Tuesday Options Outlook: XLF, MS, VIX, SYY, CCE, LULU, BBY, CQB, XRX, RIMM, ELN, GE

 

XLF – This morning’s numbers out of Goldman Sachs solidified that firm’s reputation as a spry bullet-dodger, but those expecting an upside rout on back of the numbers had to make do with flattish share price action, as for now the market feels the share is fairly priced at a flat-to-higher $182.35. Traders in the Financial Select Sector SPDR, which is indexed not to the broker-dealers but to the broader financial sector writ large, took the brunt of more defensive action with a 2.2% decline to $23.08. Implied volatility in the XLF remains stubbornly high, up 46% above the historic reading, and despite a relative balance between puts and calls, there were a few standout trades heading into the early afternoon. At least one trader appears to have sold a 7,500-lot position at the September 25 line for $3.78, which seems a risky bet to play given the recent turbulence out of the regional bank space.

MS – Next on deck with earnings is Morgan Stanley (MS) whose shares fumbled 4.3% to $40.43 in early trading as option traders have put twice as many puts in play as calls – a far cry from the confident swagger seen in the Goldman calls yesterday. We continue to see an 18% upside disparity between implied and historic volatility as the price of the $40 June straddle in Morgan suggests that option traders are looking for as much as a $2.65 move on back of the numbers tomorrow. Heavy put volume in out-of-the-money strikes in June and July suggest this may move to the downside.

VIX – Composite volatility in the S&P as measured by the CBOE Volatility Index pulled back 1.6% to 20.61 with at least some concerns about the solidity of Goldman’s exposures allayed. At least one trader took a tack of betting on a pull higher for VIX in July via what looked like a 2,000-lot call spread between strikes 22.50 and 30. A conventional scenario for this trade would involve the purchase of the lower-strike calls for $2.10 against the sale of the 30-calls for 45 cents, essentially setting goalposts for the volatility index that have the trader aiming for at least a pull to 24.15 before July 15.

SYY – Rotten tomatoes…? Some traders are positioning for turbulent share price action in the continent’s largest produce supplier. Shares in Sysco (SYY) are down 1.2% to $29.89, just days after the franchise yanked Florida-grown tomatoes implicated in a recent salmonella scare and began sourcing its tomatoes from Georgia. Implied volatility in all Sysco options ticks in at 23% - about a 25% elevation above the historic reading, showing a higher-than-normal risk premium being priced into its options. One trader is looking for this risk outlook to intensify heading into the fall, positioning long the November 27.50/32.50 strangle for a premium of $2.20. The position covers the trader in the event of a break above $34.70 to the upside or below $25.30 to the downside – either of which would penetrate Sysco’s respective high/low for the past 52 weeks. Sysco shares are down 4% for the year to date, having traded as high as $35.25 over the past year. The number of options involved in this long strangle sent overall  volume to more than 5 times the normal level.

CCE – There’s been neither a coke nor a smile to be had in the options of soda distributors. Stifled under the weight of high input costs and lagging economies even on key emerging markets, the bearish outlook expressed by option traders continued unalloyed today – after a volume bump in options of Pepsi Bottling Group yesterday, traders have turned today to protective positioning in big red Coca-Cola Enterprises. Shares are at a 52-week low with a .65% decline to $18.44 today, and it looks like the pain will continue. Meanwhile, the 8-fold increase in option trading volume picked up by our scanners today showed fresh long positioning at the November 20 put line at $2.20 per contract – a position requiring another 60-cent drop to the downside just to break even in November.

LULU – Interesting out-of-the-money straddle activity sent options in Lulemon Athletica (LULU) to our scan of most active options on the IB platform. Lulu has an interesting story in the women’s apparel space, as its specialization in yoga, Pilates, and hiking wear would seem to make it vulnerable to a cutback in discretionary spending on higher-end catalog items. On the other hand, it’s these versatile, comfort-wear items that have become a casual staple alongside denim jeans in many busy women’s wardrobes, suggesting at least the possibility of resilience with consumers who won’t spring for new J. Crew, but feel their boot-cut ashtanga pants are simply indispensible. With shares down 3% to $27.61, today’s volume is occurring at the $35 straddle in the June and July months, all of it trading to the middle of the market, along with a 3,700-lot position at the September 30 straddle, priced at $8.60. 

