Monday's Options Report: Limited, Countrywide, Southwest, CBS

LTD – We’ll resist the temptation to riff on “naked” or “covered” calls. Limited Brands Inc., the parent company behind mass-market lingerie retailer Victoria’s Secret and mall chain Bath & Body Works, registered a 2.4% decline in share price this afternoon to $20.96. The company recently reported a jump in sales after divesting its clothing subsidiary, Express, in order to focus on its core lingerie and body product lines, Options are trading at more than 8 times the average, with the nearly 22,000 active contracts equivalent to about 14% of its open interest. Of note are some 7,680 lots bought on the offer in the November 27.50 calls for a face price of $0.20 – a new low. As open interest on this contract has remained more or less stable since early August, this volume may represent the buyback of calls written earlier in the season.

CFC – Shares in beleaguered mortgager Countrywide Financial took a 5% hit today. The mortgage provider, whose ticker in recent weeks has become virtually emblematic with the ruinous tide of the subprime mortgage debacle, announced Friday that it would cut 10,000-12,000 jobs from its payroll in the wake of the housing recession. Observers have taken Countrywide’s announcement as a possible yardstick for job casualties in the mortgage sector at large. Options are trading on a volume of more than 91,000 lots today, more than twice as many puts as calls. We noted what may be strangle positioning in the October contract, at the 15 puts and 20 calls. Put-side activity also appeared to favor the January contract, where 17,700 lots traded at the 17.50 strike, and 13,200 lots traded at the 20 strike. Implied volatility on these options stands at 90% - a tender understatement in light of the 152% licking that Countrywide shares have taken in recent months.

LUV –Southwest Airlines (LUV) saw a liftoff in volume today, with options traffic some 14 times above the average occurring predominantly in the December contract – the site of so much conspicuous directional positioning in major US airlines in recent weeks. Today’s action in Southwest appears to have a distinctly bearish bias. With underlying shares down .80% at $14.70, it appears that 10,000 lots in the December 12.50 puts were bought on the offer at $0.30. The 5,000 lots trading in the December 15 calls were written at a price of $0.95 against no existing open interest. In the January contract, nearly 4,000 lots in the January 12.50 puts were bought on the offer at $0.35. All of this positioning implies a sustained $2 drop in Southwest Airlines share prices over the holiday season and into the New Year.

CBS, VIA - Option activity in “big three” network CBS and its former parent company, Viacom, have attracted bullish positioning in the March ’08 contract. Against a .52% decline in the network’s share price to $30.79, we observed fresh buying in the March 35 calls, at prices of $1.00-$1.05. Volume in media conglomerate Viacom, from which CBS spun off nearly 2 years ago, was also centered in the March contract, where volume equivalent to 10% of Viacom’s total option interest was distributed between 2,500 lots in the March 35 puts, which sold to the bid at prices of $1.27-$1.28. The same month’s 40 calls were bought on the offer at a price of $3.00. Given today’s flat share price of $38.73, the positioning in these March calls and the premium paid implies an 11% increase in share price by next spring.

XTO – West Texas oil and natural gas exploratory and production company XTO is basking in positive share-price buzz after a Barron’s feature article. The positive PR may be one factor behind the surge in option volume to more than 5 times the usual. Higher premiums on both the call and put sides hint at a heightened volatility outlook. Today’s volume is hemmed in the November contract, where we observed 9,560 lots of the November 55 puts sell to the bid at $2.55 apiece, while an equal amount of lots in the 60 puts were bought on the offer at prices ranging from $5.05 to $5.30. This contract has seen a steady increase in open interest throughout the summer. Meanwhile, put spread activity appeared to occur in the January contract, where 7,500 lots at the 45 strike were bought on the offer, against a like amount at the 50 strike, which sold to the bid at $1.60. Shares are currently trading .41% lower at $55.90.

PTEN – Patterson UTI Energy – The 32,750 lots that traded in this Gulf Coast oil driller represent about 21% of its open interest, and it was again in the November contract that volatility traders appeared to privilege their attention. With underlying shares trading flat at $21.84, some 8,000 lots in the November $22.50 puts were bought at $1.75, against 8,000 lots selling to the bid at $5.60 apiece – more than 20% of the current share price. On the call side, 16,000 lots traded to the middle of the market at $0.18.

AVY- The world’s biggest label maker, Avery Dennison, ranks among the day’s top implied volatility gainers, after the company downgraded its profit guidance for 2007, citing lower summer sales. Shares slid more than 4% to $55.97, with option volume equivalent to more than half its total open interest in play. Volume was centered in the at-the-money puts in the September and October contracts. The September puts traded 2,750 times to buyers and sellers on virtually no existing open interest, while nearly 2,000 lots traded in the October 55 puts. Overall, existing open option contracts favor the calls slightly, but we’ll be interested to see how the chips are stacked after the market digests a 40% intra-session surge in implied volatility to 29.9%.

VIX – With the jury still out over the likelihood of a September Fed rate cut despite mounting evidence of an economic slowdown, volatility continued its skyward trek this morning. The CBOE Volatility Index is showing an 8% climb to 28.38, on track to test the 30-mark once again. Heaviest option volume appears at the 30-level in the September contract, which has traded more than 11,000 times. Given the similar volumes in the October contract, we surmise that call spread activity at the 25 and 35 strikes may be in play.