It used to be the case that trading on any given Monday was kind to investors courtesy of a plethora of mergers, takeovers and acquisitions announced over the weekend. These days the weekend has become a welcome distraction from the financial bloodshed that takes over column space and air time. And so yesterday’s tone fluffed investors’ fragile confidence with a rally that spanned the entire session turning to minor losses by the close. That set traders up perfectly for a continuation of the rout on Tuesday with some key price action coming to the fore.
IAI – iShares DJ US Broker Dealers ETF – The ETF whose components include the biggest names in brokerage, including Goldman Sachs, Merrill Lynch, Morgan Stanley, CME Group et al. is caught in investor crosshairs today. With underlying shares down 2.40 percent at $48.00, today’s activity involved 10,000 contracts in the September 50-52 puts. We can ascertain that the 52 puts were sold at a price per contract of $4.60 per contract, and given the stable level of open interest at this strike, we gather that it may have been the closing of positions that were opened when the same contracts were trading for $3.60, collecting a premium of $1 per contract. The investor may then have rolled into a new position of similar size at the 50 strike, which traded to the middle of the market at $3.80 apiece. The negligible level of open interest in the September 50 puts indicates to us that this was new positioning. Both transactions guided volume in the ETF to more than 8 times its average daily volume.
PPH – Pharmaceutical HOLDRs Trust – Options in the big pharma ETF are trading at a magnitude equal to about 14 percent of its total open interest, as underlying shares slide 1.3 percent to $77.13. Today’s volume has centered in the January ’08 series, where nearly 6,700 lots in the 85 calls traded to the middle of the market at a contract price of $1.10. A comparable number, 6,100 lots, also traded to the middle of the market in the 70 puts at a contract price of $1.20.
EMC – EMC Corp – With the price curtain safely lifted on software IPO debutante, VMWare ($29 bucks a share, valuing the company even bigger than Ford), the options buying bonanza continues for proud parent company, EMC Corp. Today’s 200k volume is more than two and a half times the average daily traffic, as the market trades on implied volatility of nearly 44 percent. We observed heavy volume at the August 19 calls, which traded primarily to the bid, though the 20 calls were split, and September 20 traded likewise to the bid. After yesterday’s high-octane gains, shares have pulled back 1.5 percent to $18.80, but options volume remains sharply elevated. Seven times as many calls are moving as puts, with about 40,000 lots moving at the August 19 and 20 calls. A rush to sell calls was also seen in the September 20 calls, where 15,500 lots traded on premiums down 35 percent today.
RTH – Retail HOLDRs Trust series declined nearly 3 percent to $96.98 sending shares to the lowest in eight months. The day got off to a bad start with reports from Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT) indicating a deteriorating outlook for consumption. It’s a busy week for consumer stocks
JCP – JC Penney reports later this week and analysts expect Q2 EPS of $0.77. Shares today are down nearly 3 percent at $63.14. Investors yesterday may have bailed out of residual put positions in the August series at the 65 strike. Elsewhere, we saw the August 70 put trade on a volume of 1,000 contracts on premiums up 28 percent from yesterday.
KSS – Yesterday’s buying of calls on shares at Kohl's may turn out to be overly optimistic. It’s easy to see why investors are taking a contrarian view here since Kohl’s shares have underperformed year-to-date with shares declining by 15 percent. That leaves them trailing the S&P consumer discretionary index by more than 10% and the S&P 500 index by more than 15 percent.
JWN – Nordstrom Inc. – Shares are down 2 percent today at $47.72 with options volume light but concentrated at the August 45 puts where investors bought 2,000 lots as high as 0.45 ahead of the weekend’s expiration. In the September contract the 45 strike was also the most popular strike, but volume was low.
M – Macy’s – Shares down 4% at $32.03. In this case volume at the August 32.5/35 strikes indicate a possible strangle combination in action.
WMT - Shares in Wal-Mart are down 5 percent this afternoon, after much-maligned earnings from the retail goliath revealed Q2 EPS of 0.76 per share, in line with street estimates but confirming the widely held suspicion that the onset of a new wave of bearishness is trickling down to U.S. consumers. Last week, Wal-Mart conceded as much in explaining its move to dramatically slash prices in order to clear back-to-school inventories. Ahead of this morning’s report, options traders had positioned most heavily in the August and September 45 puts. Today, with about 110,000 contracts circulating, we’re seeing a rush to unload call options at the September $47.50 strike, where more than 10,000 contracts sold before noon, most of them for no more than a quarter apiece. Looks like a new wave of everyday low prices as far as options traders are concerned! Wal-Mart shares have underperformed the S&P 500 index by 3.5 percent this year, trailing sector peers in the S&P consumer staples index by more than 5 percent.
