Monday Options Outlook: XLF, WM, AMZN, CCE, PGB, CBG, VIX

by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

Financial Select Sector SPDR (NYSEARCA:XLF) – Despite opening higher on news of the Fannie Mae and Freddie Mac lifeline, the financial sector ETF quickly turned tail to show a downtick of 1.5% to $18.38. Implied volatility on all XLF options remains extremely elevated at 63.4% against a historic reading of 39.4% on the stock – that’s still in excess of March 17 highs. The more than 400,000 options trading by noon show puts and calls trading in relative balance, though earlier today we noted heavy buying pressure in July 17 and 18 strike puts, which would imply further declines for the remainder of the week.

Washington Mutual (NYSE:WM) – Option implied volatility in Washington Mutual is up some 101.3% to 284.0% - more than any other ticker on our platform today –on concerns following the collapse of IndyMac Bankcorp that its own exposures may be troublesome. Compared to the 103% historic volatility reading on the stock, this implied reading suggests nearly 3 times the price to Washington Mutual shares over the next month. While the sentiment surrounding WashingtonMutual is undoubtedly grim, here it looks as though traders are playing the volatility angle to take advantage of high-calorie front-month volatility – earlier today by selling July 5.00 calls at 9 cents apiece to bet against a recovery rally in the stock, and since by deploying calendar put spreads, selling a 25,000-lot position in July 4.00 puts for 89 cents and buying the same position in the August contract for 99 cents. In this case the trader wants to avail himself of the more rapid time decay of the July put and the likelihood that the August contract will increase in value (if Washington Mutual shares continue to suffer), so that the position can be closed at a profit. (NASDAQ:AMZN) – - A 3% decline in shares of Amazon.comto $66.32 corresponds with option trading volume of about 44,500, qualifying it for our early scan of top-50 options movers. This is showing up in exorbitant put trading in the front month at strikes as low as 62.50, where the volume of this position has risen 205% overnight. It is useful to note that Amazon is due to report earnings on July 23, corresponding with the August options contract, but this morning’s volume seems to indicate some expectation of downside movement before that report. Implied volatility at 83% compares to a historic reading of 43% on the stock – that’s a 19% increase from Friday’s closing levels on no apparent news catalyst, and suggests nearly twice as much risk to shares over the next 30 days.

Coca-Cola Enterprises (NYSE:CCE) – Shares in Coca-Cola Enterprises are tracking 1.4% higher at $16.59 as we report an increase in option trading volume to 52 times the normal level, owing to what looks like a 25,000-lot put spread in the November contract between strikes 15 and 20. Both of these transactions were booked to the middle of the market, making directionality hard to clinch either way, but a bear would have gone long of the spread at a $3.00 debit that would first break even at $17.00, while a bull would take the $3 as a credit in anticipation of a pull above $20. Implied volatility on all Coca-Cola Enterprises options weighs in at 41.4%, comparing to a historical reading of 25.8% on the underlying stock.

Pepsi Bottling Group (PBG) – Option activity in the major cola bottlers tends is tracking together today, as shares in Pepsi Bottling Group show a .57% gain to $26.66, and its options trade at 5.4 times the normal level. Here it looks like a trader may have rolled a 5,000 lot position in September 30 puts to the December contract at the 25 put line, showing a keen sense of timing in doing so. It looks like the 5,000-lot September position may have been opened for $2.05 back on June 16 – by cashing out at $3.70 today the trader would have realized an 80% profit per contract, which it looks like he then rolled into a new 5,000-lot position at the even lower December 25 strike for $1.75. This suggests an outlook for continued downside action – even below the $26.32 52-week low – heading into year’s end.

Chipotle Mexican Grill (NYSE:CBG) – Finally, shares in Tex-Mex-inspired eatery Chipotle Mexican Grill have taken a beating this year – down 52% since January alone – and the extreme elevation in the implied volatility of its options (73.4% versus a historic reading of 44.4% on the stock) suggest even more turbulence to come ahead of its July 23 earnings announcement. Today, with shares reading 1.6% lower at $71.42, it looks like one trader may have picked this moment to wager on a comedown in implied volatility by week’s end by selling a 6,000-lot out-of-the-money straddle at the July 80 line for $9.10. The positioning here is well in excess of open interest on both sides, and given the risk of exercise on the July 80 put, it seems that the trader wants to capitalize on rapid time decay in this position – depleting the value of the premium sold so that the position can be closed out at a lower combined price.

VIX – This weekend’s announcement by Treasury Secretary Hank Paulson of sweeping measures to instill faith (and funding) in the country’s cornerstone mortgage financers, Fannie Mae and Freddie Mac, was expected by many to un-ruffle some of the fraught mood in the financial space…at least in the short term. Reaction in the market this Monday morning has been largely dispirited – financial stocks have dragged the S&P lower, implied volatility in most financials remains well above the fever pitch of March 17, and the CBOE Volatility Index is showing a marginal increase of 1.4% to 27.87. All of the above would suggest that the “stricken” mood of investors that seemed to reach crisis levels early Friday afternoon has scarcely been abated in the short-term, much less resolved for the long-term.

The market’s behavior heading into the noon hour shows that the effect of Fed backstop has been effectively discounted – and still we find the financials trading lower. Earnings are on tap for most financial issues, an end to the write-downs is still to be discerned, and one fine day, the regulation of much of the U.S. financial system will have to be re-jiggered in such a way as to prevent these calamitous bleed-outs from ever happening again. One can hardly fault the market for its fatigued indifference at the prospect of more road to travel on this despicable journey.

VIX option activity shows heavy call-side volume in strikes as high as 37.50, but selling pressure in these upper strikes (without corresponding volumes in August puts that might imply the rollover of existing positions ahead of tomorrow’s expiration), coupled with buying pressure in strikes of 25 and 27.50 suggests that many traders may be using call spreads to predict VIX action remaining above 25 but stopping short of any cataclysmic move higher, even with the nervous backdrop in financials still intact.