Tuesday Options Outlook: XLF, DHI, TOL, SWKS, DPTR, SNV, CCRT, CMA

Rebecca Engmann Darst co-authored this article.

Financial Select Sector SPDR (XLF) - Shares in the closed-end fund indexed to leading financial stocks dusted off some of yesterday’s losses with a 1% gain to $23.27, and with nearly 400,000 options trading as of the noon hour. The fact that implied volatility at 38.9% shows the option market pricing in 50% additional risk to financial issues over the next 30 days has tempted many a trader to sell this heavily fortified premium and seek long, cheap positions in June calls, keeping puts and calls trading in relative balance. This certainly appears to have been the case of the June 23-strike puts, which sold off heavily, while calls at the 23 and 24 strikes have been bought. Neutral-to-bearish positioning was seen in the July contract via the deployment of ratio put spreads – a favorite device among option traders dealing in financial stocks today –where it looks like a trader sold 20,000 lots at the 21 strike at 48 cents per contract and used those proceeds to fund a 10,000-lot purchase of puts at the 25 line for $2.57 per contract. The $1.61 debit on this position would require a breakeven of $23.39 – right around current levels – but the trader must be fairly confident that the downside risks aren’t that hypertensive – bear in mind, he or she has a 10,000-lot uncovered short exposure at the 21-strike line.

D.H. Horton (DHI) – Yesterday’s Fitch downgrades of a series of U.S. residential homebuilders are showing an appreciable effect on option trading in individual tickers. Shares in D.H. Horton reversed some early weakness to read .68% higher at $11.81 - barely $2 above the 52-week low. With options trading at 12 times the normal level, traders are piling into August puts, sending put volume to 6 times the level of interest shown in calls in an unusually lopsided trading session. Action is particularly heavy at the 10-strike line, where these puts have already traded at twice 13,000-strong open interest, trading mostly to buyers. Put-buying interest extended as low as the 7.50 strike in the August contract. Implied volatility at nearly 73% shows option traders pricing in about one-third additional price risk over the next 30 days.

Toll Brothers Inc. (TOL) - While Fitch affirmed Toll Brothers’ issuer default rating yesterday, citing its “seasoned operating model” that has produced “often the best margins within the industry, relatively stable debt-protection measures and consistently profitable track record” through past cycles, it maintained a negative outlook on its forward rating due to the probability of continued challenges in the homebuilding environment into 2009. The market seems to have cottoned to the rhetoric as a sign of viability in Toll Brothers, rewarding its shares with a 2.7% gain to $19.83 at present. This morning’s doubling in option volume occurring (as we saw with D.R. Horton) in possible ratio put spreads in the autumn contracts. It looks as though the September 15 puts have traded 10,000 times against 5,000 lots trading in 22.50 puts. Both ends of the trade were logged to the middle of the market, making directionality a tough call – a bullish trader would have taken a $3.47 credit on this spread in hopes of Toll Brothers pulling ahead of the pack, while a bear would expect the spread between the strikes to widen on a share price decline. What’s noticeable here however is the conspicuous lack of elevation in implied volatility, which at 54.8% ticks in only slightly above the 53.5% historic reading on the stock.

Skyworks (SWKS) – Shares in Skyworks, the maker of chips for wireless handsets, dropped 5% to $10.63 today on no apparent news catalyst. Last week the company was on the receiving end of bullish exposure on Jim Cramer’s Mad Money show. Today its implied volatility has spiked 31% to 69% on no specific news catalyst- more than almost any other ticker on our platform – and suggestive of greater risk of whipsaw price action over the next 30 days – almost 50% more price risk compared to the historic average. Skyworks shares have gained 44% in value over the past 52 weeks in a solid uptrend, but it appears that traders are positioning for downside given heavy buying activity in July 10 puts at $0.70 per contract – a doubling in value from yesterday’s levels.

Delta Petroleum (DPTR) – Shares in Delta Petroleum, Last month, the company announced a 78% increase in its line of credit to $240 million owing to bullish growth in production and proven reserves. The company has benefited this year from a 35% stake investment by Kirk Kerkorian’s Tracinda Corp. Today’s option action appears bullishly poised as well, with contracts trading at 4.5 times the normal level. This occurred primarily in the September contract, first in the form of a 3,000-lot credit spread using puts, where the trader sold puts at the 22.50 strike for $1.35 and bought puts at the 20 strike for $0.90, taking a 45-cent credit on the transaction that the trader takes as maximum profit if both puts expire worthless on an upside bump for Skyworks shares. These proceeds may have been used as a funding vehicle for the purchase of September 30 calls, which were bought for $2.60, though it is not known if this volume – bullish though it may be – was related in any way to the put spread activity we noted above. Delta Petroleum last brushed the $30 mark on November 30, 2006, when the move represented an all-time high for the company.

