on the XLF dropped to 77.9% today.
GS – Goldman Sachs Group Inc. – Shares of GS are up nearly 10% to $85.93 this morning and bullish options investors are piling into the call side looking for upside exposure. Some have looked to the February contract, initiating a call spread at the 85.0 and 95.0 strikes, while others have stretched their optimism into the March contract. One investor appears to have purchased 5,800 lots for 2.35 at the March 100 strike. If shares of GS can rally through $100.00, profits will be realized at a breakeven of $102.35 and beyond. Options implied volatility is off by around 10% at 69% today.
VIX – CBOE Volatility Index – The S&P’s fear gauge is lower but holding steady at the 40 handle after the coverage of the bad bank plan. That’s a daily decline of 4% as investors consider whether or not the news will come to fruition and more importantly whether the plan might provide a lasting solution for the broken economy. One option trader appeared to cast a shadow over the fact that volatility is lower today as he used the March contract to make a call spread combination that would benefit in the event of higher volatility in coming months. The trade involved around 7,000 call options at each of the 50 and 60 strikes where the premium paid at the 50 strike of 3.00 was offset to the tune of 1.35 at the 60 strike. The investor now has upside exposure to volatility that would create a maximum payout of 8.35 per contract should the VIX be higher than 60 by the expiration date. The use of a spread also lowers the point at which the trade breaks even, which is 51.65.
CX – Cemex – Shares of the third largest producer of cement have rallied today by 7% to $9.06, and jumped to the top of our ‘hot by options volume’ market scanner due to two risk reversal strategies initiated at the February and March contracts. It appears that this investor is long of the stock and is opportunistically using the rising share price and subsequent fall in the price of puts and rise in the price of calls to finance his positions. Put debit equally offset call credit for this trader and thus the trades were enacted at zero-cost. The investor appears to be buying downside protection by purchasing 20,000 puts at the February 7.5 strike and selling 20,000 calls at the 10 strike price. An identical risk reversal was played out at the March contract with the purchase of 10,000 puts at the 7.5 strike and the sale of 10,000 calls at the 10 strike.
T – AT & T Inc. – Shares of the telecommunications giant slid by 2% today to $25.35 following the release of mixed fourth quarter earnings. AT & T just missed analyst expectations by one cent, earning 64 cents per share, while net income for the fourth quarter dropped 23%. But, there were some positive developments for the sole carrier of the iPhone. An additional 1.9million iPhone accounts were opened out of a total of 2.1million new wireless subscribers. The company has forecast that it will continue to grow in 2009 in spite of the recession, but has also disclosed the need to shirk capital expenditures by a projected 10% to 15%. In the July options contract investors appear to have initiated a couple of straddle combinations at higher strike prices. This indicates to us that the straddles were sold and that the investor anticipates a gradual recovery in the share price towards the 30 and 40 strike prices. In the 30 strike 8,000 combinations were traded at what appears to be a premium of 6.83. In this case the shares must be north of a breakeven at expiration of $23.17. The closer to the $30.00 the better for the investor who hopes that he has pinpointed the expiration price by selling calls and puts
