Tuesday's Options Report: Citi, XLF, HBC, MRX, SGP, Apple, EMC

Rebecca Engmann Darst co-authored this article.

(C) – Traders were treated to a wake-up cup of a $10 billion Q4 loss at city group – nearly double street estimates – and news that the company will cut its quarterly dividend and eliminate up to 4,200 jobs. Some market pundits had pointed to Tuesday as the day to buy Citigroup, arguing that no matter how bad the news today, it was bound to be terminative and that as of today, the baddest of the bad news would be cooked into its share price. While we can’t speak to the prudence of that recommendation, as we write this, Citi shares are down 6.4% to $27.19 - still 50 cents above the 52-week low set back on January 9. Calls at the January 30 strike sold off heavily today despite being worth only about 4 cents today. Open interest at this strike had accumulated by nearly one-third on pro-Pandit pundits, while puts at the 27.50 strike traded mostly to the middle of the market, worth 76% more today than they were yesterday. As a sign of brighter times ahead for Citi, we would offer up the high level of activity seen in February 30 calls, open interest having more than doubled over the past week, while in March we’re seeing signs of call spread activity. Traders here appear to be buying the 27.50 calls for $1.73 against the sale of the 32.50 call for $0.42 in a credit spread that would see Citi’s share price rebound from current levels, not to exceed $32.50 in March. Put another way: if a recovery is in the cards for Citi, it’s likely to be a slow, limping crawl into March.

(XLF) - Late in Monday’s session we observed a massive run on January 28 calls in the XLF, the Financial Select Sector SPDR – trading primarily to buyers on a volume of a whopping 203,210 lots. This appeared to be a late-session bet in favor of that “kitchen sink” scenario we described above. With financials bleeding once again this morning – shrugging off news of a $6.6 billion cash infusion for Merrill Lynch to empathize with Citi woes instead – the underlying share price of the XLF is down 3.4% to $26.91. Once again today the January 28 calls were a fertile battleground for bets on the financials, with traders in yesterday’s buying bonanza possibly taking some of the position off the table. Put-buying was observed in the front month at strikes of 25, 26, 27 and 28. Further out, we observed heavy trading in March calls at the 31 strike, which traded to the middle of the market at $0.42. This may have been closing purchases of calls shorted weeks ago when the price was $2.20.

(HBC) – Options in HSBC Holdings Plc, the holding company of Europe’s biggest bank, HSBC, attracted 3 times the normal level of volume today as its shares slid 3% to $77.00 – a new 52-week low. Earlier today Goldman Sachs resolutely downgraded the stock, arguing that the bank may need to boost its U.S. loan-loss provisions in a recessionary environment. Despite the immediacy of the downgrade, the brunt of this morning’s 21,000-strong option volume was remarkably parochial, located in March puts at strikes of 75, 80 and 85 with a strong bias to sellers. This could be a well-timed bet in favor of price stabilization by March in HSBC shares – a company whose shares have lost 21.5% over the past 3 months but didn’t break below the $85 level until late December. It should be noted, however, that option traders are currently holding twice as many bearish put positions as bullish calls.

(MRX) – Options in Medicis Pharmaceuticals - the maker of dermatologic drugs including the popular cosmetic dermal filler Restylane - are trading at 4 and a half times the normal level today. Shares in the company set a fresh 52-week low, losing nearly 10% of their value in a.m. trading, after Impax Laboratories sought FDA approval for a generic version of Medicis’ best-selling anti-acne drug, Solodyn. Implied volatility in Medicis options quickly surged 52% to more than 56%, making it the morning’s top implied volatility gainer at 2.6 times the historic reading. Front-month puts at the 25 strike sold mostly to sellers, and within the bounds of existing open interest, possibly sellers taking profit from a 1700% rise in premiums at this strike, which conveys the right to sell Medicis shares for 23% more than their current market value on Friday. Buyers, meanwhile, flocked to February puts, entering fresh long positions at strikes of 20, 22.50 and 25. The April 25 straddle may also have been in play, trading to buyers and sellers in a directionally neutral volatility play.

(SGP) – Shares in Schering-Plough are down more than 6% to $22.93 today, one day after the company released data showing that its cholesterol drug Vytorin (developed and marketed with Merck) showed no greater results in treating patients with a family history of high cholesterol than two other drugs already on the market. Puts in Schering-Plough are trading at their highest volume in at least a year – trading 4 times as often with puts - as total option volume currently at more than double the normal level. Implied volatility in Schering-Plough options is elevated at 42.8%, indicating that option contracts are currently pricing in 23% more volatility than its shares have shown in the past. The most heavily traded contract under the Schering-Plough ticker is the January 25 put, which is selling off heavily at around $1.10 given the imminent expiration and the 266% gain in value overnight. Open interest in this strike may have built up on December 12, when the position could be bought for 30 cents as Schering-Plough shares were 20% more expensive at $29.67. Today’s precipitous drop in share price would have generated a handsome .80-point profit for the investor.

(AAPL) – Is Apple tripping the light fantastic? Ahead of Steve Jobs’ richly anticipated key-note address later today at the MacWorld conference, the Apple honcho is widely expected to unveil a trimmer, ultra-light version of its popular Mac laptop, and may recruit Hollywood studio brass to help him unveil an iTunes-style movie-rental service that would put the company squarely in competition with Apple. Share price action ahead of the big speech is rather more valedictory than one might like, down nearly 3% at $173.71, in step with a more than 10% decline in its share price for the year-to-date. Apple shares are among the most actively traded on our platform today, with about 1.5 calls trading for every put. Front month volume showed what may be buyers and sellers of the 170/180 strangle on volume of about 20,000 lots at each strike. The mood may also favor selling of the 175 straddle, a position which costs $9.75 in premium today – a seller of this position pocketing rich premium in the expectation that Apple’s shares will remain around the $175 level through Friday’s expiration.

(EMC) – Some traders on last night’s episode of CNBC’s Fast Money suggested long positions in data storage giant EMC Corp as a way to play Apple’s product unveiling. Whether it’s this sterling recommendation or news that it’s become the first storage vendor to introduce solid state Flash memory via its new Symmetrix Storage units (these reportedly 30 times faster than the industry standard) that’s led EMC shares to buck the trend in the broader tech sector with a 1.5% gain to $17.05, we can’t say. What is certain is that 7 and a half calls are trading for every put on our platform this morning, with 44,000-plus contracts making it one of the most active tickers of the day. Implied volatility, that measure of anticipated future share price fluctuation, is showing traders expecting 25% more turbulence for EMC shares than they have shown historically. Heavy buying interest is observed in February calls at strikes of 17.50 and 18 – which would lock in prices for traders looking for upside in EMC Corp shares, not just through Macworld, but into its earnings announcement on January 29.