BBY – Best Buy   –  The market reacted negatively to this morning’s news of a 7% quarterly profit decline at the electronics retailer, even as the retailers bested street expectations. This seeming dichotomy of a swing-response to mixed news out of the quarterly report could explain the continued slight elevation in implied volatility (36.5% implied versus 34.5% historic) as options trade at 3 times the normal level, with a balance in volume between puts and calls. Heavy volume in June calls at the 45 and 47.50 strikes have traded two way, though it should be noted that the value of the higher strike has lost 90% of its value just 3 days prior to expiration. About three-fourths of the open interest at the June 45 put strike is in play, with most of this being bought on the offer, possibly by traders looking for continued erosion in the remaining 3 days of the contract.   

CQB – Chiquita Brands International  -  Yesterday’s soggy decline and pickup in option volume from the distributor of Chiquita (CQB) bananas followed a revision to its earnings guidance that had the company forecasting a “significant loss” for 2008. Today’s backtrack by the banana maker has the company forecasting a Q3 loss “roughly in line” with last year’s numbers. Still, options in Chiquita are trading at 5 times the normal level, with an interesting 3,500-lot play in the January contract. It looks like a trader may either have sold short the January 15/20 strangle for $3.70 – suggesting that he or she is confident in the company’s heavily asterixed forecast – or is using a short collar to protect a short position in Chiquita stock (suggesting that he or she doubts heavily in the outlook for in-line losses).

XRX  -  - Xerox – A similar strategy was deployed in the options of Xerox Corp (XRX), whose shares are up 2.5% to $13.75. A 5,000-lot position was entered in the January 12.50 puts and 15 calls, with the puts being sold for 65 cents and the calls trading to the middle of the market for 75 cents. Again, this looks like either a short strangle, entered with the 29% implied volatility showing a slight elevation to the 26.5% historic reading, or a short collar protecting an underlying bearish position on the stock. The volume involved represented 6 times the normal level of trading interest seen in Xerox options.   

RIMM  – Research in Motion – Giddy enthusiasm for the Blackberry maker continues today with a 2.5% increase for shares setting a new 52-week high of $144.54. Implied volatility on all RIM options shows the market pricing in 50% additional perceived risk to its shares over the next 30 days. With more than 114,000 options trading in the first 2 hours of the market, there is a slight privilege to calls, with heavy volume in the front month at the 145 and 150 call strikes. July volume shows activity in excess of open interest at the 105 and 110 put strikes, which may indicate volatility plays going through at that month.

ELN  – Elan Corp   – Shares in Elan Corp (ELN) rose 4.2% to $28.25 (a new 52-week high) after the company announced that an experimental Alzheimer’s drug jointly developed with Wyeth, showed promise in clinical trials. With implied volatility on all Elan Corp options showing a 20% elevation above the historic reading, option traders put more than 100,000 contracts in play. Heavy volume was seen in July calls at the 30 strike trading to buyers and sellers., with the $1 price tag on the position denoting a slightly better than 1-in-3 chance that Elan Corp can break past $30 over the next month.

GE – General Electric  – We continue to follow the action in GE with interest given the recent days’ unusual elevation in volatility and doldrums in its share price (having traded a 5-year low for part of yesterday). Shares have firmed up a bit, trading .38% higher at $29.08, and implied volatility has come in slightly from Friday-to-Monday levels, still showing a 58% upside gap with historic volatility. We are seeing calls trade at nearly twice the frequency of calls on a sum volume of 73,000 lots. Heavy volume at the July 30 strike has mostly been sold to the bid, and some intriguing traffic at the out-of-the-money December 34 call strike traded to the middle of the market at 54 cents – either buy-writers in play, or perhaps a confident wager on recovery in GE’s share price by year’s end.

Rebecca Engmann Darst contributed to this report.

Comments

[Tavares]

I have a small short position in MS hopefully it pays off in the coming hours!!!!!!!!!!!!!