Monday Options Update: XLF, XLE, FRE, FMD, HPQ, XOM, STM, ZMH

Rebecca Engmann Darst contributed to this report.

Financial Select Sector SPDR (XLF) - Financials led the charge lower for stocks today, amid marginally higher S&P volatility, dollar weakness, and a trace higher in crude futures. Shares in the Financial Select Sector SPDR, which tracks large depositary banks and a few major brokerages, reflected a 2.7% loss at $20.77 over the noon hour. The catalyst here is nothing new, simply a return of the Churchillian “Black Dog” mood that has sat on the financial services industry and its long-suffering components for the better part of a year now. Some traders aren’t taking their chances in this environment, using the relatively lower implied volatility reading (41.6% versus at 60.2% historic reading on the stock) to lock in positions to protect portfolios against a volatile leg lower for the sector. Early in the session we noted that one trader took the opportunity to steel against a newly volatile spell for the still-vulnerable by locking in a 10,000-lot long straddle at the 21 line, paying $2.27 for a position that generates profit for the buyer with a break above $23.27 or below $18.73.

Energy Select Sector SPDR (XLE) – The move higher in crude oil futures provided reflexive support to shares in the Energy Select Sector SPDR, which reads .30% higher at $70.99. With puts outmoving calls by a factor of 1.5 on a sum volume of some 55,000, we can safely conclude that there is no shortage of skeptics as to the current upward tilt of the ETF’s share price action. One trader appears to have played the uncertainty via long volatility positioning in the September contract, buying a 3,000-lot strangle between the 66 put and 77 call strikes at a combined premium of $2.34. At just 3% of the current share price, the trader in this instance may feel it’s a bargain for a long volatility position in a week that may be heavily dominated by events in the commodity space – simply buying the put outright at this strike without wagering on the chance of a break higher would have cost the $1.47. For less than a dollar more he or she gains protection for an unexpected turn north in coming weeks. We also observed heavy buying interest at the September 68 put strike in an outright bearish play.  

Freddie Mac (FRE) – Shares in mortgage financier Freddie Mac followed its cohort Fannie Mae lower with a 18.6% loss to $4.77 on renewed fears of a government bailout that would effectively wipe out holders of common stock. Implied volatility on all Freddie Mac options rose nearly 26% on the news (far outstripping the 16% gain in volatility we recorded in Fannie Mae), giving voice to the ripple of concern over Freddie’s immediate predicament and a rush to defensive front-month positions at the 5.0 put strike. At least one trader, however, opted to play the other side of the Freddie Mac proposition, taking advantage of higher put spread premiums to sell at January 3.00/5.00 put spread for a net credit of 83 cents per contract that represents the maximum profit to be harvested from this strategy if Freddie Mac shares are able to successfully defend the $5 level into mid-January. 

Hewlett Packard (HPQ)  – Hewlett Packard shares are down 3.5% at $44.00 on the eve of the company’s earnings, which explains the elevation in implied volatility (33.5%) relative to historic (27.2%). While front-month options are pricing in about a 7% move to the up- or downside on back of the numbers, early options volume today showed signs of defensiveness, with selling in front-month calls at the 45 and 47.50 strikes, and heavy buying in at-the-money 45-strike puts. This persisted into October, where we observed selling in 45-strike calls and buying at the 40-strike put line.   

First Marblehead Corp. (FMD) – Shares in First Marblehead Corp., the student-loan financing provider that has lost some 71% of its market value this year, rose 40% to $4.20 after the company announced the return of a former CEO who resigned three years ago for unethical practices. The advance was further fueled by news that Goldman Sachs private equity fund had completed an investment in the badly-beset company. Options volume soared to nearly 12 times the normal level as we observed two-way traffic in September 5.0 calls at about 35 cents apiece. Volume at the 5.0 put line already exceeds open interest and is being heavily sold, though we wonder how much of this is naked or speculative selling – the temptation to take a $1.00 credit on a put position may be strong for a trader confident that the worst is over for First Marblehead, but we would caution that the company is three days away from earnings, and just more than a month ago was trading at a mere $1.65.

Exxon (XOM)  - A jot lower for the dollar lent hedge appeal to crude oil and other commodities, sending contracts for September delivery of WTI crude bouncing off Friday’s lows. The development put a jot of support under shares of Exxon, which is up .27% at $77.29 as just under 20,000 contracts trade ahead of the noon hour. While commodity bears have pointed to the boom-and-bust nature of commodity bubbles, as well as an outlook for slowing global growth, in calling this year’s sizable rally over with, others say the market hasn’t seen the last of the supply pressures. At least one trader opted to sell a 5,000-lot put position at the October 75 strike for $2.15, that was either the closure of a open bearish position, or a bit of premium selling in the expectation of shares remaining above $75 into mid-October. The price of that put position today carries with it only about a 35% market expectation of Exxon shares dipping below $75 (and setting a new 52-week low) by October 17.  

 

STM – Shares in STMicroelectronics, the Swiss maker of transistors and semiconductors for wireless phones and automobiles, showed a 2% downtick to $12.30 this morning, a price that reflects about a 26% premium to its 52-week low. Shares in the company have shown protracted doldrums over the past year, down 25% during that time. Long call-spread activity we observed in the January contract suggest that at least one trader is betting on a marginal turnaround for the company, buying a 1,275-lot position in January 12.50 calls for $1.15 and selling a like number of 15-strike calls for 35 cents. The resulting 80-cent debit would require another $1 to the upside by mid-January for the trader to break even. The volume involved here was enough to send overall option activity to 23 times the level usually seen in this very infrequently traded European ticker.

ZMH    – Bullish rumors of unknown provenance may be making the rounds in Zimmer Holdings , the maker of orthopedic products. Shares traded higher straight out of the gain Monday morning, even as broader indexes struggled, and now read 1.4% higher at $73.40 on no apparent news catalyst. What caught our attention, however, was a spike in implied volatility of just under 20% (implied volatility now reads 25% versus a historic reading of 36% on the stock), as call volume in the September contract at strikes 75 and 80 has driven options volume to nearly 9 times the normal level. Option traders already have a fairly bullish bias to Zimmer Holdings shares, which are up 11% for the year to date: for a grasp of this we need only look to the open interest ratio, which shows calls in overweight by a factor of 1.4.

Comments

[alpha24seven:]

@Frankfurt/Hessen

"For those uninformed,Interactive Brokers Group is soon to file for Chapter 11 bankruptcy protection"

Proof. Please tell us all in detail immediately. Post links to documentation and to verifiable information. Opinion doesn't count.

2008 Aug 18 04:45 PM