Synovus (SNV) – Shares in Georgia-based, Southern regional bank franchise Synovus dropped 1.5% to $9.90 today, still lingering around its 52-week high, just days after its CEO told a New York investor conference that the company is in the “fifth inning” of grappling with credit issues emanating from the subprime debacle. Some 12% of Synovus’ $1.67 billion portfolio of residential loans has been categorized as “non-performing,” according to an Atlanta Journal-Constitution article, and the company has begun using auctions to dispense with homes in foreclosure in the Atlanta area. What we observed in its option activity was an increase in trading volume to 7.4 times the normal level, concentrated in November put ratio backspreads. The trader in this case appears to have bought 5,000 lots of 10-strike puts for $1.45, funding the purchase entirely by selling 2,500 lots of 12.50-strike puts for $2.90 and incurring neither credit nor debit upon initiation of the trade. We assume this is a bearish strategy, since the short-sale of higher-strike puts is covered entirely by the long puts at the lower-strike, leaving 2,500 lots of exposure to long puts at the 10 strike that the trader hopes will rise in value with further declines below the $10 mark heading into the fall. A look at overall open interest shows option traders have accumulated twice as many bearish puts as bullish calls in Synovus, a proportion that has really only gained a foothold since the first of the month.

CompuCredit (CCRT) – Today’s top implied volatility gainer is a repeat offender on our platform. Yesterday we noted a 6-fold increase in trading volume as traders made haste to sell calls and buy puts in synthetic short activity that reeked of ill omens for the company. Today came news out of the Wall Street Journal that FTC and FDIC regulators will pursue more than $100 million fines from CompuCredit and other banks for “deceptive marketing practices and abusive debt collection tactics.” The news occasioned a 109% spike in implied volatility to 160% - twice the historic reading on the stock - as shares dropped 26.6% to $6.45. It’s interesting to note that while yesterday’s option action played out in concurrent call selling and put buying at the $10 line, today’s field of vision for traders has whittled down to the $5 strike line in front month puts. These contracts are still finding buyers in excess of open interest, as traders pay out 50 cents per contract for the right to sell CompuCredit at a 28% discount to its prior 52-week low in 10 days’ time.

Comerica (CMA) - We observed opposing price action in another financial institution catering to banking’s so-called “underserved.” Shares of Comerica, the regional bank tipped to manage the U.S. Treasury’s so-called “Direct Express” card, which will make e-payments available to the 3.9 million Social Security-dependent Americans without bank accounts, rose 3.8% to $35.17. A concomitant increase in option trading volume to nearly 13 times the normal level appeared roundly centered in October puts at the 30 and 35 strikes, where the activity was fresh and where it appears that 2:1 ratio put backspreads were in vogue as well. A trader here appears to have bought 9,600 lots at the October 30 put strike for $2.35, while selling 4,800 lots at the 35 strike for $4.50. This trade incurs a 20-cent debit, still a limited initial cost outlay that still allows the trader to benefit from a drop in the share price heading into the fall. Implied volatility at 50% shows option traders pricing in nearly a third more price risk than Comerica shares have shown historically, a divergence that began around the beginning of the month.

Comments

[David White:]

What do you think of some of the hot groups that have been getting blasted lately. For instance, the shipping industry has had huge losses in the last week. This seems to be the result of a double or triple pronged sword. First the oil price increases of late have been depressing shipping stocks because people are afraid of the airline scenario (increased fuel costs = decreased or no profits). Second the markets have been going down, so shipping stock have gone down with them. Third the credit tightening in China, etc. may mean that there will be less shipping to there. Still this shoudl really be a wash as the worldwide credit tightening should lead to less shipping competition (fewer new ships being built). Further China will have to import a lot of raw materials to fix all of the earthquake damage. Also they are already short of their coal stock. They need to import a lot of this too. To me it seems like some of the better valued shippers such as NM (PE=4 with a new fleet coming into use in Q4) should be going up about now. Ditto TBSI, DRYS, etc.
What do you think? Are they going to continue to be brought down by the financial sector and oil? Or will they start a trek up (perhaps tomorrow)? I note oil is down today, probably due to the decrease in the world use estimate for 2008 by EIA.

2008 Jun 10 02:50 PM

[David White:]

The Solar sector has also been hammered recently, even with oil prices going up. What do you think of this sector? It does seem like a possible upward pop play for options.

2008 Jun 10 03:15 PM