Wednesday's Options Report: XLF, Bank of America, EMC, SGP, Bon Ton

Rebecca Engmann Darst co-authored this article.

(XLF) – Financial Select Sector SPDR – That said, the move likely won’t be a cure-all for the country’s money center banks. A half-percent gain in the value of the financial sector ETF to $30.39 looks resilient enough considering a wave of money-center bank downgrades this morning and a chastened Q4 outlook by Bank of America. The 212,000 lots in play today are trading twice as frequently to puts as to calls. Heavy liquidity is observed at the 30 strike in the December and January puts, though the directionality of these trades is not clear. We did, however, observe early willingness to buy calls at the 32 strike in December and January. Implied volatility remains around 37% - below the near-40% degree of historic volatility.

(BAC) – Bank of America – Today’s 2% drop in share price to $43.73 came after the bank took a straight-dope tack with investors and conceded that subprime mortgage writedowns could exceed prior estimates, while Q4 earnings would be disappointing once again. With 48,500 options trading before noon, Bank of America is one of the most active tickers to pass our market scanners this morning, and a look at the fact that puts are outmoving calls by a factor of 1.3 suggests that traders aren’t looking to second-guess CEO Ken Lewis on that score. Implied volatility quickly registered an almost 10% increase of 35.6%, making it one of the day’s top implied vol gainers, and a look at the volume in the front month contract shows option traders voting that now’s the time to go long volatility in Bank of America, not short. Volatility positioning took shape in the form of longs in the at-the-money 45 straddle. This position costs a $2.30 combined premium and covers the buyer in the event of a break above $47.30 or below $42.70. Note here that even a break below this lower strike still keeps Bank of America about 3% above its 52-week low, but a wave of buying in the May 40 puts suggests some traders feel this support level may not hold for long.

(EMC) – EMC Corp – This morning’s 152,000-strong volume in EMC options came as shares advanced 2.6% to $19.89, making the computer hardware maker one of the most active families by absolute volume, and representing more than 3 times the average activity in this ticker. While overall volume shows call trading in the ascendancy by a slight margin, the most conspicuous volume lay in the January ’09 contract, where traders may have looked to unload a 66,000-lot position in the calls to open a fresh long position in the puts at a price of $3.00. A slight disparity in premiums between the call and put side would give a trader a $0.70 credit to open this position.

(SGP) – Schering-Plough – This morning’s news of a congressional panel inquiry into the clinical trial of its cholesterol drug Zetia has shares down 3.5% to $28.00. Implied volatility shot up accordingly, gaining 15% to read 32.5% at the noon hour, while options volume, which is currently running at 2.5 times the average, shows traders favoring not just unbiased volatility trades, but buying puts at the 25 strike to buffer against share price declines below that strike. In the January contract traders sold calls at the 30 strike on volume of more than 10,000 lots, while the 25 puts were bought at a magnitude of nearly 12,000 lots on premiums of $0.30. Another 2,700 lots appear to have been bought on the offer in the May 25 puts.

(BONT) – It’s been a tough road to hoe for broadline retailers in recent sessions – witness last week’s bearish action in Family Dollar – and the trend reared up again in action in the Bon Ton Stores Inc. The company, which operates 279 stores in secondary and metropolitan markets nationwide under retail signs including “Bon-Ton” “Carson Pirie Scott” and “Younkers,” is nursing a 2.5% decline in share price to $13.33. The current share price represents barely a quarter of its 52-week high, a battering reflected in the 100% degree of historic volatility and 96% implied volatility reading. Options are moving at 5 times the average rate, catching our attention in early action due to what looks like put spread activity in the January contract between strikes 10 and 12.50.

(CRME) – Options in life sciences company Cardiome Pharma ticked our market scanners this morning as volume accelerated to twice the normal level. The company’s shares gained in early market action after an FDA advisory panel recommended approval for an IV version of its drug Vernakalant, used to treat a form of cardiac arrythmia. Early froth in its share price appears to have subsided quite a bit and Cardiome shares are currently trading .97% lower at $9.17. A look at this morning’s option volume distribution shows traders taking a blasé purview of any bullish implications that the FDA’s green light might hold for Cardiome. Strangle selling in the December contract between strikes 7.50 and 10 implies a trader content with pocketing a $0.35 premium in the belief that Cardiome shares will remain rangebound between the two strike prices, even though its shares touched the current 52-week-high of $12.62 as recently as November 6. Elsewhere, traders were even emboldened to engage in fresh shorting in the June 10 calls, these selling to the bid at around $3.20 apiece. Implied volatility at 127% remains sharply elevated above the 83% historic reading.