MAT - Today’s 9 million-toy voluntary recall by Mattel elicited a near-27 percent jump in implied volatility and a surge in volume to more than six times the average daily traffic. With shares down more than 3 percent at $22.82, we observed heavy selling in the October 22.50 puts, positions unwound at a price of $1.30 today, possibly against new positioning in the near-expiry August 20 puts, 1,000 of which were scooped up at $0.10. Downside exposure to this ticker is cheap today. Elsewhere, we observed heavy traffic in the August 22.50 puts, where more than 1,200 contracts traded at a fairly even divide between buyers and sellers. Mattel options are trading at more than 7 times their daily average today.
ODP – Option volume in Office Depot (NYSE:ODP) accelerated this morning to four times its daily average, with share prices down more than 2.8 percent to $22.84. This decline is part and parcel of an extended bear period for Office Depot shares over the past six months, with shares losing 44 percent over the period before hitting a trough of $21.04 last week. Despite this, the past 5 days have brought about a significant build in September 25 calls, which convey the right to buy Office Depot shares at a price of $25 apiece. The past 5 days have seen a significant build in open interest at precisely this strike, with some 6,000 new positions added during that time – 10 percent of Office Depot’s total open interest. Today’s volume of 3,000 calls traded primarily to the bid, selling at a price of $0.90, while the October 25 calls also sold off heavily, with 1,800 lots going for $1.20. Implied volatility is sharply elevated at 55 percent, the market pricing in the likelihood of 15 percent more volatility than Office Depot shares have historically shown.
XLF – Financial Select Sector SPDR shares dropped by 1.3 percent to $32.64 as implied volatility surged past 39 percent. A warning from Swiss banking giant, UBS, over lower trading revenues directly linked to current turmoil, as it announced earnings caused the sector to decline. Shares are plunging headlong to test the recent low. But for some investment banks it’s too late.
Shares at Goldman Sachs (NYSE:GS) pierced through last Monday’s low sending implied options volatility up by around 8 percent Tuesday. Morgan Stanley (NYSE:MS) also saw its share price head into a void, while the increasingly shaky pillars of power at Bear Stearns (NYSE:BSC) continue to support the shares which have already eased by one third so far this year. With a further 2 per cent drop today to $107.45 shares still have another $7.00 to fall to test the resolve of investors who bought the low last week. Meanwhile shares at Citigroup (NYSE:C) can’t avoid the fallout as investors reassess risk. At $45.62 and down 1.9 percent Tuesday the company’s share price stands just 1.4 percent above a low point that could trigger freefall.
There were no signs that options traders were turning optimistic on the financial sector today either. The put/call ratio on the XLF stood at 11, indicating that call trading was an afterthought today. Major volume occurred in the put series at the January 31 and 34 strikes where volume was similar and registered 31,000 contracts. This could be a put spread or it could be fresh bearishness. Time and sales would clue us in further. Elsewhere the 33 strike in both August and September was most popular with put buyers. In the latter contract investors paid up to 1.9 to protect from a share price decline lower than $31.10 by expiration.
VIX – Pressure on equities was curiously sanguine according to the CBOE Volatility index. It rose just 2.3 percent to stand at 27.18 by 2:30pm. Still, the fear gauge is building quite some head of steam as traders seem prepared to pay higher insurance against continued volatility. The VXN, measuring implied volatility across the Nasdaq market rose 4 percent to 32.04.
The call premium on the September VIX call options at the 25 strike rose by around one quarter today trading as high as 3.3, implying a breakeven value of 28.30. That strike rang up volume of 15,000 contracts while the surrounding strikes at 22 and 30 saw volume of 4,000 lots each. The upper strike premium there stands at 1.8 today.
By 2:00pm the Dow Jones industrial average was 1.19 percent lower at 13,087.00. The S&P 500 index was 1.21 percent lower at 1,435.27 while the Nasdaq composite index dropped 1.14 per cent to 2,513.22.