Wednesday Options Outlook: LEH, XLF, GM, BAC, HBAN, RF, LNN, ACF, AN, KMX, TSN

Rebecca Engmann Darst co-authored this article.

Lehman Brothers (LEH) – Reports this morning that Lehman Brothers CEO Dick Fuld may not, in fact, be seriously considering a sale of the firm sent volume in Lehman options bouncing back with a vengeance. With shares down 3.7% and twice as many put options trading as calls, traders made rigorously clear that the branch of mercy they had extended to the bank since Monday’s reported loss squared with last week’s guidance could easily be yanked away. Implied volatility on all Lehman Brothers options pulled back to as low as 77.5% on Monday but has climbed nearly 20% in the interim. Today’s put volume is primarily concentrated in June and July strikes of 25 and under.

Financial Select Sector SPDR (XLF) – Shares compounded yesterday’s listlessness with a 1.4% decline to $22.59, still hovering around the 52-week lows, as option traders price in double the risk to the financial sector at large over the next 30 days. While the nearly 500,000 lots trading over the noon hour show twice as many calls trading as puts, the action appears scarcely contrarian. Earlier today we observed heavy buying in July 22 calls, against an overweight of sellers at the 23 and 24 strikes, suggestive of call spreads going through at those strikes in expectation of range-bound share action near current lows into the next month.

General Motors (GM) – GM shares dropped 5% to $15.01 after a JP Morgan Chase analyst forecast that the automaker could be forced to borrow $10 billion this year amid concerns about its liquidity given high oil prices and the outlook for higher interest rates. The risk to its share price over the next 30 days is apparent from a look at its implied volatility reading, which at 69.5% shows a marked elevation to the 47.6% historic reading on its shares. With 3 times as many puts trading as calls the defensive mood is ostensible, with what appears to be put spread activity in the front month at strikes 12.50 and 15 (these in excess of open interest, despite the imminent expiration), and heavy buying in September $10 puts.

Bank of America (BAC) – The recent turbulent downside in regional banks has also made a dent in shares of super-regionals like Wachovia and Bank of America, and today is no exception. With shares in Bank of America down 3.6% to $28.26, option traders are pricing in heavier than normal risk to contracts on its share price – implied volatility at 54.8% towers above the 31.4% historic reading on the stock. Of note in the 58,000 active contracts trading this morning was heavy buying in July 27.50 puts at $1.45 per contract, predicting continued dramatic erosion below the 52-week low.

Huntington Bancshares (HBAN) - Shares in the Ohio-based regional bank dove 12.3% to $5.35 in early trading, with implied volatility at an imperiled high – more than double the historic reading. Options are moving at 4.3 times the normal level with heavy buying in July 5.0 puts showing pronounced expectation among traders of continued erosion below the $5 level into next month.

Regions Financial (RF) - Another dark and stormy mover in the squall known as regional banks, shares in Regions are down 13.3% to $11.03, clipping more than a dollar from the 52-week low as we see implied volatility up 54.6% to 107.9% - making it one of the session’s top implied volatility gainers and approaching twice the historic reading. With options already trading at 5 times the normal level, puts are out-trading calls by 5 to 1, with notable fresh positioning in the July 10 puts. The value of this position has appreciated some 300% on the session at $1.00 as the market prices in a slightly better than 1-in-4 chance of a break below $10 over the next month.

Lindsay Corp. (LNN) – Shares in Lindsay Corp., a Great Plains company that makes crop irrigation systems, dropped 16.7% to $103.59 today on an earnings miss that tacitly acknowledged that not even hefty demand for foodstuffs was enough to help the company dilute the higher cost of steel. This is a company whose valuation has risen dramatically over the past several years, but is well off its 52-week high of $131.07. Implied volatility at nearly 75% shows a 28% elevation above the historic reading. With the equivalent of nearly half its open interest in play, Lindsay met the criteria for our scan of unusual volume movers with a near 10-fold increase in option trading activity. What’s notable is that this was centered in fresh call activity at the June 110 line, suggesting that these are not just closing trades going through. These traded for $2.10.

Americredit (ACF) – Shares in auto-loan financing company, which manages more than $15 billion in car loans, tanked after analysts at Friedman Billings Ramsey suggested that consumer credit stocks did not yet reflect recessionary valuation that there could still be more downside. Implied volatility on all Americreditoptions shows 65% additional price risk to its shares over the next 30 days, with puts outmoving calls by more than 6 to 1 on option volume more than quintuple the normal level.

AutoNation (AN) – Options in AutoNation, the country’s largest direct retailer of new and used cars, showed a similar pickup in option volume to more than 5 times the normal level as shares staged a 4% decline to $12.94 – within a dollar of the 52-week low. With today’s option volume standing shoulder-to-shoulder with one-fifth the total number of options position, the preference for protection against a further declines is fairly glaring today given the traffic in July 15 puts. These are trading heavily to the middle of the market, though the 31% increase in premium price suggest buying pressure occurring here. The $2.20 price tag on the right to sell Autonation shares for $15 next month requires a decline past $12.80 just to break even.

Carmax (KMX) – Shares in competitor Carmax staged a 12% retreat to $16.16, treading a fine line against the 52-week low. Implied volatility at 51.5% shows a fairly astonishing elevation above the 39% historic reading on Carmax stock – though this is a level that has remained fairly stable over the past month. Puts are outmoving calls by a factor of 9 to 1, with heavy volume in June 17.50 puts and what may be put-spreads in force in the July contract between strikes 15 and 17.50.

Tyson Foods (TSN) – So much for those commodity hedges…! Adding to a list of food companies suffering under the weight of put buyers (albeit for different reasons) we can add Tyson Foods, where news of a Fitch downgrade of its debt to junk status sparked an abrupt 18.5% spike in implied volatility to 51.4%. This has volatility at its highest level since the pre-earnings spike in April as shares set a new 52-week low with an 8% decline to $13.72. Interestingly, this is occurring in concert with twice as many calls trading as puts. With two-way traffic in July calls at the 12.50 and 15 strikes, and outright buying at the October 15 call level, call buying may be evidence of traders reckoning on a slight recovery in Tyson’s share price heading into the fall, or perhaps using calls against a short position in the stock as a hedge – something Tyson apparently isn’t doing too well, if Fitch’s assessment is to be believed.

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[Medici]

ACF Going SUBSTANTIALLY Lower $4.00 Target-