Tuesday's Options Report: FNM, FRE, GameStop, HPQ, Ericsson

by: Interactive Brokers

(FNM) – Fannie Mae – Shares in the country’s largest buyer and backer of residential mortgages continued to hemorrhage nearly 21% this morning to $29.70, on news of a rise in the price of credit fault swaps for protecting the company’s debt. The news served to further unsettle investors, who put more than 78,000 options in play, twice as many to puts as to calls. Option implied volatility rose 23% this morning and now exceeds 98% - this compared to the 79% degree of volatility that Fannie Mae shares have shown in past performance – a sign that investors feel the potential for further losses isn’t fully expressed in the current share price. Notable volume today was observed in the December 25 puts, which are trading briskly to buyers and sellers on a volume of more than 8,000 lots where prior open interest numbered no more than 428 lots prior to today. Premiums on this particular strike have swelled more than 310%.

(FRE) –The pain extended to the nation’s second-largest U.S. mortgage financier, Freddie Mac, which earlier today reported a bigger than expected Q3 loss and announced that it has retained counsel from Goldman Sachs and Lehman Brothers to insure near-term capital. Shares plunged nearly 29% to $26.74, an 11-year-low, as implied volatility spiked more than 51% to read 106.5%. Options are currently at nearly 3 times the average volume. With about 38,500 contracts circulating, the clear trend here is for investors to seek fresh long positions in December puts at the lowest available strikes, namely those at the 22.50, 25 and 30 levels.

(NYSE:GME) – Options volume in GameStop Corp, the largest American retailer of video games, whose roster includes Microsoft’s Halo 3 release, Guitar Hero III and Assassin’s Creed, accelerated to more than 3 times the average volume after the company reported a near-60% rise in Q3 revenue s and new video game software. Its share price slumped 7% to $49.27, however, after the company’s chief executive issued a painstaking warning about the sales outlook for Q4 and the holiday shopping season, pegging its guidance for Q4 earnings at 95-97 cents a share against analyst estimates of a $1.01 or better. Calls in GameStop are currently trading on their heaviest volume in more than a year as traders hasten to sell December calls at strikes of 50 and 55, the latter on volume approaching double the open interest. Shares in GameStop had otherwise staged an impressive bull run over the past half-year, more than doubling in value from the March low of $24.95.

(NYSE:HPQ)– Hewlett-Packard – Bumper sales figures for notebook computers and printer ink helped Q4 earnings resoundingly beat street estimates and provide a welcome star on which volatility bears could hitch their wagons today. But shares are trading flat as of the noon hour at $49.49 as markets pare early gain. On the option front, more than 85,000 option contracts have traded, making it one of the session’s absolute most liquid series. Of these, 4 times as many are being logged to calls as puts. Noteworthy here are the 33,000 lots credited to the December 55 calls, which were logged to buyers and sellers on a volume some 50% above the existing open interest on this strike, even as the delta on this contract supposes barely a 13% chance of Hewlett-Packard shares setting a new 52-week high above $55 by December’s expiry . We also noted heavy selling in the at-the-money December 50 calls, where premiums lost 18% of their value this morning despite a nominal gain for Hewlett-Packard shares immediately after the report.

(NASDAQ:ERIC) – Ericsson – Shares and options in the world’s largest wireless network maker are moving to the tune of a very dismal ringtone this morning. Investors chastened Ericsson shares 11.3% lower to $25.32 after executives at the company warned Q4 sales would likely rate at the low end of its previous forecast. With nearly 17,000 options in play, contracts are moving at more than 4 times the average volume, and more than 2.5 puts are moving for every call as investors have sought protection in December puts at strikes of 25 and 27.50. A look at overall call/put open interest has otherwise favored calls by a factor of 1.7, but that proportion could shift after today.