Tuesday Options Outlook: LEH, WM, AIG, OIH, DOX, TRA, SVNT

Rebecca Engmann Darst co-authored this article.

Lehman Brothers (LEH) – Traders lost patience with still-fruitless talks between Lehman Brothers and Korea Development Bank, and a concomitant increase in the price of credit default protection appeared to be all it took to send implied volatility up some 88% as shares tanked 36.3% to $9.00. This, needless to say, represents a new low for Lehman Brothers and a new high for its implied volatility – at 313.9%, the option market seems to be suggesting that witching hour may at long last have arrived for Lehman and is pricing in about 133% more potential price risk over the next month than its past performance would indicate.  A look at front-month options suggests shares could rise or fall by as much as $5.00 over the next 11 days – effectively retracing or redoubling the loss since yesterday’s close. With 1.7 puts trading for every call, the conviction with which option traders are staking bets on Lehman can be deduced from the fact that the equivalent of nearly 1 of every 4 Lehman option contracts in existence is trading actively today. Fresh volume has been drawn to September puts at the 2.50 strike – where implied volatility at 612% is almost double the level for all Lehman puts. Also extremely active today have been the January 5.00 puts, trading nearly 50,000 times where open interest prior to today numbered only about 13,500.   

Washington Mutual (WM) – The mercury rose another 38.5% in the implied volatility of Washington Mutual options to 212.4% - suggesting about 43% additional price risk being factored into its options over the next 30 days. This occurred after analysts at Merrill Lynch opted to maintain their “underperform” rating on the stock. For those keeping track, this break higher in implied vol long shot from its mid-July highs in the 310% range. With shares down 17% at $3.41 it’s hard to fathom just much further this stock can fall, though front-month options indicate that the stock price stands to rise or fall by around $1 over the next 30 days. Sentiment is dithering somewhat among option traders, with opinion split between puts and calls today. Indeed, while buying in September calls has been pronounced at strikes 3 and 5, put buyers have staked large-sized positions at the October 2.50 and January 4.00 strikes. 

AIG (AIG) – Implied volatility in insurer AIG also rose more than 31% to 103.4% (versus 93.4% historic) as shares tanked 10% to $20.50 (within about $1.50 of its 52-week low) and option traders put twice as many puts in play as calls. With put-side premiums up some 300% in the front month at strikes of 20 and below, traders look to be battening down for yet-more downside, with the trend continuing in what looks like spread positions in October and November.

Oil Service HOLDRs Trust (OIH) - Shares in the Oil Service HOLDRs Trust dropped 3.2% to $158.35 today as it looks like a trader entered a large butterfly spread using September puts at the 175, 185, and 195 strikes. We cannot confirm whether this was an opening or closing trade, but bear in mind that a long buyer of the butterfly spread would be looking for an increase in the price of the fund to $185 by September 19, while a seller of the butterfly would be positioning for movement away from the $185 line.  

Amdocs (DOX) – Shares in customer management system developer Amdocs dropped 2.5% to $28.69 today on nothing specific, as an increase in options trading volume to 8.4 times the normal level showed traders selling September volatility at the 30 put strike for 90 cents per contract and buying into the October 30’s for $1.50 per strike. A trader using a calendar put spread in this manner expects the value of the September puts to erode more quickly than the October contracts, allowing him or her to close the trade profitably before expiration. In a bit of unrelated volume, a seller of premium also targeted the October 25-strike puts, taking a 20-cent credit on the sale. Implied volatility on all Amdocs options at 32.9% compares to historical volatility of 25.5%.  

Terra Industries (TRA) – Shares in nitrogen fertilizer maker Terra Industries declined 13.5% to $37.91, again on no specific news catalyst. Implied volatility in its options spiked 31.3% on the session and now reads 91.3% - a stark elevation against the 71.6% historic reading. With options trading at 14 times the normal level, the defensive flavor to options trading is apparent from the fact that 1.7 puts are moving for every call, although a large chunk of this proportion appears due to a trader choosing to close a 10,000-lot long put spread at the December 30/40 combination with a credit of $4.70, having bought the position for $3.25 back on August 4.

Savient Pharmaceuticals (SVNT) – Finally, shares in Savient Pharmaceuticals, a developer of niche drugs for conditions such as gout, dropped 2.7% to $19.81 on no specific news catalyst. Implied volatility in all Savient options comes in at 89.2%, against a historic reading of 61.1% on Savient stock, suggesting a considerable risk premium being priced into its options over the next 30 calendar days. A 6-fold increase in options trading volume showed traders selling volatility via puts at the September 20 and October 17.50 strikes and buying it at the December 17.50 and 20 put lines. The action here would indicate traders feel the fall risk premium and risk of downside in Savient shares is exaggerated, while the December volatility may be underpriced. While option traders hold twice as many call positions as puts in Savient, short interest is also pronounced at nearly 28% of the float.

Comments

[Richard Col...:]

There's no logical reason for stocks to go down at the level they are trading now. All the bad news is out. It seems as if the Democrats don't care about the country and just want to hold the market down until November. Your best bet is to accumulate good companies until the election is over and you will be rewarded.

2008 Sep 10 12:26 PM

[mlyn:]

Funny . . . I thought it was the neoconservatives, the old wealth who are probably funding their foreign accounts in case Obama wins; While the rest of the 95% are stuck here if McCain wins

2008 Sep 24 12:29 PM