Wednesday Options Outlook: BAC, XLF, LEH, YHOO, EBAY, S, HOT

Rebecca Engmann Darst co-authored this article.

Bank of America (BAC) – This morning’s 1.6% decline to $32.15 has shares of Bank of America hovering within cents of its 52-week low – the move lower follows revelations in a Merrill Lynch note that the next head of the credit hydra will hit Bank of America on its vulnerability to consumer and mortgage loans, exacerbated by the pain of a massive write-down on its acquisition of mortgage lender Countrywide. With implied volatility at 38% showing option traders pricing in more than a third additional price risk to Bank of America shares over the coming 30 days, the 90,000-strong option volume shows a relative balance between puts and calls. While the buying interest in June 35 calls we observed this morning may be the upshot of traders looking to protect short positions in the underlying stock, the two-way traffic in low strike calls suggests traders playing both sides of the short-term outlook. Puts at the 27.50 strike were sold for 27.50, while puts at the 30 strike traded to buyers and sellers. August 30 puts, conveying the right to sell Bank of America shares for $30 by August 15, were bought on a volume of some 11,650 lots – more than 10% of today’s active volume – and with a 44% implied volatility reading (appreciably higher than the composite implied volatility reading for all Bank of America options), the demand for this strike is a telling commentary on the defensive mood on Bank of America’s late-summer outlook.

Financial Sector ETF (XLF) – Is showing some grit with a .53% gain to $24.44, and 276,000 active contracts trading more than twice as frequently to calls as to puts. Heavy volume is centered in the June contract, with contracts trading to buyers and sellers at the 25 calls, the 27 calls selling mostly to the bid, and the 24 puts being bought heavily. Determining the directionality of these trades is difficult at present dispatch – what’s possible is that traders are deploying call spreads at the 25/27 strikes, or using the long 24-strike puts and short 27-strike calls in collars to protect underlying share price positions. While both of these strategies are hallmarks of cautious traders, neither is nakedly bearish. Calls have been freshly bought at the July 30 strike, while it appears that some butterfly call spreads are going through in the September contract in volatility plays.

Lehman (LEH) – Is trading 5% higher at $32.15 today after yesterday’s rout for shares, as media outlets weigh in on the brokerage’s likely course of action, from equity capital raising efforts abroad, to – as the Wall Street Journal suggested this morning – an actual sale of the company, possibly even to a private equity company. While it’s shrunk back a bit from yesterday’s angriest elevations, with implied volatility on all Lehman options ticking in at 101%, we can deduce that the option market is pricing in about 63% more price risk over the next month than it has shown historically – this echoing the sentiment of an early-morning spike in the price of Lehman credit default swaps. With twice as many puts trading as calls on a volume of more than 221,000 lots, it is instinctual to consider today’s early trading defensive, but it must be stated that a brisk two-way trade is occurring in many of these lower put strikes, notably the June 17.50’s and 20’s. Early buying and selling at the June 25 and 30 put strikes suggested spread activity occurring here.

Yahoo (YHOO) – Shares in Yahoo are up 3.1% to $26.96 on news appearing in today’s Wall Street Journal that Carl Icahn’s disdain for Yahoo’s response to a scuttled bid by Microsoft goes straight to the top, and that the activist shareholder is angling for the ejection of co-founder Jerry Yang – a move he considers essential to drawing Microsoft back to the bargaining table. With more than 134,000 options trading in the first 2 hours of the market, Yahoo is one of the most active tickers on our platform, where in addition to perky volume in June calls, we observed a trader roll a 10,000-lot position from the July 25 put strike to the same strike in October, where heavy volumes also are being observed in calls at strikes 27.50, 30 and 32.50.

eBary (EBAY) – Shares in eBay are up 3.3% to $30.23 despite news of a conviction in a precedent-setting French court case involving the sale of counterfeit goods. According to French news agency AFP, the French court ordered eBay to pay 20,000 in damages to luxury bag maker Hermes. With implied volatility in eBay options at 35% still elevated above the 31% historic reading on the share price, it appears that a trader may have taken advantage of the disparity between implied and historic volatility to sell the July 30 straddle, taking in $3.12 in premium per contract – no mean sum on a 22,000-lot position – on an expectation of minimal share price action over the next 6 weeks.

Spring (S) - Shares in Sprint are showing flattish price action, down .64% at $9.32, with some interesting call spread activity in the August contract sending overall volume to 4 times the normal level. It appears that a trader entered an 11,000-lot call spread between strikes 9 and 10, buying the 9’s for $1.20 and offsetting the cost in part via the sale of 10-strike calls for 75 cents, implying a narrow range for Sprint shares around current share price levels. For some reason the trader in this case opted to take a 45-cent debit rather than sell an at-the-money straddle or strangle.

Starwood Hotels and Resorts (HOT) - Shares are 3.5% higher at $47.84 this morning, and a 4-fold increase in option trading volume accompanied by an 11.7% spike in implied volatility suggests that takeover rumors involving the hospitality chain may have resurfaced. While calls are outmoving puts by 2.5, the heavy buying and selling of 50-strike calls on volume nearly twice the open interest suggests a measure of cynicism among traders who’ve seen this kind of pop and fizzle before. Volume at the June 55 strike has traded mostly to buyers, however, and the ratio of calls to puts in early trading currently stands at more than 11 to 1.

Comments

[Nextel Acce...:]

that Sprint trade does not make alot of sense to me, can anyone explain?

2008 Jun 04 05:11 PM