Thursday Options Update

Rebecca Engmann Darst contributed to this report.

Citigroup (C) – A fresh triple-digit decline for the Dow Jones Industrial Index followed pained existing home sales data that has the market still grappling in the dark for that “last rung lower” in the housing decline. Financial stocks are leading the pack of decliners today, with sharply elevated put volumes in a number of major financial components showing traders bracing for new movement lower in the financials but delineating clearer downside targets through the use of put spreads. Citi shares are down 4.7% at $20.11 as we register more than 200,000 lots trading with an edge to puts by a factor of 1.7. Early notable trades included what looked like a 10,000 lot long put spread in the December contract between strikes 12.50 and 17.50. The position here would take about a 93-cent credit from the buyer, implying at least a 17% downside move between now and December, putting a bottom to the downside at that short $12.50 strike. Nearer to hand it looks like a 20,000-lot strangle may have been deployed in the September contract between strikes 20 and 22.50, although we have no information on the direction of that trade at present. 

Bank of America (BAC) – Shares in Bank of America declined 1.2% to $33.04 as we option traders load up on a 16,000-lot put spread position in the August contract between strikes 27.50 and 32.50. Here it looks like a standard long position bought for about a $1.40 debit, implying that the trader wants to see at least another 5% off current levels but doesn’t portend a drop below $27.50. Another 20,000 lot long put spread went through in the November contract between strikes 17.50 and 30, with the trader buying the higher strike for about $3.10 and selling the lower for about 50 cents. The $2.60 debit requires at least another 15% to the downside for Bank of America shares by November 21 but, again, there’s a basement level built into the trade. The takeaway from these trades is twofold. The jaded pessimists among us would view it as an indication of continued “grind lower” in financials heading into the fall, a return of the Sisyphean grind that’s gripped the space for months now. Some might take comfort in the fact that so many traders are bracing for pullbacks with very resolute downside limits in the near future, keeping shares above its July 15 low of $18.52 for the remainder of August, with deeper downside possible into the fall.   

VIX – Composite S&P implied volatility as measured in the CBOE Volatility Index rose 4.5% to a reading of 22.28 that still finds the index well below the erstwhile 25 line. While we’ve observed some interest in calls at strikes 22.50 and 25 today, possible spreads looking for rangebound activity above current levels not to exceed 25, some traders played the other side of the coin, with what looks like a diagonal calendar put spread involving the purchase of 6,000 August 20 strike puts, funded by the sale of September 19-strike puts. Elsewhere in the September contract, however, we did note heavy buying on volume of some 18,000 lots at the September 30 strike – the volume here matching up to more than half the open interest at this strike. Option traders are currently pricing in about a 20% chance of a new crack at 30 for the VIX by September 16. This dovetails fairly neatly with the scenario posed by trades in major banks Citigroup and Bank of America that we detailed above – i.e., immediate downside with clear limits, deepening into the fall.

Amdocs (DOX) – Shares in Amdocs, the world’s larger maker of billing and CRM software for phone companies, cruised 6.8% higher to $30.77 after reporting a 14% an increase in Q3 profit and raised its guidance for year-end earnings.  Implied volatility, which had shown a slow creep higher from mid-June until peaking at more than 50.2% last week, quickly pulled back by 20.7% this morning on the numbers and while the current 35% reading puts Amdocs’ implied volatility back at June levels, it’s still a premium to the 28.5% 30-day historic reading on the stock. It looks like a trader seized upon this disparity by selling a 10,000-lot straddle at the September 30 strike for a cool $3.35 in premium – a credit he or she hopes to keep intact if Amdocs shares remain at the $30 level by September 19, thus dwindling the value of the position to naught.

 XTO Energy (XTO)  –  With shares down 1.6 % at $47.46, we’re registering an increase in option trading volume to 5.5 times the normal level with puts and calls trading in relative balance. Since our first scan of the morning, the tendency among option traders has changed slightly to the call side with August 50-strike calls trading at more than triple the open interest, and attracting heavy buying pressure at $2.00 per contract. August 55 calls have likewise traded at triple the open interest, to buyers as well as sellers.  Implied volatility at 61.3% compares to a historic reading of 55.7%.

Simon Property Group  (SPG) – With shares down 2.7% to $91.01, we picked up an increase in option trading volume to 2.3 times the normal level owing to a 5,000-lot OTM put spread in the October contract between strikes 70 and 75. In this case the trader appears to have bought the lower strike and sold the higher strike, essentially using the put spread not to express a directional view (both strikes are firmly out of the money) but to take a 60-cent credit and hope that both contracts expire worthless by October, leaving the credit intact.

General Growth Properties  (GGP) – Another 5,000-lot transaction materialized in a REIT this morning, driving option volume in General Growth Properties to 2.6 times the normal level as shares read 3% lower at $31.41. This appears in the October 30/35 strangle combination, which traded for a combined premium of $5.55 this morning. While a buyer would be playing on a break above $40.55 or below $24.45 by October, a seller would take the premium as an initial credit in the anticipation that shares will remain rangebound between the strike prices.

Comments

[dr.h]

will be nice to see all you puts expire worthless. hard learning experience...

[rookie101]

chtrplyer-
why would that be?

You had some calls expire worthless?

Do you always wish ill on people or you just had a bad day?