Thursday's Options Report: Citigroup, Bank of America, Google, SunTrust, Vertex Pharma

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Includes: BAC, C, GOOG, STI, VRTX
by: Interactive Brokers

Citigroup (NYSE:C) - Rumors of an imminent exit for harried Citigroup exec Chuck Prince briefly sent shares in the money giant 5% higher yesterday before company officials hastily refuted the reports. Today Citi's shares are down 1.5% at $44.01, making the conspicuous volumes in upside November calls particularly eyebrow-raising. So what in way of bullish news are option traders seeking from a company that's just reported 57% drop in quarterly earnings and become the apparent target of an emergency liquidity operation to shore up its ailing SIV's? Our guess is that many in the market are unconvinced by Citi's protestations about Prince's departure and option traders may be putting their best guess to work by wagering on a November adieu for the chief. A big hint is the massive build over the past few sessions in November calls at the 45, 47.50 and 50 strikes. Open interest on these calls has more than quadrupled at the 45 level, and tripled in the 47.50 and 50 strikes. A noteworthy aside - option volatility remains elevated at nearly 35% - even higher than before its lackluster Q3 earnings report, a telling tidbit on the level of anxiety coursing through the market about yet-to-be-revealed problems in the big money center banks.

Bank of America (NYSE:BAC) – Bank of America's before-the-bell report revealed a 32% drop in quarterly earnings due to heavy losses in its consumer division and investment banking unit – gapping far below the early morning market consensus. Shares in the company are down 3.6% to $48.21 today – making yesterday's at-the-money 50.0 straddle buyers playing on a break out of the September/October range very sage indeed. Volume in the November contract shows put buying at strikes as low as 45.

SunTrust Banks (NYSE:STI) – Shares in SunTrust, the third-largest banking name in subprime-sweltering Florida and beneficiary of a Warren Buffett shareholding, are showing a 1% gain to $72.58, despite the company's report earlier today of 23% decrease in Q3 net income. The decline was attributed to swelling loan-loss provisions and a near doubling in net loan charge-offs. Options are moving at nearly 5 times the daily rate today, with a clear volume bias to puts. It appears that a trader may have sold an 8,000 lot position in the January 80 puts at $9.00 in order to defray the cost of a like number of calls in the October 80 puts, which were bought for $9.00 apiece. Noteworthy in light of today's share action is the fact that the number of open call positions is twice that of open puts – which otherwise indicates a bullish view on the company's fortunes.

Google (NASDAQ:GOOG) – Google shares are holding steady at $631 ahead of this evening's greedily anticipated earnings report from the ginormous search engine. The question on traders' lips today remains how high the share price can catapult – or plummet – on back of today's earnings release. A look at the price on the October at-the-money straddle provides a good index of the kind of up-or-down move currently being anticipated in the market. At $33.65, the October 30 straddle covers a move up past $664 or below last week's heralded $600 mark to $596.

The past week has seen what may be referred to as "huffing-and-puffing" in the October calls at strikes of 630, 640, 650 660 as traders upped the stakes on a top shelf for the share price. Open interest in these strikes has nearly doubled during that time. But what we've seen this week, especially yesterday, was positioning in anticipation of a possible top for Google shares today. Traders did this by selling calls at strikes above the share price and buying puts at lower strikes, specifically the October 600's. This is a strategy - known as a "collar" – is generally bearish because the trader buys the puts and sells the calls in the hope that the puts will increase in value, and the calls will decrease in value.

Interestingly, the implied volatility reading in Google (up around 39%) is similar to what it was a year ago, when its earnings report missed street estimates but still showed 56% growth in earnings. Last Q3, Google's earnings report elicited a $32 upside jump in shares from the closing share price to the next day's opening. The move among some traders to protect against a downside surprise this time may be due to general skittishness over the share's current all-time-highs.

Vertex Pharmaceuticals (NASDAQ:VRTX) – Vertex shares are down more than 13% to $31.06 at the noon hour after a Schering-Plough clinical study showed promising results for a rival hepatitis drug. Options in the biotech are moving at 9 times the average rate, with what appears to be heavy buying in the November 25 and 35 puts. Implied volatility at more than 66% dwarfs the 36% historic reading.