Monday Options Update: C, JPM, ITU, NUE, GCI & VIX

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Includes: C, GCI, ITU, JPM, NUE
by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

Citigroup Inc. (NYSE:C) – What’s the option market's verdict to the government bailout at Citi? Well, that’s pretty inconclusive. The option volume at 486,000 contracts is massive, but the flows have been evenly balanced between buyers and sellers as to muddy the picture. We can’t say for sure that today’s 54% leapfrog in the share price to $5.85 is causing an abandonment of freshly hatched bearish bets on the stock at the December 2.5 and 5.0 strikes. One gets a sense that the jury is out and despite the clear sigh of relief across the broad market today. Many of the call options traded today in the December contract were sold at those same strikes while our observation of the volume at the 10.0 strike is that the larger chunks were bought at some of the lowest prices of the day. For example around half of the 27,000 lots traded was bought at prices between 16-22 cents, while the remainder was traded at prices as high as 80 cents. In the January contract puts at the 2.5 and 5.0 strikes were actively bought.

JPMorgan Chase (NYSE:JPM) – An 11% gain to $25.27 in sympathy with the relief brought on by Citi’s bailout spurred high volume in JPM options. In the January contract 17,000 lots were traded largely initiated by buyers at the 30.0 strike while put buying was healthy at the 20.0 strike while put sellers emerged – likely as part of a spread - at the 10 strike.

Bank Itau Holding ADRs (ITU) - While the US financial system took a step to exit the woods today, we’re wondering if investors don’t feel the same for Latin American issues. The weight of strain on corporate balance sheets migrating from the US elsewhere is likely to be just as devastating to emerging market economies, whose health is partially determined by the state of the commodity sector. In option activity today an investor appears to have bought a straddle on Bank Itau using the December 10 strike. ADRs representing shares stand 9% better at $9.90, while we noted two blocks of 5,000 lots trade on both calls and puts earlier. We see the puts were bought while the jury is out on the call direction. The gross premium of 3.25 would require a share price move beyond the borders of $6.75 and $13.25 by expiration next month. The key 52-week support stands at $7.09.

Nucor Corp. (NYSE:NUE) – Shares in commodity companies are up on the whole today, while steel-maker, Nucor is up over 10% at $31.18 at $31.17. Curiously on Friday afternoon we took mental note of some interesting option activity and today our scanners have picked up still more telling volume that the bulls are out in force on this stock. Late week action involved the January 32.5/40 call spread at the apparent expense of well out-of-the-money puts, which struck us as a neat combination to play. However, today’s activity shows more aggressive bullish action with both call strikes having been bought on volume of 5,000 contracts today at 4.0 and 1.65 and so indicated unmitigated bullish prospects for a recovery. The lower strike puts also appear to have been purchased today. We could be watching some unwind against Friday’s sold puts at the 17.5 strike given the decline in premium of around half. That shows you the value of the erosion of time value over the weekend in conjunction with the jump in Nucor’s share price.

Gannett Co. (NYSE:GCI) – USA Today publisher, Gannett Co. has seen its share price decline from around $40.00 one year ago to around $6.00 last week. Recession fears always tend to put media and advertising companies on the chopping block when recession pressures build, but this demise seems extreme. The company announced in a memo to staff Sunday that it was further reducing headcount from its 450-strong newsroom with a 5% cut. While shares are higher at $7.05 our market scanners indicate hefty option volume at the January 5.0 strike puts where a block of 25,000 options traded to the middle of the market. On the face of it this appears that an investor sees further downside to the stock. There are no commensurate positions at the strike and while this position could be tied to stock, or could have been a sold position, it does look like an investor maintaining a bearish stance. The 30 cent premium implies a share price of $4.70 at breakeven or a decline from present of 33%.

CBOE VIX Index (VIX) – Despite Friday’s huge rally – and partially due to the intra day index swings – volatility closed stubbornly high. Today, the VIX took a drubbing as index values rose hot on the heels of further government intervention to stave off systemic risk. The VIX index slipped 8 points or 11.5% to 64.32 as the S&P 500 index rose by 4.3%. VIX options saw modest volume and the most active of all series was the December 45 line where 11,068 contracts were exchanged indicating investors' expectations that the VIX should head lower into year-end. The volume almost matches the current reading of open interest as positions are built.