Tuesday Options Outlook: WB, F, AIG, DFS, EMC, INTC, VIX

Rebecca Engmann Darst co-authored this article.

Wachovia (WB) – Meanwhile, the “Grand Guignol” to which we alluded earlier continues apace in the financial space today. Implied volatility in Wachovia options rose 21% earlier today after Oppenheimer analyst Meredith Whitney cut her rating on the stock, calling the outlook for the bank “bleak,” and telling Bloomberg News in no uncertain terms: “(Financial) stocks won’t be taken seriously by investors until they revalue dramatically – and Wachovia is the outlier.” Though implied volatility has since come off its blistering highs amid a 2.5% recovery for shares to $10.10, earlier today option traders wasted no time in selling July 10-strike calls for 20-cent premiums, while buying heavily into July 7.50 puts (which expire on Friday) for 25 cents. The premium on this position denotes a 10% likelihood of Wachovia shares breaching the $7.50 by that time. Interest in low-strike puts extended into the August contract at the 7.50 strike.

Ford (F) – Before a $9 pullback in oil prices gave rise to an abrupt turnaround in the fortunes of automakers, it was news of GM’s recessionary restructuring that sent traders looking for downside protection in both it and Ford, where shares currently show a .43% uptick to $4.68. Will the pre-noon upside endure? It’s hard to find much enthusiasm from option traders. Earlier today we noticed activity from at least one option trader sees a slump below $4 as more or less an inevitability, buying a 10,000-lot position for 37-cents at the August 4 put strike. This position may have been funded by shorting a December call spread between strikes of 5 and 7 – which he or she would have done if confident that neither strike was likely to be exercised by December 19 – for a net credit of 56 cents. If this is the way the trade played out, the net credit on the December spread would have covered the entire cost of the protective August position and left the trader with a 19 cent credit besides.

American International Group (AIG) – Implied volatility in multi-line insurer American International Group rose 37.6% earlier today to 152.8% today – fast approaching 3 times the historic volatility on the stock, and quantifying in fairly stark terms the level of perceived price risk that the options market is pricing into AIG shares. Though implied volatility has pulled back somewhat as AIG has pared its losses to 4% on the session at $21.68, it remains at the highest level we have on reading for AIG. Heavy put volume appears to involve July spreads between the 20 and 22 strikes, with fresh volume in August puts favoring the 19 strike again at $2.24 per contract – up one-third in value overnight.

Discover Financial (DFS) – Options in credit card issuer Discover Financial are trading at nearly 5 times the normal level as shares trade flat at $12.94. The action here appears in a put ratio backspread in the January ’09 contract, with a trader selling 3,750 lots at the January 15 strike and loading up on 7,500 lots in the January 10 puts. Even buying twice as many puts as selling them, the trader is able to pocket a $1 credit per contract on this trade, which wagers on volatile downside for Discover Financial shares heading into the first of the year.

Barrick Mining Corp, (ABX) – Shares in the world’s largest gold producer, Barrick Mining Corp, declined .97% to $49.90 after announcing an unsolicited takeover bid for Calgary-based oil company Cadence Energy Inc. According to Canadian news reports, the bid was aimed at harnessing Cadence’s 3,600-barrel-per-day output to hedge up to one-quarter of the oil Barrick needs for its mining operations. Energy costs have been a major bane for metals producers, many of whom sustain a 1:1 increase in costs per rise in the price of a barrel of oil. With Barrick due to report earnings on July 31, corresponding with the August options contract, it looks like one trader may have anticipated the effect of high energy prices on Barrick’s bottom line, buying August 47.50 puts more than 4,000 times for $1.90 per contract in fresh positioning. The price tag on this position implies at least a 6% decline over the next month to break even.

EMC Corp (EMC) – Last week we noticed an increase in defensive position in EMC Corp options following the abrupt leave-taking of VMWare CEO Diane Greene. At that time (last Tuesday), implied volatility rose nearly 30% on the session to 51.2 as traders sought protection in August puts at the 13 and 14 strikes in seeming anticipation of an earnings shortfall on July 23. Today EMC Corp’s implied volatility continues to etch higher, ticking in at 54.4% as shares show a .87% decline to $12.54. Again, here some traders appear to be bracing for volatile downside on back of earnings, but are deploying a different strategy to express that view – selling about 11,000 lots in August 14 calls for 22 cents in a diagonal calendar call spread with January 12.50 calls, which were bought 11,000 times for $1.57. The trader in this case is taking advantage of a disparity in the implied volatilities of the two contracts (50.7% for the short August position and 44.6% for the long January position), betting that the value of the August position will decay more quickly (especially on back of an earnings miss). The value of the January position – in the mind of this trader – is likely to appreciate given some stabilization in EMC Corp prices at current levels by the first of the year.

Intel (INTC) - Intel shares are trading .68% higher at $20.60 ahead of its after-the-bell earnings. While the price of the front-month straddle suggests a $1.36 move on back of the numbers (6%), early options volume today suggested option traders betting on a price move south of the $21 mark. We noted preponderant selling in July 21-strike calls, but some evidence earlier today of credit spreads involving 19 and 20 strike puts, in which the traders would have taken a 30-cent credit betting on a close for Intel shares above the $20 mark by Friday. Implied volatility on all Intel options is ticking in at 46.7% against a historic reading of 36.3%.

CBOE Volatility Index VIX - Fed chairman Ben Bernanke’s testimony before the Senate Banking Committee soberly acknowledged the asteroid field currently pummeling the nation’s economy – spreading financial sector dysfunction, putrid consumer sentiment, high food and energy prices, declining home values, and rising joblessness. But averring that the Fed remained focused on the inflationary threat as Job One, coupled with an implicit acknowledgement of the country’s current recessionary malaise, brought increasingly frustrated market participants to embrace a common theme: demand erosion for oil. Shares are now off morning lows as oil prices have staged a jarring $9 pullback. Against, this Grand Guignol backdrop, the CBOE Volatility Index brushed a reading of 30 earlier in the day as traders grappled not just with Bernanke’s testimony but also the implications of a Fannie Mae/Freddie Mac bailout being dropped into the laps of already severely tested U.S. consumers. At present the Volatility Index is off its highs, down .95% at 28.23, but continued buying interest in VIX calls in the August contract at strikes 30 and above supporting this “slow grind higher” scenario that has been taking shape for the past several sessions amid successive losses in the S&P.

Comments

[Ames Tiedeman:]

AIG is looking inexspensive.

2008 Jul 18 07:37 AM