Monday Option Update: LEH, WM, XLF, CCRT, ETFC, BDK, GGP, XLNX

 Lehman Brothers (LEH) - Lehman Bros.' announcement this morning of a $2.8 billion forecasted Q2 loss, together with plans to raise $6 billion in a stock offering, put the market in a mood of reflection on the pressures that continue to plague brokers moving from “mark-to-model” to  “mark-to-market” and now, it seems, “mark-to-monstrosity” valuations of troubled assets.  Lehman shares are down 9% at $29.37 at present dispatch and implied volatility has shrunk by more than 21% in early market action. With puts outmoving calls by a factor of 1.5, option traders continue to position defensively in Lehman Brothers, particularly in out-of-the-money July puts. It should be noted that while that month’s 17.50 put strike found buyers on a volume of some 11,000, volume at higher-strike puts from 20 to 30 were mostly sold.

Washington Mutual (WM) – WaMu succumbed to a new 52-week low today, extending Friday’s battery of losses that were widely attributed to bearish jobs data and fears of a more protracted U.S. recession. Today, analysts at UBS forecast $22 billion in mortgage-related losses on the way – well in excess of the $12-19 billion that WaMu has already guided -  further undermining the market’s confidence in WaMu’s ability  to pull itself from the tar. What’s astonishing here is the extreme elevation in implied volatility, which at 130% is more than twice the historic reading on the stock and the highest level seen in Washington Mutual since the keyed-up days of mid-March. Besides heavy volume in June puts at strikes of 5 and 7, we were interested to see a glut of buying interest in out-of-the-money calls at the July 12.50 strike for 10 cents – a position currently pricing in a 1% chance of landing profitably. It’s possible that this volume represents closing purchases of calls written previously. Some may also be trading long in concert with July 10 puts, which were bought heavily for $2.84. A buyer of this strike is positioning long of volatility in the July contract, looking for a sustained break below $7.06, or a pop higher past $15.44.

Financial Select Sector SPDR (XLF) – Shares in XLF, which tracks the money-center banks, were down .34% at $23.25 over the noon hour, with more than 330,000 options trading 3 times as often to puts as to calls in concert with the market’s aggrieved mood on the financial space in general today. A jaw-dropping 120,500 lots traded at the June 24 put line – more than a third of the total volume in the XLF, trading mostly to sellers at $1.19, a slight discount from Frida’s levels. Calls at the June 25 strike level attracted buyers at 17 cents apiece. Elsewhere, traders appeared keen to position in September puts at the 21 and 25 strikes, though on disparate volumes.

CompuCredit Corp (CRT) – Option activity in CompuCredit  tapped our “Hot by Options Volume” with a boost in activity to 6 times the normal level. This occurred against a marginal .44% decline in the value of the underlying to $9.04. Shares in CompuCredit have had a spectacularly drawn out plummet over the past 52 weeks, down from the $36 level in June 2007. The company, which originates and purchases credit products for consumer segments traditionally “underserved” by traditional banking, including fee-based life insurance and card registration, is thought to be “partially vulnerable” (as an Associated Press story put it last week) to payday  loan legislation. The option activity here looks indicative of synthetic short activity, with traders selling June 10 calls for 5 cents per contract, and buying puts at the same strike for $1.05, creating a $1 debit on the transaction that breaks even at $9.00.

E*Trade (ETFC) – Shares in E*Trade lost nearly 2% in early trading to read $3.91. The company is still clearly reeling from last November’s 59% drop in value following heavy writedowns on an asset-based securities portfolio and concerns about its solvency. Not to mention its 52-week high of $25.21, E*Trade has failed to make a serious pass at even the $5 mark since February of this year. What caught our attention this morning was a 15% spike in implied volatility to 73.2% which shows the options market pricing in some 56% more price risk to E*Trade shares over the next 30 days than has already been demonstrated by this eminently storied ticker. This appears to follow no particular news catalyst – particularly striking given that its earnings are first scheduled for release on July 25, fully a week after the expiration of the July options contract, where most of today’s volume in E*Trade is situated at the $4 put line, trading mostly to sellers at 45 cents apiece, in what could be a contrarian gesture of put-selling in anticipation of a jag higher over the next month.

Xilinx (XLNX) - Options in Xilinx are trading at 5 times the normal level in the early market against flat action in its $27.24 share price. Volume is concentrated heavily in July calls at the 27.50 and 30 strikes, with the latter strike switching hands more than 14,000 times – representing virtually all of the open interest at that strike. Implied volatility at 38% shows option traders pricing in 25% more price risk than is already charted in the stock.

Black & Decker (BDK) – Shares in hammered-down power tool maker Black & Decker also set a fresh 52-week low today with a 2% decline to $60.99. The development follows no particular news catalyst in the company, which is more than $35 off its 52-week high, and has lost 12.6% of its value for the year to date. A drilldown of the volume shows option traders deploying put spreads in the August contract, possibly in advance of Black & Decker’s July 24 earnings report. Puts at the 60 strike sold for $3.10 while contracts at the 65 strike traded to the middle of the market for $6.00 in what looks like a spread involving a $2.90 debit that breaks even for the trader with shares at $62.10, but apparently doesn’t portend further declines below the $60 line, given the short put position at that strike.  The volume here was enough to represent a 6-fold increase from the normal level usually seen in Black & Decker.

General Growth Properties (GGP) – Flat share price action at $39.86 in the General Growth Properties real estate investment trust, which is the second-larger owner of regional shopping mall properties, coincides with option trading volume nearly 12 times the normal level. This appeared mostly concentrated in put activity, with traders gravitating to June 45 puts for $5.05, and then entering put spreads in the October contract between strikes 30 and 40. Both ends traded to the middle of the market, the lower strike for $1.23 and the higher strike for $4.87, making directionality difficult to ascertain, though it should be noted that the chips have been stacked bearishly in General Growth Properties for some time, as evidenced by the skew toward puts by a factor of 2.5 in overall open interest. Implied volatility at 44.2% shows a marked elevation above the 34% historic reading. Late last week the company’s management confirmed that it is working on two debt financing deals to make good on obligations that come due this year and next.

Rebecca Engmann Darst contributed to this report.

Comments

[The RealExpert]

Good wrap-up Andrew. As you can see from my previous posts, in my opinion most of the commetaries on SA are trash or pumps. But this is a good and useful piece.

[lost]

Dear Sir,
What good you se in ETFC,I dont understand.The stock has been bashed down last three weeks and has not seen one day of highs.
Whats going on here.

[Go US]

Just another great buying opprortunity for the ETraid Faithful....

[oregonduck]

EFTC--Buy low--sell high. Today it is at 3.61. If I didnt have all of my money in Apple where I am making a boatload, I would be putting more of it in Etrade now. The only people losing money are the people who succomb to panic everytime they see "unrealized" losses. They are only losses when you hit the sell button.

I actually hope etrade keeps going down another 20-30 cents.

[JimmyGoodwin]

Etrade very risky atm, get out, get out.