Monday's Options Report: C, BAC, BSC, HOV, CX, HA, BVF

C – Conjecture over the extent to which Citigroup may seek to shrink itself as a banking entity in order to rebound from a disastrous $150 billion loss in market capitalization this year looks to have provided a 7% boon to Citi’s share price. With shares at $24.04 at present dispatch, option traders have put nearly 200,000 contracts in play, trading with a slight volume privilege to calls. While open interest continues to favor puts by a very narrow margin of 1.1, we saw some signs of wary confidence in Citi’s share price prospects with what appears to be collar activity in the September contract. It appears here as though a trader, looking to protect guardedly anticipated gains in Citi’s share price heading into the summer and early fall, bought 10,000 lots of September 22.50 puts at $2.72, while selling a like number of calls at the September 30 strike for $1.05. The sale of the out-of-the-money call functions like a de facto covered call, representing the price at which the trader would be happy to unhand Citigroup shares come September, while the purchase of the out-of-the-money put represents protection against another tumble lower.

BAC – Meanwhile, shares in Bank of America – the country’s second-largest bank by assets – still pulled off a 3% gain to $43.08, despite a Bloomberg report over the weekend that the bank may be forced to take a $6.5 billion loan-loss provision for Q1 to cover potential losses in its home equity and mortgage portfolios. The implications of Bank of America’s takeover of beleaguered mortgage lender Countrywide remain a huge x-factor in the minds of many investors. Despite this, implied volatility in Bank of America options at 35% is resting comfortably below the 46% historic volatility reading – an indication to us that traders are expecting rather less trouble out of its share price that it has been wont to share historically. The battleground for this point of view appears to be the April 45 call strike, which has traded more than 23,000 times today – well in excess of the open interest at this strike – to buyers and sellers. The 75-cent price tag on this just-out-of-the-money strike indicates a 1-in-3 chance of a long position landing profitably on or before the April 18 expiration date, which could explain the willingness of option traders to play both sides of the trade.

BSC – Throughout much of last week, option traders positioned readily in long speculative positions in out-of-the-money calls (and out-of-the-money puts) in Bear Stearns on speculation that dazed shareholders would fight JP Morgan Chase’s demoralizing $2-per-share bid. While bets placed on the March contract, which expired last Thursday, were premature, this morning’s news of an amended deal valuing Bear Stearns shares at $10 apiece indicates that they had the right idea. Shares in Bear Stearns are up 106% at $12.28 – the share price, again, being bid up in excess of the offer on the table – and option traders have put some 235,000 options in play, trading with a bias to calls by a factor of 1.5. Once again we see an almost-diametrical tendency among option traders to play on both sides of a possible bidding war for Bear Stearns. This is evident from the volume in out-of-the-money calls at the April 15 strike, which have already traded on volume twice the open interest, and in April 10 puts, which have traded at 5 times the open interest.

HOV - This morning’s surprise rise in February existing home sales – the first in seven months – offered an 11% boon to shares in homebuilder Hovnanian. With shares up 11%, option traders have put more than 10,000 contracts in play, with calls and puts trading on comparable volume. While call-side premiums moved sharply higher on the share price gain, the most actively traded Hovnanian contract this morning was the out-of-the-money April 7.50 put, which was bought heavily at about 30 cents apiece – a development which certainly speaks to an sense among many option traders that today’s data, if not anomalous, is not a license to seek unmitigated exposure to recovery in homebuilding space just yet. Open interest shows almost twice as many open put positions as calls.

CX - American depositary receipts in the world’s third-largest cement maker, Cemex SAB, rose 6% as of the noon hour to $26.88. The upside in its share price comes on the heels of Friday’s warning of a 25% drop in earnings guidance out of Cemex, which in turn elicited an analyst downgrade citing not just softness in Cemex’s primary markets in U.S. and Spain, but also the prospect of a slowdown in its great emerging-market hope, Mexico. Not second-guessing Friday’s sober outlook, it appears that at least one trader took the opportunity to enter heavily into long positions at the July 25 put strike – positions bought for about $2.21 today, a 22% discount from last week’s closing price. The position supposes a further 14% decline from current share price levels by midsummer just to generate profit for the buyer. Cemex shares have traded as low as $20.92 over the past 52 weeks.

HA – Some traders are taking a protective stance on shares of Hawaiian Airlines, after its arch-rival, Aloha Airgroup, was compelled to file for Chapter 11 bankruptcy protection on Friday. In its filing, Aloha indicated that rising fuel costs had tacked $71 million to its annual operating costs, as well as difficulties posed by Mesa Air Group’s low-fare carrier Go! Airline on inter-island routes. While shares in Hawaiian Airlines are up 2.8% to $4.94 today, it appears that some traders don’t believe the company can remain immune to the Go! Airlines challenge…or the equal-opportunity threat of spiraling oil costs. This goes some distance in explaining the 15% spike in implied volatility we observed this morning, along with a 130-fold increase in option trading volume which appears tied up in bear call-spread activity in the tourist high-season July contract. It looks as though a trader sold the July 2.50 call for $2.45, while buying calls one strike higher at the 5.00 strike for 90 cents, initiating the trade with a $1.55 credit that represents the maximum profit on the trade should Hawaiian Airlines shares trade below the thresholds of both call strikes. In order to do so, the airline’s shares would have to break below the standing 52-week low of $2.60. The volume involved in this so-called short call spread totaled 15,000 – equivalent to three-quarters of the total open interest in Hawaiian Airlines.

BVF – Shares in Canada’s largest publicly traded drug company, Biovail, dropped 3% to set a new 52-week low at $11.14 after the company’s founder and controlling shareholder was indicted along with other Biovail executives for fraud by the U.S. Securities and Exchange Commission. The news sparked a 60% gain in implied volatility to 78.1% - gaining more than any other company on our platform this morning, while option traders sent volume to nearly 16 times the normal level. With 2.6 puts trading for every call, the rush to seek protection against further erosion below the prior low is apparent in heavy buying interest in April puts at strikes of 10.00 and as low as 7.50. Open interest at these strikes was negligible prior to today.

Rebecca Engmann Darst contributed to this report.