Monday's Options Report: Apple, Rackable, Virgin Media, CTC Media, Valero, Schlumberger, XLF, VIX

by: Interactive Brokers

Apple Computer Inc. (NASDAQ:AAPL) - Apple's much anticipated after-the-bell report has market players keen for a gander at the first full quarter of iPhone sales, and greater disclosure surrounding Apple's commission structure with iPhone servicer AT&T. While the market is generally positioned for price appreciation in the wake of its earnings report, the fact that shares have gained 25% over the past quarter suggests that valuation may be sitting a bit heavy on some traders. With shares 1.8% higher at $173.50, bullish near-term expectations are finding expression through heavy buying in November calls at the 175 and 180 strikes. The outlook into January shows more abbreviated upside expectations, with call spread activity occurring between strikes 180 and 200. A look at the delta on these calls indicates that while the odds are 50/50 of Apple shares trading above $180 in the first month of 2008, there's less than a one-in-three chance that Apple will see the ball drop on $200 by that time.

Rackable Systems Inc. (RACK) – Rackable Systems saw relatively heavy options volume to accompany a 4.2% share price rally in early Monday trading. Shares rallied to $13.33, while November call options at the 15 strike were most actively traded. The calls costing around 0.45 today are 29% higher than at Friday's close. The company's share price has ranged between $11.25 and $15.00 over the last six months. Open interest at the 15 strike of 4,816 contracts already exists, but we can't see why today's increase in premium would be rationale for closing positions. Hence, coupled with today's price rise in the underlying, we'd say this looks like fresh speculative call buying activity. Volume of nearly 10,000 options represents around 15% of current open interest. The company reports on Thursday this week

Virgin Media Inc. (NASDAQ:VMED) - Today's news out of the telecommunications arm of U.K. conglomerate Virgin Media that it will intensify its focus on enhanced broadband services sent shares a marginal .57% higher in U.S. trading to $22.98. The company's options, meanwhile, are trading at more than 5 times the average volume – their highest level in more than a month - where we noticed conspicuous buying in the March calls. Buyers have gravitated toward the 25.00 strike, though buying activity was also observed at the 22.50 and 27.50 strikes. Positioning here indicates clear expectation of positive share price development for Virgin Media next spring. Implied volatility at 43% is sharply elevated above the 30% historic reading.

CTC Media Inc. (NASDAQ:CTCM) - Our volume scanners picked up unusual activity in Moscow-based CTC Media, a Russian media outfit that operates the eponymous CTC Network along with sister station Domashny. The nearly 9-fold pickup in option volume coincided with a 2.5% loss for its shares this morning to $22.23. Much of today's action appears in put buying in the February and May contracts at the 22.50 strike. A comparison of the premiums indicates that traders are expecting a slow erosion in CTC's share price to at least $20.80 by February, and to $20.20 by May – roughly within 7% of the company's 52-week low of $18.82.

Valero Energy Corp. (NYSE:VLO) - Shares in the nation's largest oil refiner are down 2.7% to $66.64 after the company acknowledged that technical malfunctions had caused flaring of sulfur dioxide at its Texas refinery. Options in Valero are extremely liquid this morning, with nearly 66,000 contracts in play. With premiums sharply higher in the puts, it appeared that traders looked to sell positions in the November 70 puts against heavy buying in puts at the 65.0 strike. These traded largely at prices of $2.05 apiece today, and a look at the delta on this contract shows option traders pricing in about a 38% chance that these shares will land in the money come expiry. Valero is due to report quarterly earnings on November 6.

Schlumberger Ltd. (NYSE:SLB) - Overshot expectations ahead of its quarterly earnings report exacerbated a nasty tumble for shares in oil sector peer Schlumberger. Today its options have remained heavily trafficked, as shares take another 4.3% licking to $95.07. A look at the volume distribution indicates traders looking for continued short-term duress in Schlumberger shares. Calls at the front-month 100 strike sold heavily this morning despite what would seem to be a losing proposition on the premium side. These contracts were trading last week for as much as $13.80 – today's price reflects an 83% discount in the space of just a week. Buying interest was brisk in the November 95 puts, which can be had today for $3.75 apiece, implying a drop below $91.25 by November's expiry.

Financial Select Sector SPDR ETF (NYSEARCA:XLF) – There was a strange air of confidence in options trading in the financial sector to start Monday's trade. While global bourses had prepared the U.S. markets for some fallout as evidenced by deep losses for S&P futures contracts, the financial sector didn't feel the strains implied by that loss of confidence. The financial ETF was 0.5% ahead by noon as options traders appeared to sell volatility and put options in the November contract. Interestingly, options traders sold most of today's volume to the bid and forced options premiums lower on what had the potential to become "Black Monday: Part Two." With shares in the XLF at $32.75 today, traders sold the right to sell through put sales at most of the surrounding strikes. At the 31 strike some 70% of the series volume was sold. More than half of the trading at the 32 strike were outright sales to buyers, while 87% of all trades at the in-the-money 33 strike were sold to the bid. At the 34 strike, 85% of transactions went to the bid after an early slug of 1,000 contracts went through at a premium of 1.84. After that more sellers and a rising share prices saw premiums decline to 1.60 on the day. The trading pattern is rather unusual given the carry-over bearishness from Friday and its second-round effect on global sentiment. The official G7 communique also spooked investors ahead of the bell this morning warning that U.S. housing market deterioration and a high price of oil would surely moderate growth further still. In fact there was no shortage of negative news today, including that of the financial sector itself. London's Financial Times carried an article concluding that mortgage related consumer problems had lead to a worrisome rise in other revolving loans from autos to personal loans further undermining the prospects for banks' balance sheets. There were also market rumors of an emergency meeting at a major investment bank said to have deeper subprime losses than earlier stated.

VIX – The CBOE Volatility index has eased back from its opening print and stands higher by around 0.5% at 23.07. The fact that the market is a lot steadier than indicated by the red screens reflected in Asian and European bourses in pre-market futures prices has provided a less-panicky air to start the week. The November call series at strikes ranging from the in-the-money 20 strike to the out-of-the-money 32.5 strike accounted for most of today's volume. The 11,700 lot volume at the 22.5 call series at a premium of around 2.45 implies a breakeven VIX reading of 24.95.