Friday's Options Update: WB, ZION, BAC, MRVL, GE, KO, LEH, CLX, AAPL, FITB, IGT

Bad auguries are spreading like fungus in regional and super-regional banks this afternoon – despite a modest gain for the S&P in afternoon trading, and limited downside for the XLF (which tracks the broader financial sector), the Regional Bank HOLDRs Trust (XLF) set a fresh 52-week low today with its ominous dip below the $100 mark.

Wachovia (WB) – Option traders seemed to hold an especial sense of doom and enervation for Wachovia. Shares tumbled 8.7% to set a new 52-week low at $17.62, precipitated by this morning’s news out of  California savings & loan Downey Financial Corp (DSL) of a 9-fold rise in bad loans for the month of May. This apparently exacerbated concerns about the state of Wachovia’s own ARM exposure, which coupled with the sense of dire doldrums among all regional banks seems to have culminated in this ominous put activity. Implied volatility in all Wachovia options has spiked nearly 54% on the news – more than any other ticker on our platform – as the market now perceives twice as much risk to Wachovia’s share price over the next 30 days than they have shown historically. This hefty risk perception is playing out in fresh buying of out-of-the-money puts at the June 17.50 and July 15 put strikes.  

Zions Bancorp (ZION) – Ditto the action in Zions Bancorp, which joins the ranks of regional banks trading on elevated implied volatility and with heavy action in puts. Shares declined 5% to $34.01, slumping below the prior 52-week low as its name was ruefully added to the roll-call of regionals crimping under rumors of capital inadequacy. With more than 10,000 options in play this afternoon, today’s activity in Zion’s Bancorp is more than 6 times the normal level observed in this ticker and equals about 1 out of every 4 of its options in play. Implied volatility has risen more than 25% on the session, suggesting heightened price risk being factored into its premiums today. Put-buying at “dust bowl” strikes as low as 30 in the front-month, and as low as 25 in July, is being observed as 3 times as many puts trade as calls in afternoon market action. Prior to today, Zions Bancorp’s 42,000-strong open interest was evenly split between puts and calls.

Bank of America (BAC) – No super-regional bank appears to elude the grasp of this afternoon’s volatile run. While shares in Bank of America have kept the downside in check with a half-percent decline to $29.29 (respectably a buck above the 52-week low), especially active this Friday afternoon are out-of-the-money June 25 puts, which have traded more than 22,000 times to the middle of the market for 10 cents per contract. Open interest at this strike heading into today’s session numbered only about 2,000 contracts. Traffic in excess of open interest extended into 25-strike puts in the August contract, where we observed a brisk two-way traffic in these puts. Implied volatility on all Bank of America options ticks in at 50% - showing a 61% elevation above the historic reading on Bank of America shares.

Marvell (MRVL) –  Options in Marvell are drawing heavy activity today on rumors that the company might draw a bid from Texas Instruments or a private equity firm at $24 per share. Bullish sentiment was furthered bolstered by a Smith Barney report forecasting short-term margin improvement for the company. Shares are up 5% to $16.75 and implied volatility showed an early spike of 18%. With  80,000 options already in play Marvell ranks early among the most active tickers on our platform, as calls are heavily bought in excess of open interest at the 17.50 strike in the June and July contracts. Premiums are more than 150% higher today at both these strikes. The TXN-for-MRVL rumor also dovetails conveniently with the long put and straddle activity we’ve observed in recent sessions in Texas Instruments, which has been tipped by Barron’s previously as a likely buyer in some kind of tie-up in the analog chip space.

General Electric (GE) – Shares in General Electric declined a modest .28% to $28.97 to close out a week in which it descended below $30 for the first time in 4 years on concerns that it may seek outside capital to maintain its credit rating – rumors the blue-chip has vehemently denied. Vehement denials aside, implied volatility on all GE options has risen 11% today, adding to a 31% increase this month alone, and today’s reading of 36.6% shows options prices reflecting 76% additional price risk over the next 30 days. This is the highest reading in at least 52 weeks for GE, surpassing even its customary pre-earnings elevation. While early activity showed front-month puts active, especially at the 27.50 and 29 strikes, one massive call-spread in the January ’09 contract showed traders looking further afield to play the upside odds on GE. Early this afternoon, we observed a massive 105,000-lot spread involving January 25-strike calls bought for $4.72 and the 35’s sold for 59 cents. Because there’s a $4.13 debit initiating the transaction that needs to be earned back, the trader needs to see a rise to $29.13 before he/she breaks even, but selling the 35’s caps any upside. The size of this spread helped to propel options volume in GE to 6 times the normal level this afternoon.

