Wednesday's Options Report: WaMu, COF, Mirant, HL, GM

(WM) - Shares in Washington Mutual , the nation’s largest thrift, slumped more than 10% this morning to $21.57 – a 7-year low, after reporting a 72% drop in Q3 profits, an increase in forward loan loss provision, and forecasting continued declining home prices into 2008 While implied volatility in an option series often recedes sharply after an earnings report (even a negative one) as the element of uncertainty pre- earnings disclosure dissipates, we observed just the opposite in Washington Mutual options today. Its implied volatility reading soared nearly 25% and now exceeds 85% - this against the 51% degree of fluctuation that its shares have shown historically –a strong hint that option traders don’t believe the worst of the bad news – or the share price hemorrhaging – has been fully fathomed by the market as yet. Traders expressed this by bailing out of November 25 calls despite a more than 77% erosion in the value of these positions overnight, and heavy buying in the 22.50 puts, driving the price of these contracts up nearly 200%. A look at the overall put/call ratio in Washington Mutual shows nearly 1.5 put positions open for every call.

(COF) –Market cassandras looking for signs of seepage from the summer’s credit and subprime fiascoes into the credit card segment found troubling news in Capital One Financial. The country’s leading independent credit-card issuer today sustained its biggest single-day loss in more than a year before acknowledging that costs tied to charge-offs of unpaid loans could stretch into “the mid-5 billions.” With shares down nearly 9% to $54.20, implied volatility on Capital One options surged more than 21% and now exceeds 63%, by our market scanners. It appears that traders rushed to shed January 85 calls, which traded to the middle of the market at $0.30, while heavy liquidity in the November puts occurred at strikes 55 and 50, the latter trading at 5 times the existing open interest on that strike. Option traders are currently pricing in better than one-in-four chance that Capital One shares can dip below the abysmal $50 level in the next 9 days.

(MIR)– Mirant Corp – A look at the pickup in options volume in energy giant Mirant suggest rumors percolating in the market, Contracts are moving at 6 times the average volume, but the fact that shares have traded flat around $42.66 and implied volatility has remained fairly static is a hint that the rumors may be fairly low-watt. Of interest to us was heavy shorting in the November 40 calls on volume more than twice the existing open interest, along with what may be buying in the December and January 42.50 calls. Mirant’s current share price represents an 11% discount from its 52-week high.

(HL) –Booming commodities have put Hecla Mining, which mines silver, gold, lead, and zinc in the Western U.S. and Central and South America, in a sweet spot. The company is due to report earnings tomorrow, and for a second consecutive session, options in Hecla Mining have piqued our “Hot by Options Volume” scanner, today trading at 4.5 times the average frequency. This morning’s 10,580 active contracts stack up against some 14% of the total open interest. With shares up 3.7% to $11.59, a new 52-week high, we observed fresh buying in the January 15 calls in anticipation of yet another leg higher for Hecla shares, which have nearly doubled in value over the past 52 weeks – and if option traders have their druthers, aren’t looking to dry up anytime soon.

(GM) – General Motors – Shares in the automaker are down 5.4% and counting at $34.21, after reporting its biggest-ever quarterly loss. Option traders put more than 166,000 contracts in play in the first few hours of trading. More calls are moving than puts, due in large measure to a rush among traders to shed calls at the November 37.50 strike and in the December contract at strikes 32.50, 37.50 and 40. Put-buying appears to be on the ascent in the November contract at the 32.50 and 35 strikes. The lackluster news flow may have provided a sentimental backdrop for a bearish play in the Industrial Select Sector SPDR (XLI), the ETF indexed to blue-chip industrial and machinery stocks. Option volume in this ETF picked up to 10 times the average volume, against a 1% decline in share price to $40.21, owing to a 7,500-lot position in the January 40 puts, which traded to the middle of the market at around $1.55. A buyer of this position is predicting a continued 10% decline for the index to around $38.45 by January’s expiry. A look at the overall open interest on this ETF shows bulls and bears equally divided between calls and puts.