Thursday Options Update: GM, C, UAUA, ALL, RYL, CTX, TGT, DDUP, NWX, PAYX

General Motors (GM) – Goldman Sachs’ demotion of GM from “neutral” to “sell” further demoralized a stock that has suffered mightily for the sins of the broader economy in recent months. Goldman’s downgrade cited the possibility that GM will have to resort to shareholder dilution “and/or” a cut in its dividend to shore up capital. Shares plummeted 11%, setting the latest in an atrocity exhibition of 52-week lows today, as implied volatility on all GM shares veered almost 20% higher, now coming in at 97.4% against a historic reading of 53.2%. Buying pressure has been observed in put contracts securing the right to sell GM shares at $10 apiece in July and August, with the value of those contracts attracting buyers even at double the price from yesterday. This buying interest in puts spilled down to the 7.50 level in the August contract, which at current premiums would require another one-third slash in its share price. Cooler heads prevailed in the September contract, with a preponderance of buyers at the September 10 put strike and sellers at the 12.50 put strike suggesting some spread activity occurring there – this squared with what appeared to be call-spread activity at strikes 12.50 and 15, suggesting some stabilization at current price levels by fall.

Citigroup (C) shares returned to March lows today with a 5.5% decline to $17.81 after Goldman Sachs added the big bank to its “conviction sell” list. The downgrade cited the possibility of a grueling $8.9 billion in Q2 writedowns, placing its current quarterly dividend in jeopardy. Implied volatility on all Citigroup options rose 13.5% on the news and now at 59.6% shows a substantial elevation above the 43.3% historic reading, but is well off the March highs. Still, the option market has seized upon a heightened near-term price risk to Citigroup shares, with the price of the at-the-money straddle showing a $2.19 move priced into the front month options. Buying interest is observed in July 15 and 17.50 puts and 20-strike calls, but the volume here is disparate, making it hard to ascertain whether some of this volume may be long strangle positioning. A long strangle using either the 15 or 17.50 puts as a base would be a cheaper way for a trader to position long front-month volatility than buying an at-the-money straddle, costing 3% or 7% of the current share price, respectively – against the 12% of current share price that a trader would pay for the straddle. Puts are out-trading calls by a factor of 1.7.

United Airlines (UAUA) – Call options in United Airlines’ parent UAL Corp are trading at a 6-month high at present dispatch, more than 15 times the normal level, against a precipitous 4% drop in its share price to $5.51. Earlier today the company announced plans to lay off some 950 of its pilots and sharply trim back its fleet to allay the effects of high prices. While the calls at the September 15 level, which traded more than 142,000 times today, appear to have been mostly sold, call buying was observed on volume of 75,000 lots at the December 7.50 line.

Allstate (ALL) – Shares in multiline insurer Allstate traded flat-to-higher at $47.57 heading into the noon hour. The company is due to report earnings on July 18, coinciding with the expiration of the January contract, but an excess of buying interest in July 50 calls qualified Allstate for our scan of most active option contracts heading into the noon hour. The 22,000-lot volume here equates to two-thirds of the existing open interest at the July 50 call strike, so the action here could represent closing trades, but a long position at 50 cents per contract implies a return to the $50 level that has so far eluded Allstate in the month of June. Implied volatility on all Allstate options comes in at 29.4% - elevated some 53% above the historic reading and speaking to the heightened risk that option traders are already anticipating to Allstate shares and pricing into its options accordingly.

Ryland Group (RYL) – A pair of homebuilder plays resulted in trips to the “Hot by Options Volume” scan for two well-known names in the space. Shares in Ryland Group Inc dropped 7.3% to $22.92 on the back of bearish earnings and guidance from sector peer Lennar (LEN). The effect of this report on options in leading homebuilders was to prolong an already very dystopic outlook for the sector, with traders seeking haven in puts or volatility plays in the month of October. Options in Ryland immediately registered an increase in volume to 2.5 times the normal level. This was heavily centered in October 22.50 puts, where a 12,500-lot fresh position was opened for $2.85. Breakeven on a long position at this strike would imply a new test of Ryland’s 52-week low of $19.28. Implied volatility on all Ryland Group options at 67% is elevated above the 57% reading on the stock.

