Monday's Options Report: LEH, VIX, MF, C, CRME

Rebecca Engmann Darst co-authored this article.

(LEH) – Lehman Brothers - Despite early-session assurances from CEO Richard Fuld that the Fed’s move to give brokerages access to its expanded lending and collateral facilities would “take the liquidity issue for the entire industry off the table” wasn’t enough to stave off a 19% decline in its share price to $31.69. Implied volatility continued to gain apace, with a 93% hike in implied volatility on Friday meeting with a similar gain in the volatility reading this morning. Implied vol currently stands at more than 224% - indicating that option traders are factoring the risk premium to Lehman Brothers shares at 220% above the historic reading. More than triple the number of puts are trading today as calls, with heavy volumes in March puts at strikes as low as 25, extending into the April contract at strikes as low as 10. Option traders keen for protection have bid up the price of the April 10.00 put, which conveys the right to sell Lehman shares at $10 apiece by April’s expiration, to $1.65, despite the fact that the market only assigns about a 3% probability of the strike landing in the money by that time. The price of the at-the-money straddle in Lehman Brothers today is $12.20 – this gives an idea of the kind of move option traders are bracing for in Lehman shares ahead of tomorrow’s earnings, believing the brokerage has the capacity to gain or lose more than one-third of its current valuation on back of the numbers.

VIX – Despite an early morning pass at the 35-mark as US equities struggled to find their gravitational center, the CBOE Volatility Index has shown a quick willingness to recede, trading flat-to-lower this morning at 31.15. Early on in the session we saw traders eager to buy March VIX calls at the 30 strike on the eve of their expiration, paying some $1.55 for a position that would require the so-called fear index to close at or above its year-to-date highs once again tomorrow. Early action on the April contract shows that the money is currently on a sustained VIX close above 30, given the heavy volumes we observed at strikes 30 and 32.50.

(MF) – Are fresh disclosures afoot at MF Global? Barely two weeks after the company confirmed that a rogue trader sustained $141.5 million in losses, we observed yet another spike in put volume occurring as its shares tanked 55% to $7.90, freefalling past the 52-week low as implied volatility skyrocketed some 73% higher. The action elicited a rush among traders to buy April puts at strikes as low as 10.00, paying $2.15 for a position that first generates profit for the buyer with a close below $7.85. Heading into today, option traders had held nearly twice as many call positions as puts in Man Financial.

(C) – Citigroup – Implied volatility in Citigroup options rose by more than 25% this morning as shares slumped 5.6% to $18.68, setting a fresh 52-week low. While the 147,000 options trading in the first market hour show twice as many puts trading as calls, a large chunk of this appeared due to the cash-out of some puts at the March 20 strike line, which traded for $1.13. In the April contract, traders are seeking protection via put-buying at strikes as low as 12.50.

(CRME) – Cardiome Pharma Corp. – Shares of drugmaker Cardiome rose nearly 47% to $9.16 – still more than 3 bucks off their 52-week high – after the company reported promising results from a Phase IIb clinical study of a heart fibrillation drug. The move sent options trading to nearly 7 times the normal level, as traders appeared keen to shed puts at the 5.00 put strike despite their value eroding to only about a nickel apiece, while calls at the March 7.50 fetched $2.30 apiece from traders looking for a test to within 20 cents of the $10 mark in Cardiome shares by Thursday. Prior to today, option traders held 3 times as many call positions as puts in the company – the 52-percentage point spread between its implied and historic volatility readings shows the option market isn’t entirely comfortable with the current price level of the stock and is looking for about 60% more turbulence over the next 30 days than it has shown historically.