Today’s tickers: DRYS, STI, VIX, XLF, BAC, KEY, FDO & GLD
DRYS – DryShips Inc. – The dry bulk carrier appeared on our ‘most active by option volume’ market scanner today as its shares continue their steady decline. Currently its share price is off by 20% to $5.20. But, what really caught our attention was the call-to-put ratio on DRYS because calls were traded 3.34 times to every 1 put in action today. This ratio was inflated by call purchases initiated by a far-term bullish trader expiring two years forward. Some 1,000 calls were purchased at the January 2011 10 strike for 3.20 per contract, while 10,000 calls were bought at the 40 strike price for 1.10 apiece. Apparently, this trader is getting in early on rights to the cargo-carrier, which he believes will rally to $41.10 in two years time. The dismal performance presently seen at DRYS contradicts this bull’s sentiment that the cargo-carrier is not on a collision-course to bankruptcy, and rather will make a comeback. The pattern seen in the short-term February and March contracts was consistently call selling across the 5.0, 7.5, 10, and 12.5 strikes, as well as low-volume put buying at the 5.0 strikes in both months.
STI – SunTrust Banks Inc. – The skies look ominous over SunTrust as shares have dropped over 24% to $9.42, which is awfully close to its 52-week low of $8.85. The Atlanta-based company announced dividend payments for common stock shareholders in the amount of 10 cents per share, down from the previous 54 cent payout. Option implied volatility has increased by about one-third to 177%, and attracted option players to the area. Option traders today reflected the falling share price, scanty dividend, and upward move in volatility, by shedding calls and picking up puts in February. At the February 5.0 strike, nearly 1,500 puts were purchased for an average price of 18 cents each, while at the February 7.5 strike, over 4,500 puts were snapped up for about 48 cents per contract. The priciest put purchases occurred at the February 10 strike, where 1,200 cost investors around 1.31 apiece. 1,200 calls were sold at the February 10 strike for a VWAP of 1.59 each, while at the February 12.5 strike price, 2,800 calls yielded a premium of approximately 59 cents per contract. Surprisingly, not all of the call activity at the February 15 strike was on the sell side. Even though expiration is under two weeks from today, only 1,850 out of some 3,130 calls traded today were sold for an average premium of 20 cents. This must mean that either some call buyers have pretty deluded optimism for STI or that they will be taking further action on these contracts in the near-future lest they wind up with nothing.
VIX – CBOE Volatility Index – The poor reception afforded to Mr. Geithner’s speech in which little was revealed, reminded investors that more turbulent times may be ahead without some sense of resolution to the health of banks’ balance sheets. Implied volatility, Wall Street’s fear-gauge added 7% to 46.8 today. We’re still trying to unravel the pattern of options trades here. In the March contract, it appears that 2,000 put options with a 32 strike may have been sold at 95 cents in order to fund the purchase of 70 strike calls at 60 cents. That would give the investor a credit, but admittedly facing potential downside risk should volatility subside beneath 31.65. It seems to us that buying a strangle here at 1.55 doesn’t make a whole lot of sense given the magnitude of the move required to turn this trade profitable (we can see the calls were bought). Elsewhere the March 45/60 call spread was initiated 2,000 times at a net premium of 2.35, which gives a breakeven at expiration of 47.35 on the VIX index.
XLF – Financial Select Sector SPDR – President Obama’s press conference last night fueled more nervous anticipation for Treasury Secretary Geithner’s speech today regarding the Financial Stability Plan. The banking index jumped with activity this morning with option investors vying for positions amid all of the uncertainty in the financial sector. Shares are currently down over 2% to $9.64 today, prompting one investor to sell 10,000 calls at the February 11 strike price for a premium of 26 cents per contract. Another XLF pessimist sought downside protection by purchasing 20,020 puts at the March 7.0 strike for 26 cents apiece. Shares would need to decline to $6.24 in order for this bear to breakeven on his trade. One investor played today’s 88% implied volatility rating and initiated a 4,000 lot strangle in the June contract. At the June 8.0 strike, 4,000 puts were purchased for 94 cents each, and at the June 10 strike price, 4,000 calls were bought up for 1.66 per contract. The net cost to the trader is 2.60 for the strangle, yielding breakeven points of $5.40 on the downside and $12.60 on the upside. This investor seeks a sharp directional movement in order to profit but would also benefit from a rise in implied volatility, which would serve to boost the premiums commanded on either option.
BAC – Bank of America – Heavy two-way options activity accompanies a 14% slide in shares to $5.90 at BoA today. Overall options volume of 376,000 contracts has traded by noon, while option implied volatility is lower at 190%. Just ahead of midday one investor sold 20,000 March expiration calls at the 8.0 strike at a 67 cent premium. It’s hard to state with any conviction that this investor isn’t bailing out on what looked like a good position yesterday or whether this is a fresh short take on the shares, which are struggling to gain traction following Treasury Secretary Geithner’s maiden speech.
KEY – Keycorp – One of the leading volatility gainers according to our market scanners today is at regional lender, Keycorp. Its shares have recently been pushing the ceiling of a $6.00 – $9.00 range and today investors have dumped them unceremoniously right off the roof. At last count they were 19% lower at $7.28 while options implied volatility raged 30% higher to 143%. The price of protective put options at the February 10.0 strike virtually doubled to 2.50 per contract where investors grabbed around 2,100 lots. At that strike very little open interest exists as investors built new positions. At the same strike on the call side it appears that investor ditched 1,400 call options at a dime apiece in expectations that today’s Treasury plan won’t benefit Keycorp.
FDO – Family Dollar Stores – The discount retailer received a vote of confidence from one option trader today even as shares dip slightly by 1% to $27.16. Amid the strong financial earnings and the fact that FDO seems to be a recession-friendly place to shop for cash-strapped consumers, this investor opted to reel in pure premium. In March at the 22.5 strike price, this dollar store bull sold over 12,000 puts for a premium of 30 cents per contract. As long as shares remain above $22.20, this trader can breathe easy.
GLD – SPDR Gold Trust – Even before the stock market was able to take the opportunity to react negatively to the latest government plan, the price of gold had headed higher overnight to around $915 per ounce on the February contract. Gold is once again a vogue topic for those who believe that the current economic situation will debase the dollar with economic agents resorting to hoarding physical gold to protect their wealth. We’re unsure how much a loaf of bread would cost in terms of gold these days, but we are more sure that these investors are telling us that gold will extend its gain to $1,000 per ounce before the March option contract expires. Investors paid 1.30 in premium to buy call options allowing them to buy shares in the GLD sector fund at a fixed $100.00 per share (the fund is pegged on a ratio basis to the spot price of gold and that price would be equivalent to $1,000 per ounce).
