Thursday's Options Report: WM, KBH, LEN, MRX, UST, AMZN

Rebecca Engmann Darst co-authored this article.

(WM) – On the eve of this week’s 50 bp Fed rate cut, Washington Mutual CEO Kerry Killinger told industry watchers at a Citigroup-sponsored financial services conference that his bank was banking on an increase in net-income of $150 million for every 25 basis-point cut in the Fed’s guiding rate. Taking Killinger at his word today, post-Fed, WaMu shares are up more than 6% to $19.96 as of noontime. The 64,000 options trading this morning rank it among the most active options trading on our platform. The last such spike in its share price occurred earlier this month, when a dogged Q4 earnings report gave rise to rumors that it might be taken over by the likes of JPMorgan. The rally was accompanied by a spike higher in option implied volatility, and we’ve seen no evidence of a similar such volatility spike today. Nevertheless, option traders appear to be buying and selling at-the-money straddles at the February 20 line, wagering for and against turbulent share price movement away from the $20 strike price. The April 20 straddle, meanwhile, attracted mostly sellers. This may be evidence of traders looking to pocket the $4.70 premium in the expectation that WaMu shares won’t veer too far from current levels even given the current Fed rate-cut regime.

(KBH), (LEN) – The worse-for-wear homebuilding space got a welcome reprieve on back of the latest Fed cut, and it’s in KB Homes and Lennar Homes that we find two of our biggest share price gainers and most active option tickers. Shares in KB Homes are trading 12% higher at $28.22, a move that induced traders to sell short out-of-the-money puts at the February 22.50 strike at nearly 3 times the open interest for $1.00 apiece. This inclination to sell puts – a by-all-accounts bullish indicator – extended into the April contract at the 20 strike, while call spread activity was observed at the 25 and 30 strikes, with a trader buying the lower strike against the sale of the out-of-the-money call. Similar evidence of near-term confidence in the some price stabilization for the badly-beaten homebuilders was observed in Lennar, whose shares are up more than 8% to $19.71. February puts at the 17.50 strike were mostly sold for $1.05 while calls at the 20 strike were bought for just under a buck apiece.

(MRX) – Medicis Pharmaceuticals - Options in Restylane-maker Medicis Pharmaceuticals are trading at more than twice the normal volume today against a 9.4% decline in its share price to $19.74. The decline followed news that the US FDA has rejected an application for Medicis’ Botox competitor Reloxin on grounds of incompleteness. The move sent implied volatility in Medicis options higher by some 14% to more than 51% - making it one of the day’s top implied volatility gainers on our platform. Puts are trading at nearly twice the normal level, where it’s a safe bet that many traders are looking to take profit in February puts at the 20 and 22.50 strikes, where premiums are up 375% and 116% respectively on the session.

(UST) – UST Inc. – Earlier this week we noted a spike in implied volatility and 7-fold increase in option volume in UST, the maker of Skoal and Copenhagen tobacco brands. The development followed news that, following its spinoff of Philip Morris International, Altria is making an incursion on the $3.7 billion U.S. smokeless tobacco market under the Marlboro brand, directly challenging UST’s 75% dominance of the space. With UST shares trading 1.4% lower today at $52.49 (Altria shares are flat as of noontime), its options are moving at 5 times the normal level today, with a more than five-fold increase in put volume. Once again the volume appears to favor put activity at February strikes of 55 and 60, with higher put-side premiums implying buying interest at those strikes.

(AMZN) –Amazon.com - A Q4 margin squeeze and less-buoyant-than-expected profit forecast for 2008 has shares in the online retailer down 2.6% at $72.25, after selling off heavily in extended trading yesterday. Nearly 85,000 options traded in the first market hour, with twice as many puts moving as calls, amounting to 30% more put volume than is normal for Amazon option. Continuing the trend we observed on Tuesday, traders, appear eager to buy puts at the February 70 strike with calls at the 75, 80 and 85 strikes selling off.

VIX – An opening reading above 28 in the Volatility Index following yesterday’s half-point Fed rate cut provided a briefer, watered-down reprise of the sentiment that lay behind the January 22 spike, when the index surged past 37.50 following a surprise, intrameeting 75-bp hike. Namely, that the Fed, newly stalwart in its recognition of the need for further rate cuts, is already behind the curve and in any case, unequal to the task of keeping markets immune to a new slew of multi-billion-dollar writedowns and monoline downgrades. While the volatility reading itself has come off some 2.4% to 26.95 as of noontime, trading action in VIX options bears out this creeping sense that the VIX may be in for another leg higher before the last hurrah of the February contract. Traders look keen to go long volatility in VIX options, with buying in February calls at the 32.50 and 35 strikes to protect portfolio positions against another wave of volatility in the S&P. Put positions at the volatility-bearish 20 and 22.50 strikes appear to have been unwound.