Thursday Options Update: VIX, ADS, GOOG, OI, CCK, RIMM, JDSU

Rebecca  Engmann Darst co-authored this report.

CBOE VIX Index (VIX) – Another false dawn with the bull dragged to the water by the ring through its nose only to find the water was tainted. The early buying inspired by an insipid inflation report soon gave way to another bout of selling and a casual record reading for the VIX index, which reached 81.17. With options maturing next week, investors are forced into an ever tighter corner and have reached today for 90 and 100 strike calls. One never knows whether there will be a spike at expiration and it’s a tough call to sell into the weakening economic environment. The early inflation optimism was no ‘buy’ signal today and we’re mystified as to why investors reacted so positively to what is really bad news: Price pressures are slowing because commodity prices are in decline thanks to gathering evidence of weakening demand.

Alliance Data Systems (ADS) has seen options volume totaling 16,000 lots, which is high in comparison to the 30,632 open interest across the entire contract. The company provided specialist credit and marketing profiling services to around 450 clients to assist in acquiring new customers. Its share price has cratered from a 52-week high last October at $80.79 to a rather depressing $42.33 today. Options activity occurred at two strikes in the January 2010 puts where 12,605 lots traded at the 25 strike (premium 2.90) and 4,020 lots traded at the 45 strike (premium 11.30). The transaction may well be tied to an underlying stock position. The 45 strike already has open interest of 4,050 lots and the current delta reads 41%. This investor maybe rolling down from what should be a profitable open position to the lower strike where the delta of 13% requires three times the number of contracts to maintain an equivalent delta position.

Google Inc. (GOOG) - You have to ask why Google insists on announcing earnings the day before options expiration. This leads to aberrations and dare we say opportunities across Google’s options. The chart of its stock – like that of most companies – isn’t a pretty picture with a 52-week range spanning $747.24 to $310.30. Hence, the deserved historical volatility of 88% on the shares. That translates into overall option implied volatility of 100% across the contract. But that’s not the cost of hedging after-the-bell earnings today in the October contract. Oh, how those who need to hedge would like to pay just a mere 100%! Instead, they have to buy options with embedded volatility of around 300% for that honor. To put that in perspective the cost of the October 320 straddle costs a gross premium of around $46.00 offering investors an effective hedge should its shares create a new 52-week low below $274 or bounce back above $366. And by the way, that needs to happen before we wrap up by Friday’s close of business please!

Owens-Illinois Inc. (OI) - This company manufactures glass containers and manufactures healthcare product packaging. Its shares are lower today at $20.65 at the bottom of the year’s range and a long way off the $60.60 peak. The company announced free cash flow pressures a couple of weeks ago due to a higher dollar and rising energy prices. The former hurts the company given its global nature, but while we understand the issue with rising energy prices, investors must be wondering why the company is under such pressure in light of declining energy prices. Several analysts have declared the run on the share price as overdone and state that they think it offers extremely rich potential. Perhaps that’s why we’re picking up at-the-money put sales at the October and November strikes. There appears to be increasing appetite to sell the October 20 puts at a premium of around 60 cents today, which have traded over 4,000 times. With a day before these options expire the 18% delta tells us that the chance of a further decline is predicted to be pretty slim.

Crown Holdings (CCK) is a fellow packaging company and whose share price added almost 10% to $19.80 following a glowing earnings report earlier. Strategy seems to be working well and the company has seen a return on its investment in underserved global regions. In the option market investors were quick to clutch at just-in-case protection at the November 15 put strike, which traded 3,750 times at a premium of 55 cents. The move strikes us as unusual in the aftermath of earnings. The share price has been under pressure and the earnings news was positive – but we’ve seen good investments sour for no reason lately. With implied volatility coming off the boil and declining to 89% today, this investor is still paying a dear price to establish protection below $14.45 while the 52-week low was recently triggered at $16.28.

Research in Motion (RIMM) whose price chart looks like it recently went through a highly successful reverse stock split saw pretty healthy option volume of around 100,000 by early afternoon. Shares are suffering at the hands of a soggy tech environment and the shares are down today at $55.30. Investors seem to be worried about further declines ahead with put buyers on the prowl at the November 50 line where 3,800 lots changed hands at a price of 4.70. The volume is equivalent to the current total number of puts outstanding and suggests investors want to be prepared for weaker prices or higher volatility. Yet the implied volatility reading at the strike at 107% is already lofty.

JDS Uniphase (JDSU) just jumped onto our “hot options volume” market scanner and the news isn’t entirely bullish. The put/call ratio of 10 indicates investors are diving for cover as the share price takes a 2.9% slapping to $6.07. Some 2,000 of the October puts at the 7.0 strike changed hands at 90 cents while almost 1,000 December 6.0 puts are in play at 85 cents. But the major volume could be a put spread at the January 5.0 and 15 strikes where 7,500 lower strike options traded compared to 3,500 upper strikes.

Comments

[Warm_Paw:]

Wall Street journal was reporting LIBOR goosed markets.
Today's positive DOW is a minor short squeeze.
RIMM is an example. Which direction is it going today?
Same with AAPL. Bullish stocks aren't getting squeezed today.
November at 50 for RIMM has nothing to do with RIMM and everything to do with Mortgages resetting.
Smart investors know the sub prime crisis has one more bump before it lays dormant for a while.
Someone claiming today is a positive is an expensive person.
The selling will begin at 2 PM today with the real bailing occurring tomorrow in ernest. I'm on the sidelines until at least December.

2008 Oct 20 11:15 AM