Monday's Options Report: JP Morgan, Citigroup, Elan, Home Depot, Vivus, ITT

Equity markets can’t decide on a broad direction to commence the trading week. On the one hand, earnings are surprising to the upside meaning that the string of double-digit earnings growth may not yet be broken. On the other hand none of the financial worries that plagued related share prices and raised fresh alarm bells over the health of the economy have subsided. While the financial sector is broadly unchanged, shares at two major institutions remain close to one-year lows.

JPM – Less than three months ago shares at JP Morgan were trading at $53 and today have lost 17 percent to stand at $43.90. Implied options volatility has risen to one third more than the historic reading on the shares and stands at around 36.8 percent. Considering that implied volatility has rarely been above the 20 percent level in the last 12 months, the current environment has created an elevated reading. Monday’s option trading is finely balanced with each call neatly offset by a put trading. But it’s hard to make the claim that traders are selling this elevated measure of volatility in the hope that it will disappear anytime soon. In the December series the 42.5/47.5 strangle may be in play on volume of 3,000 lots at a premium cost of 5.0. In the January series it looks as though the same type of trade is in play but this time at the 40/50 strikes at a price of 8.0.

C – Shares in Citigroup were trading at $55.33 just two months ago but have lost 16 percent since May. While the implied volatility in shares at Citigroup mirrors that at JP Morgan, the bulls have remained out in force on this stock as is evident in the reading of open interest where open interest on the call side has hugely outpaced that on the put side. Investors hold 28 percent more calls than puts on this stock, while open interest appears to be growing evenly despite the drubbing of the last week. Ten days ago open interest favored the bears with put positions outnumbering calls by 58,000 at 559,000. By the end of trading last week traders’ appetite for puts had accelerated. Put positions grew by 15 percent to 644,000 while call open interest grew 9 percent to 644,000.

ELN - Fully 105,942 lot volume in options of the NYSE-listed, Irish biotech Elan Corporation (ELN) are in action today, equivalent to roughly 11 percent of the company’s total open interest. Underlying shares are down 10.5 percent at $17.00, with puts outpacing calls by a factor of 1.5. Volume has settled today on the October 19.00 put, where more than 14,000 lots moved with a bias to the buy side at premiums of $2.35 and $3.00 – an increase of more than 125 percent. These trades went through against existing open interest. Implied volatility on Elan options stands at a whopping 67.5 percent, head and shoulders above the historical documented volatility of 40 percent in Elan shares.

HD - Options in Home Depot (HD) are trading at a respectable clip this morning, with shares up 1.5 percent this morning at $37.33. Traders made a beeline for the August 45.0 straddle, where 20,500 lots moved on each side. The September 40 calls were also well patronized, with 3,400 shares trading at inflated premiums of 0.55 cents. Implied volatility currently stands at 30 percent. Historically, Home Depot is a fairly volatile share, with 27.4 percent volatility in underlying share prices.

VVS - Vivus Inc., a pharmaceutical company that originally made its mark in the development of therapies for erectile dysfunction in men, announced today that the U.S. FDA has approved its application to market Evamist, the first transdermal hormonal therapy for menopausal women. As such, the company will be eligible for a milestone payment of $140 million. With shares up 5.6 percent on the day, trading at $5.80 at the top of the noon hour, options are trading to the tune of 24,820. This is a fairly good tip that the positioning is fresh, given that today’s volume represents 66 percent of its total open interest. Volume has centered on the September 5.0 calls and puts, where 17,610 lots traded on the put side, and 6,000 traded to the call at premiums up 25 percent on the day. Selling of these puts would imply a bullish stance on Vivus share prices over the next month.

RAI - Reynolds American Inc., the holding company for R.J. Reynolds Tobacco, grabbed our attention after our screens registered an increase in trading activity of more than six times the daily average. Today’s actively traded volume of nearly 11,000 contracts represents about 10 percent of the company’s total option interest. With shares up half a percentage point at the noon hour, currently standing at $61.13, volume has centered on the September 60 and 65 calls, with nearly 3,500 contracts trading at the latter strike. Given comparable volume on the put side involving the September 55 strike, some of the traffic today may be involved in strangle activity, though the sharp decrease in price premiums on the put side leads us to conclude that today’s market is exerting pressure to sell puts. A look at the total open interest in Reynolds American options continues to show a bias toward put-side positioning by a factor of more than 2.5.

VIX - The CBOE VIX index [VIX] remained firm despite a 1.2 percent decline to 22.94 to start the week. Once again there is heavy volume totaling 197,000 lots by 12:30pm with August 15 puts trading 20,000 times at 0.15 while much of the remaining action has gone through from the 20 to 30 strikes on the call side. In the September contract there could be a ratio call spread in action between the 20 and 25 strikes where 10,000 lower strikes have traded against 20,000 higher strikes. It could be the case that some investors are betting that volatility is set to remain with us but that it won’t escalate much further.

ITT - Finally, options in ITT Corp. are trading at more than 8 times their average daily volume, with upwards of 11,300 contracts in play this morning. This is equal to nearly 20 percent of the open interest, with puts and calls moving at a fairly even clip. Today’s attention has focused on the January ’08 65.00 straddle, which given today’s share price just a hair below $64.00 is currently at-the-money. Implied volatility on these options is at 31 percent, a significant elevation against the 20.5 percent volatility in ITT Corp share prices.

The Dow Jones industrial average was 0.12 percent higher around lunchtime at 13,284.40. The S&P 500 index rose by 0.15 percent to 1,461.56, while the Nasdaq composite index added just 0.05 per cent to 2,564.61.