Centex (CTX)   – It’s possible that the same trader in Ryland next turned his or her attentions to Centex Corp, where shares are 5.8% lower at $14.50 and options volume advanced to twice the normal level. with heavy volume at the October 15 put strike (in excess of open interest), along with the 17.50 calls (also in excess of open interest). The volume suggests there may be some ratio put strangles going through, but we need to assess directionality first. Implied volatility on all Centex options at 82% is elevated above the 68.6% historic reading.  

Target (TGT) – On a day of not-so-everyday low prices for most US stocks, shares in Target followed suit with a 3% decline to $48.44, roughly in line with losses in other retailers. With more than 66,000 options trading by afternoon, Target qualified for our scan of top 50 most active option families, driven in large part by heavy buying in July 45 puts. The buying volume here added up to nearly three-fourths of the open interest at this strike and would imply a break below the 52-week low in Target shares over the next 3 weeks. Further out, it looks like a trader may have taken in a $1.83 credit betting on Target shares not recovering past $55 into the fall. This appears to have been done via a call spread in the October contract, involving the sale of 55-strike calls at $2.40 and purchase of 65-strike calls at 57 cents. The maximum profit on this spread is realized if neither call is exercised – meaning no return for Target shares to early June levels by fall.   

NWA – The unusual trading volume we observed in United Airlines’ parent UAL Corp (UAUA) extended to options of Northwest Airlines this afternoon. Shares showed an unseemly 1.5% gain to $6.18. Option volume surged to 46 times the normal level. Again, this appeared in very heavy selling in September 10 calls, which may or may not be the closure of a large position opened on May 1 for $2.85, possibly rolling this position over into December 7.50 calls, which were bought heavily at $2.05 per contract.

Paychex (PAYX) – It’s hard to imagine a tougher crowd to work with an earnings announcement than today’s market, and that’s exactly the situation facing payroll services provider Paychex Inc. as it prepares to unmask its numbers after the bell. Shares are trading in mildly positive territory, down .87% at $32.37. Options are trading at more than 7 times the normal level as traders buy into July 32.50 puts in excess of open interest. Buying interest has extended into the August 30 puts, bought at 75 cents apiece. Paychex shares are down 19% over the past year, despite reporting better-than-expected earnings the past 3 cycles.

Data Domain (DDUP) – Shares in Data Domain, the maker of file system protection and disaster recovery technology, are down 5.4% to $23.47. With still a month to go before its earnings announcement, puts are trading at a two-month high in Data Domain, driving overall volume to nearly 20 times the normal level, according to our market scanners. The action here is fairly white-bread bearish, with put-buying at the July 22.50 strike at 65 cents per contract, implying at least another 6% downside before Data Domain even reports its earnings. Puts at the September 22.50 strike were sold at $1.15, possibly used as a funding mechanism for the purchase of the calls.

VIX – A market cacophony of bank downgrades, soft earnings from tech bellwethers Research in Motion (RIMM) and Oracle (ORCL), airline layoffs, high oil prices, and jaundiced outlook for earnings from S&P components all combined to send U.S. stocks whistling through the March 17 low. The coordinated slump is unsurprising – the tech sector earnings misses yesterday, followed by Goldman downgrades of GM and Citigroup this morning all but set the cylinders for a selloff as the market realized that no sector was left to lead a recovery. Slightly more surprising might be that we see the CBOE Volatility Index registering just 23.35 (granted, a 10.5% gain from yesterday). The early session slump nonetheless sent traders winging for July calls at strikes of 25 and up to 32.50, where heavy buying pressure has been observed throughout the day.    

 Rebecca Engmann Darst contributed to this report.