Friday Options Update: MSFT, HBC, DWA, AGN, XLF, C, MS and VIX

Rebecca Engmann Darst co-authored this report.

Microsoft Corp. (MSFT)– Despite an initially positive response to Microsoft’s earnings yesterday, its shares couldn’t avoid the initial Friday meltdown. By noon they had rallied 1.1% to stand at $22.59. Given the robust options volume sniffed out by our scanners today we were curious to look at precisely where the volume took place. In the November contract at the 19 strike puts investors sold several blocks of 2,000 lots between 82-84 cents as volume rose to around 19,000 contracts in the series. On looking further we note that open interest during the past five sessions has grown by roughly the same amount indicating that today’s put sale is likely the successful removal of intended downside protection over earnings. So today’s market meltdown provided a cherry on top of the cocktail for at least some Microsoft option traders. Elsewhere the January 30 strike call appears to have been sold around 15,000 times indicating a lack of conviction that the shares will recover too strongly in this environment.

HSBC Holdings ADR (HBC) – While Asia has been largely unscathed by the financial crisis to date, there is no escaping the fact that the fresh wave of currency dislocation is impacting economies and companies. Today shares in HSBC are sharply lower by 15.5% at $54.45 as evidence emerges suggesting corporations are being hammered with currency related losses. The Far East and emerging markets are core areas for HSBC and Standard Chartered Bank. Our market scanners picked up a sharp rise in implied volatility in HSBC options by 15% to 86% as put demand was evident at the 60, 50 and 40 strikes. At the two lower strikes where currently no customer interest exists, investors paid premiums of 4.30 and 1.50 respectively to hedge against further downside at HSBC.

Dreamworks Animation (DWA) – An interesting play in Dreamworks where implied volatility has reached a fresh peak today at 81% on the equity options. An investor appears to have further interest in adding to a long strangle on the stock in the November contract. The trade involved the 30 calls and 25 puts where around 1,200 lots traded at a combined premium of 3.0. Shares are trading at $27.28 and the investor appears to be adding to an existing position where similar open interest exists.

Allergan Inc. (AGN) – Eye care and wrinkle treatment manufacturer, Allergan, didn’t feel the love from an analyst downgrade of Swiss competitor, Alcon Inc.  where revenue forecasts were decreased. The headwinds of a stronger dollar, slowing U.S. sales and competition from generic prescriptions all played a role in creating a 52-week low for Allergan shares, down 2.9% at $34.44 today. Our option scanners picked up activity at the January 45 strike call option and if we’re reading the tape correctly, this appears to be a large losing trade. An investor sold 10,000 calls at 75 cents this morning in what might be the closing leg of a similar bought transaction on October 9 where 10,000 lots were added to open interest at prices ranging from 5.40 to 6.90. At the time shares in the company closed at $41.54 or 175 above today’s trade.

Financial Select Sector SPDR (XLF)– Financial shares are lower on average by 5% at 13.75 according to the actively traded SPDR. Today option investors have sold the November 16 strike call where volume is heaviest. We note that open interest here has jumped from 28,000 to 73,000 lots during the week, which is starting to look a pretty soggy bet just now.

Citigroup Inc. (C) – Trading through its 52-week low and down 6% at $12.30 hasn’t deterred some bullish position taking in the 15/17.5 call spread in the front month November contract. Clearly some investors expect a rebound sometime soon. In the Dec, Jan and Mar contracts puts were active at the 10 strike.

Morgan Stanley (MIS) – Option implied volatility screeched 25% higher to 150% in response to a share price dive of 7.4% to $16.74 this morning. It marks the weakest price in two weeks and highlights the perception that the authorities are powerless to fight the market. Heading into this session open interest at the November 12.5 strike put options read just 5,553 contracts, which compares to volume at the strike today of 29,077. Some 17,000 lots were bought at 1.70 here and as such infer a decline to $10.80 within a month.

CBOE VIX index – the chances of a reading above 60 on the so-called fear-gauge by February are currently eight out of 10 according to the current reading of delta at the strike. Today an investor took those odds placing fresh open interest at the strike on volume of 12,500 contracts at a premium of 1.75.

Comments

[NOWHEREMAN:]

Some one has done their Homework. The VIX hit 1.75 in the 1987 Crash. That Is The Historical High.

2008 Oct 24 01:57 PM

[NOWHEREMAN:]

Actually, I am in the Process of trying to pick an entry point on one of the stocks listed, When the real spike comes, everything will drop and nothing will buck the trend, a trading halt will occur but after resumption the drop will continue. When the Jerk at the Fed drops the discount rate by at least 75 basis points, the Market may rebound.

The Stock is Morgan Stanley, the price $11.

2008 Oct 24 02:04 PM

[User 285278:]

Apparently, people at Citi do not know how to draw a contract! The best opportunity they had to prosper disappeared with Wachovia. Citi is drawing closer to bankruptcy. Mr. Pandit has no clue what is happening. He has a bloated company with over 300,000 employess. Their annual salary alone anmounts to $20B. The banks income does not even match this. If I were the CEO I would have cut the staff by 100,000 by now. Since Mr. Pandit did not do it, all 300,000 employees are going to lose their jobs. I have considerable amount of my retirement money tied up in Citi stock and hate see incompetant people running the company to ground.

2008 Oct 24 02:59 PM

[Emerald:]

I don't see bankruptcy ahead for Citi, although they will limp along until 2010. Remember, the government is your partner at the preferred level. I agree, they need to cut their overhead more. Note: Long C.

2008 Oct 25 05:52 PM

[User 285876:]

Why Goldman Sach's has "Convinced Sell" rating for Citi?


On Oct 25 05:52 PM Emerald wrote:

> I don't see bankruptcy ahead for Citi, although they will limp along
> until 2010. Remember, the government is your partner at the preferred
> level. I agree, they need to cut their overhead more. Note: Long
> C.

2008 Oct 26 07:04 AM