Monday Afternoon Options Update: VIX, MEOH, WSH, CORS

VIX – Broad declines in the tech and financial sectors bridled hopes of a meaningful recovery in stocks today, sending the composite measure of implied volatility in the S&P 500 3% higher at 24.32. Late last week we noticed a strong current of VIX call buyers positioning for further turbulence in the S&P in June and July via call options near the 30-line. With today’s revelations out of Lehman Brothers keeping financials tethered to the downside and the spread of losses to other consumer-exposed sectors, traders have extended their volatility-bullish outlook by trading heavily calls at the August 27.50 strike on a volume 3 times the open interest. These contracts, which switched hands 16,000 times, commanded premiums of $1.50 per contract – a price reflecting about a 40% chance of VIX closing above 27.50 by August 19.

Methanex (MEOH) – With markets awash in red today, shares in Methanex, the world’s largest supplier of the petrochemical methanol, were conspicuous for gains. With shares up nearly 4% to $29.63, it appears as though Methanex is making its fifth pass at the $30 line since last Halloween. It should be noted that while serious tests of the $30 line were observed around Halloween time, again in December, again in March, and again on Friday, it only managed to penetrate above the $30 line on that first occasion. Against that backdrop it’s particularly interesting to contemplate today’s 27-fold increase in option trading volume, as it occurs almost entirely in calls at the July 30 strike, extending into the October contract at the 35 strike line. Because all of this volume has traded to the middle of the market, it’s hard to tell whether this is a trader brazenly playing against the likelihood of a break of $30 for the wood alcohol maker by selling calls, a shareholder looking to enhance yield on an existing stock position by doing the same, or a bullish investor seeking long exposure to share price gains by buying these calls. Methanex shares have shown an almost unmitigated uptrend over the past 5 years, handily outperforming the Nasdaq Industrial Index by some 25 percentage points over the past year.

Willis Group Holdings Limited (WSH) – Shares in Willis Group Holdings declined 5.3% to $34.00 after the London-based risk management and insurance intermediary announced a bid to buy sector peer Hilb Rogal & Hobbs in a transaction expected to double the company’s North American earnings. The deal, which effectively creates a newly merged entity known as Willis HRH, was billed on the company’s website as the largest insurance brokerage industry deal in a decade. What we observed on the options front was a surge in volume to some 141 times the normal level of activity usually observed in this sleeper of a ticker, with buying interest in October 30 puts, and selling interest in October 40 calls on disparate volumes that may suggest some long collars being deployed by traders eager to protect long positions in the stock. Willis Group has traded as high as $45 over the past 52 weeks.

Corus (CORS) – Is decisive movement in the cards for Corus? Implied volatility in commercial real estate lender Corus Bankshares staged an unsettling 19% spike today to read 115.8% - an indication that risk perception as measured in options prices portends more than one-third additional risk over the next 30 days than Corus has shown historically. Shares today are trading flat at $5.00, lingering right around the 52-week low of $4.95 they’ve been circling for the past month. The decline in Corus over the past year has been virtually uninterrupted since it peaked at $16.95 last June, and it is worth noting here that a look at short interest in Corus shares shows some 77% of its float is held by short sellers. Today’s active option volume, which adds up to 10 times the normal level of activity seen in this ticker, is observed on either side of the June $10 line, where a 4,250-lot position traded to the middle of the market on both sides, with the calls trading for 5 cents and the puts trading for $5.00.

Rebecca Engmann Darst contributed to this report.

Comments

[just me..:]

Wilkinson's June 10th article mistakenly labels MEOH a "wood alcohol maker" such a mistake calls into question Wilkison's authority to be analyzing stocks such as MEOH. Methanol is produced by natural gas and not wood pulp. Crucial to analyzing this stock is knowledge of pricing and availability of Natural Gas and demand and pricing of Methanol. Moreover, a little knowledge of the consistent annual issuer bids of 10% over the last few years and the double digit dividend growth year over year are important too. Not to mention the quality of management. Reading the tea leaves of share price as an investment strategy is sure to wipe out virtually every dollar you have if you were lucky enough to have them in the first place. Moral of the story DON'T RELY ON WEB ARTICLES TO PURCHASE OR SELL STOCK. As the above illustrates, there it is more important why a stock ticks than how. and.... Wilkinson either take a chemistry lesson or write about something you have knowledge. - Just me...

2008 Jun 10 11:27 AM