Coca-Cola (KO) – Most beverage stocks (at least those not involving in preliminary talks with Mexican beer makers…) faltered today on elevated inflation numbers, though the loss in Coca-Cola was compounded by a cut in sales and profit guidance by its Hellenic bottling subsidiary. Implied volatility on all Coca-Cola options spiked to 24% as shares stomached a 4% decline to $54.90, and investors piled early into puts at the 55 strike in June and July. The mood lifted later in the morning with fresh buying interest in calls at the June 55 and July 55 and 57.50 calls even as there was little relief in the share price, sending the proportion of calls to puts traded in favor of calls by a factor of 1.6.

Anheuser-Busch (BUD) – The beer brawl brewing at Anheuser-Busch (this week’s InBev (INBVF.PK) bid having been soaked into the options activity for weeks now) was thrown a Mexican mixer on yesterday afternoon’s news that the Budweiser maker has begun preliminary talks with Grupo Modelo SA. A tie-up with Grupo Modelo, in which Anheuser-Busch already owns a 50% take, would thwart the $65-per-share bid by InBev that is already drawing criticism at home and abroad. The immediate upshot was a 16% spike in implied volatility, making Anheuser-Busch one of the day’s top volatility gainers, and bringing fresh call-side volume into strikes as high as $70 in the July contract as the market’s appetite for deal jockeying was piqued once more. At 15-cents per contract, the July $40 call is the market’s equivalent of a “dollar draw” on the likelihood of a more favorable tie-up for the Bud maker. Anheuser-Busch shares are trading flat at $61.28 at present dispatch. Bottoms up!

Lehman (LEH) – Yesterday’s executive defenestration at Lehman sent shares to new multi-year lows, but was quickly followed up by news that the company may be amenable to a buyout, sending the price of its credit default swaps down along with its options implied volatility, which has come in by 27%. Shares rebounded 12.6% to $25.54. With puts and calls trading in relative balance today, out-of-the-money front-month puts are trading on heavy volume, but with no lopsided preference to buyers or sellers. With the options market pricing in a very small likelihood of a sustained rebound past $30 within the next week – current premiums put that probability at just 10% - we are noticing heavy options activity on both the call and put sides of the July 30 strike. Most of the calls at this strike are being bought, while the puts are trading to the middle of the market in what may be volatility plays betting on some sort of deal activity over the next month.  

Ryland Group Inc. (RYL) – Options in homebuilder Ryland Group Inc.responded with a day’s delay to an analyst upgrade by UBS.  Shares in the company, which serves first-time U.S. homebuyers, rose 3% to $24.66, as option traders positioned with cautious bullishness via call spreads in the January ’09 contract. Similar volumes suggest that we may have seen a 3,000-lot call spread go through at the 27.50 and 35 strikes, with a trader buying the lower strike for $3.55 and funding that purchase in part with the sale of 35-strike calls for $1.55. Ryland Group shares have traded as high as $42.39 over the past 52 weeks, and open interest shows twice as many open put positions as calls.

Apple (AAPL)  –  Vagaries surrounding the health of charismatic CEO Steve Jobs continue to swirl around this stock, which is 1.6% lower at $170.50 in afternoon trading. What is immediately striking here is the widening cleft between the historic volatility of Apple’s share price and the composite implied volatility of its options. Implied volatility at 47.5% is up nearly 20% since June 1, comparing to a historic volatility reading of 34% on Apple stock, and suggesting that current option prices are reflecting nearly 40% more price risk to Apple shares over the next 30 days. Heavy volume today is centered in June 170 puts, where the equivalent of a third of the open interest is in play, and in June calls at the 170, 175 and 180 strikes. 

Fifth Third Bancorp (FITB)  –  Markets continue to portend unrest out of the regional banking space. Shares in Ohio lender Fifth Third Bancorp crumpled below the 52-week low, down 12.6% to $12.83, on an analyst downgrade by BMO Capital Markets. Options activity is ticking in at nearly twice the normal level owing to heavy action in June puts at strikes 10, 12.50 and 17.50, and what may be activity at the July 12.50 straddle. Implied volatility on all Fifth Third options popped 19% higher 81.4%, comparing to a 47.5% historic reading on the stock and ranking it among the day’s top volatility gainers.   

International Game Technology  (IGT) – Casino stocks have made recurrent appearances in our market scanner of relative volume gainers this week, so we continue to keep a close eye on the action in IGT, where shares are flat at $30.46, loitering just near the 52-week low, but options are already trading at 9 times the normal level. This is occurring heavily in 30-strike puts which would seem to suggest jockeying for a break below the standing low, with fresh volume at that strike in the June contract at 65 cents per contract, extending into July at $1.75. Implied volatility at 53% on all IGT options shows pronounced elevation above the 33% historic reading – an 11.5% gain on the session.

Comments

[crimfunk:]

Any update on the FTO options action? Thanks for these great posts.

2008 Jun 14 10:42 AM

[cz:]

...how about a Credit Default Swap update, Andy??

2008 Jun 14 10:13 PM