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Lehman Brothers (LEH) – Lehman shares careened lower today with a nearly-audible 13.6% downside lurch to $23.75 after Merrill Lynch removed its ‘buy’ rating on the brokerage stock just 1 week after the original recommendation was made. While trading in Lehman shares and options was colored for much of the day by the notion that its capital-raising efforts were struggling and that derivatives traders were (as Reuters put it) “taking a closer look” at the level of activity they pursued with Lehman, it was this intimation out of Merrill that sent implied volatility scorching 30% higher late in the session to 113.7% (this compared to a 75% historic volatility reading in the underlying stock)  - now higher than level seen last week when the company took steps to stave off a crisis of confidence by opening up about the expected extent of its losses. With twice as many puts trading as calls by closing bell, out-of-the-money put strikes in the front month attracted heavy action from buyers and sellers at strikes as low as 12.50. In the July contract we observed the July 15 puts trade on a volume of some 43,000 lots - more than 4 and a half times the open interest  - sold mostly to the bid in what may be partial hedges on short sellers of Lehman stock. July puts at the 20 and 25 strikes traded briskly to buyers and sellers.

Shares in the Financial Select Sector SPDR (NYSEARCA:XLF) absorbed their share of the blow today from financials, setting a fresh 52-week low with this afternoon’s 3% decline to $22.42. The 41.5% implied volatility reading on the ETF – suggesting 50% more price risk to financial shares over the next 30 days than they have shown historically – served as a kind of clarion call to option traders to position defensively, and we observed mammoth volumes trading particularly in the July contract. Puts at the 22 strike traded on volume of 156,000 – more than twice the open interest – trading heavily to sellers. This same tendency to sell puts on mammoth volume extended to the 24 strike puts, and again, we question whether this is representative of covered put selling by traders who have sold short the ETF and wish to hedge their underlying short positions. The proliferation of call buying in the July contract at strikes of 22, 23 and 24 suggest that, in addition to the hedging strategies we outlined above, some traders are positioning long of volatility simply in the interests of caution.

Option volume in Goodyear Tire and Rubber (NASDAQ:GT) surged  to 10 times the normal level this afternoon as shares slumped 5% to a new 52-week low of $21.50. The action in Goodyear – occurring against the backdrop of a flagrant elevation in implied volatility (at 52%, option traders are pricing in more than a third additional price risk to Goodyear shares over the next month) – was highly counterintuitive, to say the least – characterized by heavy naked call-buying in the January contract It looks like the 25 calls were partly bought/partly mid at $2.00, while the 30 calls were bought outright at $1.15 on volume representing almost all the open interest at that strike. Goodyear’s share price has suffered mightily over the past month as spiraling oil prices have fueled momentum in Tokyo rubber prices, weighting heavily on Goodyear’s input costs. Prior to the decline that began on May 14, Goodyear had made 4 passes at $30 over the past 6 months, so it’s not an unfathomable price level for it to obtain. There may be a couple of scenarios in play here – option traders may have some inside notion about possible deal activity, which might be plausible for a company looking for cost-saving mechanisms given the rub of commodity prices. Or it may be a backhanded wager on year-end pullback in oil prices, giving relief to a company like Goodyear with an obvious dependence upon synthetic rubber.

Options in Orbital Sciences Corp. (NYSE:ORB), the maker of satellite and missile defense launch equipment, traded at more than 68 times the normal volume today against a flat close for its shares to $23.65. The action here appears to be an advance play on earnings-correlated upside for the company, given the preponderance of call-buying at the September 25 strike and put-selling at the same month’s 22.50 strike. It should be noted that Orbital Sciences set its 52-week high as recently as April 25, but has pulled back nearly 15% since that time. Orbital Sciences’ earnings report is scheduled for July 18, corresponding to the September options. Implied volatility shows an uncharacteristic divergence against the historic reading, with the 39.3% implied gauge comparing to a 26.1% historic level – these two readings were roughly equal at the start of this month.

Source: Late-Session Options Update: LEH, XLF, GT, ORB, XLK