Tuesday's Options Report: XLF, WM, BAC, C, VIX, HUM, CVH, WLP, AET, UNH

Rebecca Engmann Darst co-authored this article.

(XLF) –Today’s move by the enigmatic, arcanely resourceful, Fed to ease liquidity woes by expanding its securities lending program under the so-called Term Securities Lending Facility provided a morale booster to financial issues. The financial sector ETF rallied 4% in short order to $24.56, and much of the 400,000-plus contracts circulating show a decidedly bullish bent to the front-month action. This is patching through in a number of ways, including the massive buying interest in March 25 calls. While these were bought for about 60 cents this morning, some of this volume may involve call spread activity with traders selling the next strike higher for 27 cents to temper the upside expectation. Besides the long call spread, the short put spread appeared to be in play at strikes 24 and 26, a trade yielding an initial credit of $1.25 in anticipation of share price movement past the 26 strike. In what may safely be termed a moxie-upside trade, some traders were emboldened to buy calls at the June 30 strike for 50 cents apiece, despite this position pricing in a less than 1-in-5 shot at profitability by June.

VIX – Today’s rally in shares had the expected, inverse effect on composite implied volatility in the S&P 500 as measured in the CBOE Volatility Index. Having failed to breach the 30-line yesterday despite a snap to the upside on a broad stock market slump, VIX volatility declined 2.8% in early trading and now stands at 28.54. Given the fact that volatility has been loath to stick by a serious pass at the 30-line for months despite deepening credit problems in the financial sector, we noted a wave of VIX call-selling yesterday that seemed to divine just this kind of short-order pullback in the volatility reading. The same calls that were shorted so zealously yesterday for 75-80 cents apiece once again attracted heavy traffic today, trading to the middle of the market for 60-65 cents, giving the trader as much as a 20-cent profit for contract by closing out the position today.

(WM) – While the financials benefited mightily from the Fed’s breath-of-life bid this morning, option activity in Washington Mutual showed evidence of other rumor-based momentum in play. Shares rebounded 12% to $11.25 this morning, bringing implied volatilty off more than 15% but still loitering around all-time highs at 126%. This morning’s scuttle involved talk of a possible capital infusion, with names ranging from Goldman Sachs to even Warren Buffett, with the talk eliciting heavy buying pressure in March 12.50 calls at around 45 cents apiece. Open interest in this strike has built up more than 6-fold this week, but today’s volume has already exceeded even the 8,500-strong open interest heading into this morning – suggesting that option traders are seeking fresh exposure to share price upside in Washington Mutual over the next 9 days.

(BAC) –Shares rallied 3.5% to $36.55 today, but the implied volatility in Bank of America at 48.7% still shows evidence of heavy-laden price risk – 30% more price risk than the historic average to be precise. This may be due in large part to the ambiguity of possible FBI action against Countrywide and what the implications may be for its on-call lifeguard, Bank of America. Much of today’s volume is wrapped in January 30 calls, which sold heavily for $7.90. If these are closing sales, the volume may be indicative of a trader taking some of a large-size position off the table despite doing so at a loss. Open interest here accumulated in mid-April at more than $17 per contract, before Bank of America shares lost more than 34% of their value in the interim. Downside expectation remained intact via put-buying at the August 35 strike, at prices of $3.65-3.70.

(C) – Today’s 6% boon for Citigroup to $20.88 sent more than 170,000 options trading in the first 90 minutes of the market. Implied volatility came off some 19% after this morning’s Fed action (though it still shows option traders expecting a third more price risk to Citi shares than is typical historically), making long volatility positions like the March 20/22.50 strangle more economic to enter. This combination costs 81 cents to buy today, generating profit for the buyer with a break above $23.30 or below $19.20. In April, it appears that some traders looked to unload the April 20 puts for $1.55-1.59 apiece today.

(WLP) –- Managed-care companies dominated the ranks of option volume and implied volatility gainers after WellPoint slashed its earnings guidance, eliciting an analyst downgrade of the entire sector that sent WellPoint and its peers tumbling. WellPoint shares are down 26.1$ to $48.67, sending implied volatility up 64.2% to 48.3% and option volume to two and a half times the normal level. Much of today’s action has settled on the June contract, where deep-in-the-money puts at the 65 strike – the strike equivalent to the 52-week low heading into today – were bought, fetching 350% higher premiums today than yesterday at $15.60. The selling action we saw in June calls at the 55 and 60 strikes may have helped to defray the cost of this put-side position. Further out, puts at the September 45 strike sold to the bid for $2.15.

(UNH) – UnitedHealth, meanwhile, registered a 9.7% decline to $40.69, while its implied volatility rose 16% to 38.5%, and option traders sent volume to twice the normal level, with today’s volume logged 4 times as often to puts as to calls. Despite the preponderance of put volume, it looks as though some traders are wagering on a short-term stabilization in UnitedHealth’s share price compared to its peers. One clue to this can be found in apparent short put spread activity in the March contract between strikes 40 and 45, where the trader bought the lower strike at 90 cents and sold the higher strike at $4.50, initiating the trade with a $3.60 credit representing the maximum potential profit in anticipation of a recovery past both strike prices and the prior 52-week low, which was $44.56 heading into today. As was the case with WellPoint, we observed some volume in the September puts as well, but the inclination here was to buy rather than sell the position, with contracts at the 40 strike bought for $3.90-3.95 implying yet another leg lower into the fall.

(AET) –Although Aetna, the third-largest U.S. medical insurer, was quick to reiterate its earnings and enrollment forecast in the wake of WellPoint’s cost-pressure shocker, it wasn’t enough to avert a similar 10% decline in share price to $41.84 that sent implied volatility 20% higher to 43.9%, and option volume to 3 times the normal level. Front-month volume was concentrated at the March 45 put line, where premiums surged 450% to $3.30. The same strike attracted volume to the middle of the market in the July contract at $5.55. Put/call interest is evenly split in Aetna, but that may be set to change now that implied volatility shows traders anticipating 25% more price volatility over the next month than has been shown historically.

(HUM) – Shares in Humana declined 22.6% to $48.54 – spackling the downtrend for the year that has seen its shares surrender more than a third of their value so far. With options trading at more than 5 and half times the normal level, we observed two-way traffic at the May 55 call line, with the 25-cent bid-ask spread showing buyers and sellers staking bets as to whether Humana can make a pull back to its prior 52-week high of $56.25 over the next two months. The August contract showed a willingess to go long volatility that struck us as noteworthy given the very high cost of this trade. It appears that some traders bought the 50/55 strangle for a combined premium of $9.10 – some 18% of today’s share price – in the anticipation that Humana shares will jump up past $64.10 or down below $40.90 by August.

(CVH) – Option volume in Coventry HealthCare came in at more than quadruple the norm today as its shares took a 14% punch to $42.48. This represented the equivalent of nearly a quarter of its open interest, and the clear trend here was to sell April 45 calls, taking in premium of 60-65 cents in a speculative bet that Coventry shares won’t breach the 45-line by April, making those calls likely to be exercised. While Coventry shares have lost more than a quarter of their value for the year to date, open interest heading into today shows a privilege to bullish calls by a factor of 1.5.