Friday Options Outlook: MF, HRB, WB, XRT, MER, C, PMCS, NRG

Rebecca Engmann Darst co-authored this article.

MF Global (MF) – Options in the country’s largest futures and options broker, MF Global, saw a 24.4% spike in implied volatility this morning amid yet another ruinous selloff for its shares, down nearly 18% to $7.03. With the reading now in at 150%, option traders clearly feel these are choppy waters for the brokerage, with more than a third added price risk to its shares over the next 30 days. This latest turbulence came after the company priced a pair of $150 million debt offerings, but after a cut in its price target by analysts at Deutsche Bank and still reeling from Wednesday’s Q1 credit warning. A relative balance in seen in the trading in calls and puts this afternoon, with a brisk two-way traffic in June 7.50 calls in excess of open interest suggesting speculative wagers on a close above or below that level in the final hours of the June contract. The activity in the July contract looks extremely pessimistic, with what looks like credit call spreads occurring at strikes 7.50 and 10 – traders selling the 7.50 strike for 95 cents and buying the higher strike for 35 cents to take a quick 60-cent credit in hopes of both contracts expiring worthless. Heavy buying, on the other hand, was observed at the July 5.00 put line at 50 cents per contract.

H&R Block (HRB) – Option traders may be positioning for a break below $20 in tax prep and financial advisory giant H&R Block for the first time since March when it reports earnings on June 30, if not before. Shares in H&R Block took a 3% haircut to $22..40 but the company is still trading at the high end of its $7 52-week-range. On the options front, contracts to buy and sell H&R Block shares are determined strike prices are trading at nearly 14 times the daily average. Implied volatility on all H&R Block options gained 31% and now ticks in a 52% - a 3-month high. Today’s volume is heavily contracted in July 20 puts, which have been bought heavily at 30 cents per contract. H&R Block shares are up 22% for the year date, delivering largely static returns over the past 52 weeks.

Wachovia (WB) – This morning’s characterization (by a Merrill Lynch analyst) of the mood vis-à-vis regional banks as “capitulatory” elicited a response consistent with what has been seen in the sector over the past week or so – namely, it wobbled the highest head on the totem-pole, super-regional bank Wachovia. Shares deteriorated another 2.7% to $17.29 over the noon hour, with some 63,000 options in play making it a popular destination for option traders. Similar volume in the 7,000-lot range was observed in the July contract at put strikes 15, 20 and 30, leading us to suspect initially that there were put ladders going through, but a check of time and sales suggests that these trades are not related – and that volume is trading to buyers and sellers at the middle strike, while buyers are clinging to the lower strike.

(XRT) – Options in the XRT, the closed-end fund that tracks S&P-listed retail stocks from Costco to Tiffany, are trading at 6 times the normal level against a 3% decline in the value of the fund to $31.06. Implied volatility on XRT options at 35.6% shows a pronounced elevation above the 29.5% historic volatility over the fund – from this disparity we can infer a general 20% added risk premium to all XRT options against the historic norm. This is being parlayed primarily through puts, which are used to express a bearish view on the sector en masse or to hedge a position in one of its components. At-the-money July 31 puts were bought in a 10,000-lot gross, it seems, for $1.30, implying a pull below $30 over the next month. Another 7,500 lots traded at the September 28 put line, but it appears that these were sold for $1.00 per contract in what would seem a gesture of confidence by a trader who doesn’t feel the current sector woes will merit a new trip below the $28.55 52-week low.

Merrill Lynch (MER) –Merrill’s taking its turn in the profit-warning rumor hotseat, with its shares 3.7% worse for wear at $36.29, within a dollar of its 52-week low. Implied volatility on all Merrill options reads 75% against at 48% historic reading, and with puts outmoving calls by 7 to 1 the defensive posture is clear. Of note here is significant volume at the July 32.50 put line trading for $1.85 in seeming anticipation of near-term price declines, while the outlook for sustained downside is noted in September 32.50 put-buying at $3.30.

Citigroup (C) – Shares declined 3.2% at $19.51, making a significant draw below the $20 line today as option traders buckled up for downside volatility – a look at implied volatility on all Citi options shows the 59% elevated sharply above the 41% historic reading. Besides two-way traffic at close to the money puts and calls in the July contract, we observed a sizable 7,000 lot position opened today at the September 17.50 put line for $1.23, positioning for substantial erosion below the $17.68 52-week low by September.

PMC Sierra Inc (PMCS) – Shares are down 1% to $8.79 but an increase in trading volume to nearly 20 times the normal daily average is showing up in the November 10 puts, which traded to buyers and sellers. What’s interesting here is the fact that the sheer size of the trade amounts to nearly a quarter of the total open interest in PMC Sierra. Implied volatility at more than 54% is elevated above the 46% historic reading on the stock, and calls and puts up to today have shown a virtual even split.

NRG Energy (NRG) – On the upside minority, shares in NRG Energy Shares are trading flat-to-lower at $43.12at this dispatch but an 8-fold increase in option trading volume showed not just the closeout of June 40 call positions, but outright buying of December 42.50 calls bought for $4.50, implying a break of the 52-week closing high set back in mid October by year’s end. Implied volatility ticks in roughly on par with the historic reading, and a look at open interest shows a slight overweight of bullish call positions, edging out the puts by a factor of 1.5.