Thursday's Options Report: Citigroup, WM, XOM, Crocs

Includes: C, CROX, WMIH, XOM
by: Interactive Brokers

Citigroup (NYSE:C) – The day’s most actively traded option series on our platform, Citigroup put the scariest face on today’s market house of horrors. Analyst downgrades amid unsettling speculation on the company’s capital adequacy sent Citi shares down 6% to $38.86 in early trading. Implied volatility shot up nearly 23% to start the trading day and now exceeds 42% (this against a historic volatility reading of 29.5%. The slide in prices has sent put-side premiums sharply higher. Of note here is buying activity in the November 40 calls, which seems counterintuitive given Citi’s current straits. We noticed similar buying activity in the November 45 calls a couple of weeks back – contracts reportedly dubbed “Chuck Must Go” calls by traders because the positions wagered on an imminent exit for the company’s embattled CEO Chuck Prince. Though rumors persisted, no announcement was forthcoming and the trade seemed a wash. But with the screws tightening around Mr. Prince and other financial sector CEO’s in light of the credit crunch, the “CEO exit call” may once again be in vogue as the market “bays for blood.” A 59% decline in premiums on the November 40 calls can’t hurt – possibly luring some options traders in on a bet that its share price can recover in the short term if the CEO is at long last forced from his watch.

Shares in Washington Mutual (NYSE:WM), the nation’s largest thrift, have taken a 7% dive today to $25.82 as speculation rises that the $1.3 billion in loan loss provisions set aside for Q4 may not be enough to mop up what’s left of WaMu’s year-end losses. Shares in Washington Mutual have surrendered 15% of their value in the two weeks since its staggering 72% drop in Q3 income, and today’s share price action hints that the worst ain’t over. Option players, meanwhile, have sent nearly 67,000 lots into action, with 3 times as many puts moving as calls. Traders sought hasty protection against further precipitous slides in WaMu shares by paying 260% more to obtain November 25 puts. The price outlook for December looks even bleaker given the intense buying interest in that month’s 22.50 puts.

Exxon Mobil (NYSE:XOM) surprised the market this morning, missing street estimates for Q3 earnings by 6 cents a share. Tight margins on gasoline prices trumped record-high oil prices, leaving Exxon vulnerable to the same refinery squeeze that hurt its competitor ConocoPhillips in the earnings stakes last week. Damage to the share price has been marginal, with a 2% slide early in the session abating somewhat to 1.4% and a share price at $90.70. Options in Exxon Mobile remain extremely liquid today, ranking among the most actively traded series according to our volume scanners. The November 95 calls sold heavily today despite a 60% decline in the value of these positions. Similar activity seen yesterday we took as an indication of covered call writing against positions owned in the stock – a move that is directionally neutral but would have shown a market anticipating in-line earnings from a monster stock. Put buying is observed in the front month at strikes of 85 and 90.

Crocs Inc (NASDAQ:CROX) – Shares in the trendy shoe maker are seeking traction with little success today, down 27.6% to $54.05. The company more than doubled its Q3 profits, beating pre-report estimates, but guidance well short of street expectations hit right at the heart of Crocs’ skeptics inclined to write off the company’s prosperity to the fickle attentions of the fad shoe market. Options are trading at nearly 4 times the average volume, with more than 125,000 options in play. Heavy liquidity is observed in the front month contract in the November 50 puts and 60 calls – possibly indicative of strangle activity between those strikes. The Crocs series is a rich hunting ground for volatility plays – options traders are currently pricing in 73% potential fluctuation in its share price – a slight comedown from yesterday’s pre-earnings peak near 80% - against a historical volatility reading of 53.5%.

VIX - The VIX took a 15% leap to 21.35 by the noon hour, urged on by today’s redoubled trouble for the financial sector. With nearly 127,000 option contracts in play, it appears that some traders may have taken profit on positions in the November 22.50 calls, which sold heavily on the bid as premiums on the contract rose nearly 86%. The November 25 calls also sold heavily, with prices on the contracts nearly doubling today. Action in the December contract showed calls at the 25 strike trading to buyers and the middle of the market for around $2.00 apiece, implying a move past 27.00 to cap off the year. A look at the delta on this call shows option traders pricing in a less than 50/50 chance of this actually coming to pass, but if we’ve learned anything of the financial sector’s exposure to the credit squeeze, it’s that this tale is a very long yarn, and with each week comes new iterations, new layers of the crisis.