Monday's Options Report: LEH, XLF, YHOO, TMA, FDRY, NLY

Rebecca Engmann Darst co-authored this article.

(LEH) – One week in advance of its Q1 earnings report, shares in Lehman Brothers logged a 4% loss to $48.82, still outpacing declines in the brokerage space. Put volume has already pushed to its highest level in a month, with more than twice as many puts as calls trading today. Much of this put exposure has been deployed at the at-the-money 50 strikes in March and April, where the equivalent of more than 25% of the open interest at each of these strikes has already traded this morning. The current $5 premium on the April 50 put requires a 7% breach below the standing 52-week low just to break even – option traders put the odds at slightly less than 50/50.

(XLF) – With financial issues trending lower in early trading, shares in the Financial Select Sector SPDR are priced 1.7% lower at $25.38 lower. More than 208,000 options had changed hands as of 11:00 this morning, with puts outranking calls by a factor of 1.6. The current 46% implied volatility reading indicates that option prices reflect 11% more price risk to XLF shares over the next month than they have shown historically. Similar volume at the respective strikes suggests that we may be seeing front-month strangle plays at the 25 and 29 strikes. A seller of this position would accept about a $1.00 premium as the maximum attainable profit in the belief that XLF shares will remain rangebound between the strikes in the combination, while for a long-volatility trader the dollar-premium is a reasonable price to pay for a new break of the 52-week low past $24 or a recovery past $30 by March 20.

(YHOO) – Shares in Yahoo! are trading .76% higher at $27.97 after Microsoft CEO Steve Ballmer cannily dodged speculation as to whether the company might pursue a proxy fight to force through a takeover of the dogged search engine. Speaking at the CeBT IT fair in Germany, Ballmer said Microsoft was still “fully engaged” with Yahoo, actively speaking with its shareholders, and said that finalizing the $44.6 billion takeover would result in an “everybody wins” scenario. With twice as many calls moving as puts, it would seem that call-spreaders are out in force in the April and July contracts, a strategy which generates profit for the long trader if Yahoo shares trade between $30.68 and $32.50 in April and $30.99 and $32.50 in July. In any event, option traders continue to look skeptically at any more substantial premium for Yahoo than Microsoft has already put on the table. Delta on the July 32.50 call reflects a slightly better than 1-in-4 chance that Yahoo shares will breach $32.50 by midsummer.

(TMA) - Options in Thornburg Mortgage are trading at nearly 4 times the normal volume against a 56% drop in its share price to $4.01, cratering below its standing 52-week low. Fresh volume is observed in March 2.50 puts, where more than 5,000 lots have changed hands this morning at about 45 cents apiece. Interest in this strike extended into the April contract. Additionally, puts at the 5.0 strike in March and April contract attracted heavy volume, with premiums up more than 1000% on the session. The $2.00 premium on the $5.00 April put requires another dollar decline in the price of Thornburg stock just to break even.

(FDRY) – Foundry Networks Inc. – Options in Foundry are trading at 12 and a half times the normal level, against a 1.3% increase in its share price to $12.01. Volume shows a bias to calls by a factor of nearly 6 to 1, virtually all of it rooted in the at-the-money 12.50 strike in March, April and June. Shares in Foundry have eroded 45% from their November 52-week high amid successive earnings disappointments. Still, option traders hold nearly twice as many call positions as puts in Foundry.

(NLY) – Option activity in Annaly Capital Management tripled in early market action as shares in the REIT, which invests in U.S. residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, declined nearly 5% to $19.71. Last week the company set a succession of 52-week highs as investors held to the promise of further Fed rate cuts, which coupled with confidence in Annaly’s risk management and consistently solid earnings buoyed confidence in its share price prospects. It appears that much of today’s volume may be tied up in put spreads in the April and July contracts between strikes 15.00 and 20.00. A buyer of a bear put spreads in the April contract would initiate the trade with a debit of $1.40 for a trade that breaks even upon a break of $18.60 – a 6% pullback from current levels.