Monday Options Outlook: GE, GS, XLF, MEOH, WB

Rebecca Engmann Darst co-authored this article.

General Electric (GE) – The drift higher in implied volatility and surge in defensive front-month position that we saw in GE options on Friday (following rumors of a capital-raising bid) continued apace today (following news of an analyst downgrade). Shares are down a restrained .58% to $28.97, but a look at implied volatility on all GE options shows the options market pricing in 84% additional perceived risk to GE’s share price over the next 30 days than they have shown historically. Conspicuous plays include what looks like a 37,000-lot transaction in the front month where a trader sold calls at the 32.50 strike for a penny while buying the puts for $4.35. In the September contract, it looks like a long collar was deployed using 10,000 lots at the 25-strike puts for 73 cents, selling the 35-strike calls for 18 cents. Both cases are suggestive of traders rattled about the street buzz surrounding GE – talk that has patched through to GE’s implied volatility reading – and seeking to protect positions in GE stock using options as hedges.

Goldman Sachs (GS) – With Lehman’s in-line loss this morning restoring a sense of alignment (and therefore credibility) to investment bank guidance, option traders appear more willing to traffic in calls of Goldman Sachs and other on-deck earnings brokerages. Shares in Goldman are up 1.5% to $181.24, with some 120,000 lots trading twice as often to calls as to puts. Most of this is in front-month calls, with many strikes already trading in excess of open interest – to wit, the June 185 calls, which at $4.35 are worth 64% more than they were on Friday. Goldman shares are 1.5% higher at $180.90.

Financial Select Sector SPDR (XLF) – Shares are holding steady, up .43% to $23.48, with option traders closing out positions at the June 23 and 24 lines on hefty volumes. There’s still plenty of evidence of defensive sentiment in the sector ETF, as depicted by what looks like buying and selling at the 23-strike line in July, call-selling at the July 24 line, and buying in September puts at the 22-strike. Option traders are pricing in 52% added risk to financial issues over the next days, a fact which could add to the allure of cost-controlled strategies like put spreads in the coming sessions.

Methanex (MEOH) – Options in Methanex, the world’s largest supplier of the petrochemical methanol, are making their second appearance in 7 days on our scan of large volume gainers. One week ago today, we noted that a 27-fold increase in trading volume occurred in July 30-strike calls as shares appeared to make their fifth test of $30 since Halloween. Shares have been unable to pull off a close above $30 – but are still nursing a 2.3% gain to $29.89 – and a 7-fold increase in option volume shows what may be traders taking off some of those 30-strike bets in the July contract for $1.40 today. Elsewhere, there’s heavy volume occurring in October 35 calls at $1.02 per contract – activity we’re chalking up to covered call writing, since Methanex shares have as yet not breached the $35 mark, options prices are reflecting barely a 30% chance of this occurring by October, and because today’s analyst upgrade of Methanex by Raymond James put the 12-month target at just $26.50 per share.

Wachovia (WB) – On Friday we noted a steep increase in implied volatility of Wachovia options that coincided with a rash of out-of-the-money put volume following bearish stats on non-performing assets out of California lender Downey Financial. Today’s Wachovia shares are up 2% to $18.54, but its option activity continues to carry a pall. Implied volatility on all Wachovia options shows traders pricing in three-fourths added risk to the company’s shares over the next 30 days, and are expressing this view through bearish puts 4 to 1 over calls. The 13,000 lots purchased at the July 22.50 put strike today may seem like no great shakes given the current share price, but realize that the $5 price tag on this position requires a break of $17.00 (Wachovia’s current 52-week low is $17.34) just to break even. Even bleaker is the positioning in October, with put buying at strikes 12.50, 15 and 17.50 on elevated premiums – nearly 20% of the active moving volume in Wachovia options is centered in puts that require a substantial break below $17 by October.