Monday's Options Report: WB, XLF, CNB, ZION, SNV, INTC, MNST

Rebecca Engmann Darst contributed to this report.

Wachovia (WB)– Surprise, surprise…news of another left-field writedown from a major bank – this time, the nation’s 4^th largest institution, reeling from bad home loans in an acquired California portfolio – sent shares on a 10.5% downward spiral to $24.86. Options traders put some 162,000 lots into play over the noon hour, with puts outtrading calls by a factor of 1.2. Implied volatility in Wachovia options came off by nearly 27% - a strong indication that option traders feel the worst of the downside for Wachovia’s share price is already being felt. They also expressed this view by selling long-volatility strangles in the April – and even into the May – contract. Here we observed the 25/27.50 combination sell to the bid for a combined premium of $2.90. Elsewhere, it looks like July puts at the 25 strike were mostly bought, signaling no pull back above current depressed share price levels heading into midsummer.

Financial Select SPDR(XLF) – Shares in the financial-sector ETF slid more than 2% on Wachovia’s writedown, with some 200,000 options trading over the noon hour. Where traders appeared to sell front-month volatility in Wachovia, however, we think they’re buying it in the sector ETF. Strong buying interest and similar volumes at the April 25 puts and 26 calls indicate that this is the case, while the same strategy may be in favor between strikes 24 and 25. More bumps in the road for financials…? It bears noting that long volatility plays also generate profits for the buyer with surprises to the upside…and in that spirit, we were interested to note buying interest in June 30 calls, which were a steal at 22 cents today.

Colonial Bancgroup (CNB) – Options in Colonial Bancgroup, the Alabama-based holding company that operates more than 320 bank branches in the Deep South, showed a sudden, 25% spike in implied volatility this morning. The 106% implied volatility reading stands in marked elevation to the 79% historic reading, and indicates option traders pricing in one-third more deviation in Colonial’s share price than it has shown historically. The staggering implied volatility move coincided with a 5% drop in Colonial’s share price to $8.89 – a new 52-week low that did not appear to follow any news catalyst. The company is due to report earnings next Monday, corresponding with the May option contract, which explains the eagerness of traders to enter new longs in May 7.50 puts for 50 cents apiece, implying continued erosion behind the lows heading into next week.

Zions Bancorp (ZION)Consistent with a spike in option trading volume observed in a number of regional banks today was activity in Zions Bancorp, a multi-bank holding company that operates regional banks in the western part of the United States. Banks under its aegis include Amegy Bank of Texas, California Bank & Trust, National Bank of Arizona, Commerce Bank of Oregon, and others. Shares slid 4.4% to $42.50 this morning, just three days ahead of its quarterly earnings numbers. A quadrupling in option trading volume appears to be the work of bear put-spreaders out in force in the April contract. A 2,000-lot position of this sort looks to have gone through between strikes 45 and 50, with the upper strike likely bought for $7.03 against the sale of the lower strike for $3.28. The $3.75 net debit on this position benefits the trader if Zions Bancorp trades in a fairly narrow $1.25 range between $45.00-$46.25 ahead of Friday’s expiration. The sale of the lower-strike put would seem to insulate the company (at least in the mind of this trader) against a crash below its 52-week low of $38.88.

Synovus Financial Corp. (SNV) Continuing the high relative-volume trend in options of regional banks, we observed a 14-fold spike in trading volume of Synovus, the $33 billion holding company that owns and operates 37 banks in Georgia, Florida, and throughout the Deep South. With shares already down 2.4% to $10.56 heading into the noon hour, it appears that traders are girding for a test of the $9.54 52-week low even before its earnings report next Thursday. This was evidenced by the 1,000-lot purchase of April 10 puts for 15 cents apiece, with buying interest extending into the same strike in the May contract for 50 cents apiece. Put positions already outnumber call positions in Synovus – whose shares are down just half a percent for the year to date – by a factor of 1.7.

Intel (INTC) – Shares in chip bellwether Intel got a head start on earnings last Thursday, with an exultant analyst upgrade that sent shares sharply higher before the broad market slump pulled them down again. Today Intel shares are trading 1.4% lower at $20.94, in contrast to smallish gains on the broader Nasdaq index. But it appears that many traders, mindful of the promise of last week’s upgrade, are positioning in seeming anticipation of a positive earnings report. They’re doing this through heavy buying in April calls at strikes 21 and 22.50, the latter strike trading at 22 cents apiece. Interestingly, while the $1.32 price of the April $21 straddle shows the market pricing in a 6% up-or-down move on back of the earnings (consistent with the reading last Thursday), few traders are positioning long volatility this afternoon, opting instead to sell more puts in the April contract and buy more calls. Some did avail themselves of the fact that all Intel options are pricing in a quarter more volatility than they have been wont to show in the past – making all option premiums comparatively richer - by selling the May $21 straddle for a combined premium of $2.04.

Monster Worldwide (MNST) – Shares in the online job site have come off their session lows at $22.77 (2.4% above Friday’s close) after setting a new 52-week bottom earlier today. On Friday, news site MSNBC announced that it had entered an exclusive partnership with Monster for syndicated nationwide job listings. Options volume pushed to more than 4 times the normal level, with April 22.50 calls bought heavily at double the open interest, buying interest extending one strike higher to the 25 line. In what may be advance positioning ahead of its May 1 earnings report, we observed possible long strangle positioning between the 20 and 25 strikes. This position would cost about $1.85 to enter today, covering the buyer in the event of a break below $18.15 or above $26.85. Implied volatility already shows a sizable elevation above the historic reading in Monster, with the option market currently figuring in nearly a quarter more price risk to the job site’s shares over the coming month than it has shown historically.

Comments

[Russ Abbott:]

What am I missing? A bear put spread 50/45 for 3.75 on Zion is profitable if Zion closes anywhere below 46.25 when the options expire Friday. Why does it have to sell for more than 45?

2008 Apr 15 02:50 PM

[Procrastinator:]

Wow! You know they say hindsight is perfect, but damn, how could all the experts be so wrong in their analysis of Synovus which headed straight up after this article suggested a decline into the nines? Ah! such is the market.

2008 Apr 17 06:56 PM