Tuesday's Options Report: XLF, MS,LEH, GS, EWJ, SRZ, SHPGY, INTU

Rebecca Engmann Darst co-authored this article.

(XLF) – Financial Select Sector SPDR - Yesterday’s relative market resilience was compounded by this morning’s all-things-considered decent earnings from Lehman Brothers and Goldman Sachs, bringing a sturdy mood of sticktuitiveness to the financial space – to wit, implied volatility in SPX options correlated to the S&P dropped more than 10% in early trading. Shares in the ETF representing the financial sector, long the S&P’s Achilles heel, gained 5.7% to $24.78 and the 356,000-plus options trading in the early market show 2.6 calls trading for every put. Nearly a third of this morning’s volume is centered at the March 25 call line, which is trading to buyers and sellers as the value of the position has appreciated by more than a third in early trading. Volume one strike higher, at the 26 line, was bought heavily for 17 cents apiece. Call-buying in the April contract has fixated on the 25 line for $1.27 apiece.

(MS) – There’s no denying the audible sigh of relief resonating across the brokerage space after today’s brokerage numbers – it’s a sound that rippled through the implied volatility readings of the entire sector. Nowhere was this perhaps more pronounced than in Morgan Stanley, whose earnings are due out of the gate tomorrow morning. The fact that its implied volatility came off more than 43% after Lehman Brothers and Goldman Sachs reported earnings today – and now at 61% is actually a smidgeon below the historic reading – illustrates just how much heat is off Morgan Stanley with the market now somewhat reassured that two of its brokerage peers will remain among the living. The implication of this, of course, is that when volatility comes down, so too do option premiums, and the price of the $40 at-the-money straddle at $3.60 is now predicting just about an 8% up-or-down move on back of the earnings announcement. This should make for a more reasonable offer for traders looking to position long volatility today ahead of Morgan Stanley earnings tomorrow, and may explain the surfeit of activity we’re seeing at the 40 line, trading to buyers and sellers. Calls at the 45 strike were bought for around 40 cents apiece in a cheap upside bet, but we note here that the implied volatility reading of 95% on the March 45 call is well below that of the 40 call, implying less demand for substantial upside in Morgan Stanley. Heading into tomorrow’s earnings announcement, put positions outweigh calls by a factor of 1.4.

(LEH) - Lehman Brothers – Where yesterday’s at-the-money straddle – then the $30 line – supposed that one-third of Lehman Brothers’ value was at stake, this morning’s better-than-expected numbers sent Lehman’s share price clawing back to the upside. Shares are up 37.8% to $43.80 as of this writing, with more than 209,000 options in play and heavy volume at the 40 call strikes in March and April. In the case of the front-month strike, the value of that position has gained 300% to $5.30 overnight.

(GS) – Goldman Sachs - Shares are up 12.6% to $170.14 in early trading, with the 105,000 active option contracts matching up to 12% of its open interest in play. Call-buying, especially in the April contract, is evidence of a renewed vote of confidence in Goldman’s prospects, with calls at the 175 and 180 strikes selling for $5.50-6.00 in the case of the former strike and $4.20 in the latter attesting to confidence in continued upside through the month of April.

(EWJ) - This morning’s rebound in the Nikkei was sparked by bargain-hunters sifting through the wreckage of a three-session decline. Shares in the iShares MSCI Japan Index Fund were up 2.3% to $12.13 in US trading as of the noon hour. Shares in the fund, which correlates to the performance of the Japanese stock market, are down more than 10% for the year to date, and today’s upsurge in value may have emboldened a trader to stake fresh long bets on June 12 puts for 80 cents. The price of this contract implies a pull back below the standing 52-week low of $11.53 by June’s option contract expiration or before. The implied volatility reading on this index shows the option market pricing in a 40% risk premium against the historic average, and today’s action in anticipation of a new campaign lower for the Japanese market, was sufficient to send option volume to nearly 5 times the normal level.

(SRZ) – Shares of Sunrise Senior Living, which owns and operates assisted-living centers for senior citizens nationwide, cratered some 18% to $18.86 as of the noon hour, following news that it had missed an extended deadline for the filing of its 2006 annual report. Sunrise is embroiled in a far-reaching accounting scandal that has led to a formal government inquiry into its accounting and insider stock sales. While implied volatility on all Sunrise Senior Living options swelled some 20% to more than 80% on the news, it’s worth noting that the brunt of today’s volume is situated at the March 20 put strike – which is trading on an implied volatility of more than 151%, implying a huge demand among option traders despite a 3300% spike in premiums. Heading into today, the company’s modest, 24,000-strong open interest was fairly evenly divided between puts and calls.

(SHPGY) –Just days after posting gains on back of bid-talk from Pfizer, American depositary receipts in Shire PLC were given an early 6% boon to $63.56 on speculation from UBS analysts that Astra-Zeneca might consider a takeover of the company. With option traders currently pricing in almost a third more price volatility from Shire over the next month than they have shown historically, option volume itself accelerated to two and a half times the normal level. What’s interesting here is the concentration of volume in the July call, where more than half today’s total volume appears localized in out-of-the-money calls at the July 72.50 strike. These were bought for around $3.10 apiece, implying a move to within $5 of the $80.74 52-week high by July. Volume of 1,000 lots at each of the 75 and 80 call strikes suggests encroachment upon the 52-week high itself. Option traders currently hold almost 5 times as many call options as puts in Shire.

(INTU) - Positive analyst buzz in Intuit, the maker of TurboTax software, sent shares on a 3.6% upward trajectory to $26.35, bouncing off the 52-week low. Option volume, meanwhile, surged to nearly 12 times the normal level in early trading with out-of-the-money call buying at the March 30 strike. The 5-cent price tag of this position is handily explained by the miniscule time value of the contract – shares only have until Thursday to make a move past $30 and the odds currently favor virtually zero chance of that happening. Intuit shares are down 17% for the year to date, narrowly underperforming the S&P Information Technology Index.