Tuesday's Options Report: C, FRE, HOT, XLB, SIL, XME, MFE, INTC

Rebecca Engmann Darst co-authored this article.

(C) – Citigroup shares set not just a fresh 52-week low today – but a multiyear low – with a precipitous 6.7% decline to $21.52. The move came after Dubai International Capital head Sameer al-Ansari said Citigroup would continue to require outside capital infusions despite its grueling regimen of writedowns. The sense of pessimism was further reinforced by yet another projected loss, this time forecasted by Merrill Lynch, which is bracing for a new round of $15 billion mortgage-related writedowns. The move elicited a mass exodus among option traders into Citigroup puts, which are outmoving calls by a factor of 2.5. Of note here is gargantuan volume in the April 20 puts, which have already traded more than 111,000 times today – more than 4 times the prior open interest at this strike, as the price of the position has appreciated some 77% from yesterday’s levels, still reflecting a slightly less than 1-in-3 chance of exercise for the $20 put heading into April. Front-month action appears to show volatility plays at strikes ranging from 20-25. Implied volatility has also made an abrupt jolt upward, up some 14% on the session to more than 61%. While that’s only a slight gap above the 60% historic reading for Citigroup, it’s the highest implied volatility reading we show in at least a year, and a strong indication that the tumult for its share price isn’t going to end with today’s fresh lows.

(FRE) – News of an agreement with the New York State Attorney General’s office to set more stringent rules for home mortgage appraisals sent shares in Freddie Mac down 7% in early trading to $22.09. Meanwhile, its 181,000-plus active option contracts – the equivalent of about 30% of its open interest - are trading with a skew to puts by a factor of nearly 10 to 1 as the current volatility environment suggests about 5% more price risk to Freddie shares than they have shown historically. Traders are seeking protection against this level of price risk by piling into out-of-the-money April puts, notably at the 17.50 strike, which is already trading at 12 times the open interest, and at the 20 strike, where traders are seeking opening positions at $2.20 apiece for a position that requires another 19% decline from current levels just to break even.

(HOT) – News that Starwood Hotels and Resorts will make its entrée into the never-starved-for-luxury United Arab Emirates with the opening of a premium hotel in Ras Al Khaimah sent implied volatility kicking 13% higher on the session to 43% - still below the 49% historic volatility reading. Option activity accelerated to more than 5 times the normal level, this against a 5% gain in share price to $49.94. This morning’s option volume appears roundly concentrated in March calls at the 50 and 55 strikes, with the latter strike trading at 4 times the open interest and on premiums up 800% on the session despite a miniscule 18% chance of profitability before the March 20 expiration date.

(XLB) – Today’s put activity in the Materials Select Sector SPDR represents the highest level of put volume on our books for the commodities-rich ETF, sending overall volume to nearly 5 times the normal level. Volume here shows massive clusters of put volume in the March contract at strikes 39, 40 and 41, still within the confines of open interest, with trading in April puts at the 38, 40 and 41 strikes showing comparably high volume and fresh positioning – possibly representing the rollover of positions from March into April

(SIL) – Despite disclosing its quarterly earnings numbers last week, Apex Silver Mines Ltd is attracting about 9 times the normal level of activity today – equivalent to nearly 1 of every 4 of its option contracts in play - against an 8.5% decline in its share price to $11.88. Most of this volume appears seated in July 15 calls, which traded some 10,000 times as premiums on this strike came off 20% on the session. A look at the implied volatility reading shows current premiums reflecting about 15% more risk to Apex Silver Mines shares than they have shown historically.

(XME) – Fresh positioning for an April retracement sent option volume in the SPDR Metals and Mining ETF to 5 times the normal level. This occurred as shares showed a 3% decline in share price to $73.47. The volume here occurred at the April 75 put strike, where the $5.70 premium implies a break below $70 heading into April – possibly a gesture o the part of a trader looking to hedge a long position elsewhere in the red-hot commodity sector via the ETF put. The fact that open interest in the ETF shows more than 17 times as many put positions open as calls may attest to the popularity of that strategy.

(INTC) – Tech-hawks got their fix of bad news after yesterday’s announcement from semiconductor giant Intel that lower-than-expected chip prices would dent its Q1 profit margins. Thus far this morning, the share price carnage has been fairly restrained, with Intel shares down 1.7% to $19.67 heading into the noon hour and implied volatility at 39.7% resting about evenly with its 40.6% implied volatility reading. This may explain the level of interest we’re observing on either side of the March 20 line, which could suggest volatility plays occurring in the at-the-money straddle. At $1.24, the combined premium initiates a position that becomes profitable for the buyer with a recovery past $21.24 or continued downside below $18.67 - $1.00 below the standing 52-week low.

(MFE) – A rush to calls in the January ‘09 contract sent option activity in McAfee hurtling 10 times the normal level as shares declined 1.5% to $32.77 this morning. The 10,000 lots trading at the January ‘09 contract traded for about $2.15 apiece – a marginal, 8.5% discount from yesterday’s premiums owing to the downside share price action. The position still implies a break past the standing 52-week high of $41.66 in McAfee shares, and utilizing the January ‘09 timeframe gives the trader plenty of time to get there – current share prices represent about a 30% gap below the 52-week high.