Friday Options Update: XLF, C, CROX, JNPR, GDX, TOL, UHS, COLM, TEN

Rebecca Engmann Darst contributed to this report.

XLF – Early in the session today it looked as though financial issues might dust off at bit after yesterday’s ruinous rout, but most big bank stocks have reversed early gains and are now resolutely in the red as the market’s “dust bowl pessimism” continues to stick to the shoes of these stocks. Even during the gains of the early session, option traders seemed to show a knowing inclination to put spreads, continuing a trend that began Wednesday with the prolific spread activity in Wells Fargo (WFC), and continued throughout yesterday with action in Bank of America (BAC) and Citigroup (C). Shares in the financial sector ETF (XLF) are showing a downtick of .81% to $20.78 at present dispatch, as large block trades have driven the volume up to more than 560,000 active of the noon hour. We continue to see heavy buying pressure in August 18 puts on volume of more than 60,000 lots at this strike. Block trade action in the August 17 puts has continued throughout the morning, with a large raft of these puts apparently selling to the bid after some early buying pressure: the 23-cent premium on that position reflecting about a 10% likelihood of occurring. Elsewhere we saw fresh volume enter the middle of the market at the December 21 put line at $2.55 per contract. The takeaway here is that option traders appear readily positioned for a further unwind in the financials notwithstanding some intermittent catches of breath to the upside.

Citigroup (C)  – shares changed course after a Deutsche Bank analyst portended more downside to come for U.S. and European banks en masse and are down 2.6% at $18.56 at present dispatch. Highlights from the 190,000-plus active volume in Citi options include a 25,000-lot put spread in the December contract between the 12.50 and 17.50 strikes that was entered this morning. This looks like a regular long put spread, implying a $1.50 debit in a play that would see at least another 17% downside for Citi shares and a possible break of the 52-week low by December 19, not dropping below $12.50. At present, the options market sees about a 1-in-5 chance of a drop below $15, which would put Citi within sights of the $14.01 52-week low.

Crocs (CROX)  – Yesterday’s late-day profit warning from Crocs fanned the usual fears among trigger-happy options traders that the company’s squishy colorful clogs are a fad with a limited shelf life. Shares have collapsed 41.6% to $5.22, bringing with it a rise in implied volatility of more than 31%. Options are trading at about 2.2 times the normal level, divided evenly between calls and puts, with fresh volume on both sides of the August 5 call/put line. Buying pressure is heavier on the put side, extending into the same strike in September at $1.10 per contract. 

Juniper Networks (JNPR)  – Better-than-expected earnings out of Juniper Networks sent shares 16% higher to $26.20 as we observe an increase in options trading volume to 5 times the normal level. Brisk volume in August calls, especially at the 23 and 25 strikes, is observed as premiums on those positions are up 223-350% on the session, but earlier today we also observed heavy buying pressure at the August 24 line representing nearly all the open interest at that strike. This could be a play on a swift correction in the price following today’s rally, or the closing of a short position on the puts.  

Market Vectors Gold Miners Fund (GDX) – Shares in the Market Vectors Gold Miners Fund rose .41% to $44.20 today as its 16,000-strong volume qualified the fund for our scan of top-50 volume movers. The action here volumes a 6,400 lot diagonal calendar call spread, where it looks like the trader sold in-the-money calls at the 43 strike for $3.50 to fund the purchase of December 48 calls for $3.60. The trader is likely taking advantage of the more rapid time decay and perceived overpricing of the September 43 call relative to the December 48 and looks to close the trade at an advantageous price on both ends.

Toll Brothers (TOL) – Stronger-than-expected new home sales data and a marginal improvement in the Michigan Survey of Consumer Confidence patched through to upside action for most homebuilder stocks. Shares in Toll Brothers rose 2.5% to $19.76, putting the company about $1 off the average of its high and low prices of the past 52 weeks. An increase in option trading volume to triple the normal level appeared in the form of a multi-leg trade in the December contract, where it appears based on the order flow that a trader may have sold 10,000 lots of December 15 puts at $1.10 in order to fund a long 5,000-lot collar between the 20 and 30 strikes, which was done for a net debit of $2.70. Using the December 15 puts as a funding mechanism would have brought that debit down to 50 cents. The collar strategy itself is implicitly bullish in that it’s done in tandem with an underlying position on the stock (i.e., the trader has to be confident enough in the company’s viability to want to own the stock), albeit protective (i.e., the trader feels the stock is vulnerable to losses that should be protected by a long at-the-money put) and pragmatic (i.e., the trader would gladly unhand the underlying stock position if exercised on the short call. The apparent sale of those $15 puts would seem to rule out the possibility of a new pass at Toll Brothers’ 52-week low of $15.49, which lends some credence to a scenario of slow recovery beginning in December.  

Universal Health Services (UHS) – Shares in the country’s third-largest hospital management company, Universal Health Services, rose 1.3% to $59.92 as its options activity swelled to more than 15 times the normal level owing to what looks like a 2,000-lot straddle sold at the January $60 line. The initial premium acquired at the outside of this trade amounts to $9.85 – a full 16% of the share price owing to the ample time value of the position. The trader in this case is looking for uneventful share price action in Universal Health that will let time decay work its magic on the position, ideally whittling the value to naught by expiration if shares remain at current levels and subject neither position to exerciser.

Columbia Sportswear (COLM) – Shares in Columbia Sportswear, the maker of fleece hiking togs and other active apparel, found themselves on the lee side of the economic mountain, down 7.7% to $36.74 after earnings missed street estimates. Analysts at Citigroup have reiterated their sell rating on the stock, and option traders are doing little to position against the gulch-level sentiment. An increase in option volume to 5 times the normal level showed buying pressure at the September 35 line, where 2,000 options traded for about $1.53 – a buyer of this strike is looking for a break of the $33.06 52-week low by September 19.

Tenneco (TEN) – Shares in Tenneco, the maker of shocks, struts, and emission control equipment for cars, rose 2% to $13.43 after an announcement yesterday that it had won new 14 new customers in North America that are expected to generate $12 million in revenues annually. It looks like an existing Tenneco shareholder may have sought to protect his or her position in the stock against auxiliary damage from the ailing automobile sector by putting on long collars in October and January at the 12.50 and 17.50 strikes. In a long collar, the long put position protects the stock against a dramatic drop below current levels (or, in this case, the 52-week low of $11.47), a shield that is funded by the sale of long calls that also function like a covered call. A comparison of the implied volatility reading on all Tenneco options (81.3%) versus the historic reading on its stock (75.6%) shows about a 7% added risk premium being priced into its options over the next 30 days. The protective action sent today’s option trading volume to 17 times the normal level.

Comments

[Dame Daxx]

I love this article. Informative and also educational. Thanks!