Monday Options Outlook: AIG, GE, BAC, XLF, SKF, SDS, WAG

Rebecca Engmann Darst co-authored this article.

AIG (AIG) -  With curtains down on not one but two venerable Wall Street institutions in the form of Lehman’s liquidation and Merrill Lynch’s giving-over to Bank of America, there’s lamentably little in the options market to suggest that this weekend’s mega-purge was enough to stanch the downside in the space. Instead, sky-high implied volatilities in a number of sector names suggest the premium on defensiveness remains higher than ever. Consider the case of AIG, whose shares are off the lows set earlier in the session but  still down another 51% to $5.96 as it seeks Federal Reserve assistance in fighting off a credit rating downgrade. With historic volatility on AIG shares at 120.8%, composite implied volatility on all AIG options is approaching 430% - a 62% gain from Friday’s closing levels, and suggesting nearly three times the perceived risk to AIG shares as the company faces tyrannosauric risks with no predictable outcome. The tendency here is toward bald put buying, notably at the September 10 strikes, while deep-in-the-money October 18 puts are also attracting buyers today.  

General Electric (GE) – Pressure on heavily financially-exposed GE continues to gather, meanwhile, with today’s 5.5% decline to $25.29. Implied volatility continues to spackle on last week’s highs, spiking up 38% today to 77.8%, more than twice the historic reading. A multi-leg 19,500-lot trade in the December contract at strikes 17.50, 23, 24 and 27 speaks to a level of defensiveness that is prevalent surrounding GE. Activity here represents nearly 5 times the normal level of activity seen in GE. 

Bank of America (BAC) – Bank of America shares are down 13.5% to $29.17 in step with a spike in implied volatility of some 28% earlier today. Option traders, in no mood to reward the depositary institution for its decision to absorb the heavily-shorted Merrill at $29-per-share are loading up on long put positions at the September 25, 30 and 32.50 strikes in the front month, sending overall put volume to 2.4 times that of calls on a sum volume of more than 156,000 lots. 

Financial Select Sector SPDR (XLF) - With shares down 5% to $20.06  - about $3 and change above its July lows - some 513,000 options have already traded, with calls outmoving puts by a factor of 1.5. Much of this appears to be due to call selling and short call spreads in the front month between strikes 20 and 21. The tendency to sell calls at strikes of 22, 23 and 24 also persisted into the October contract. As one might expect in the current market environment, option traders are pricing a pretty premium on risk in the XLF basket, with implied volatility at 68.8% showing a sizable elevation above the 49.9% historic reading. 

Ultrashort Financials Proshares (SKF) – Shares in the Ultrashort Financials Proshares rose 10.7% to $124.99 as implied volatility continued its upward trek – this contrarian fund’s volatility measure is up 45% in the past week as the financial space has continued to roil, and now at 122.2% is within about 6 percentage points of the mid-July highs. Calls on the fund protect buyers against deterioration in major financial shares, and against the backdrop of the ongoing market drama, it appears logical to see 2.6 calls moving for every put today. Heavy buying appears in the front month at strikes 125 and 130. 

Ultrashort S&P Proshares (SDS) – Call volume was heavy in other ultrashort ETF, the Ultrashort S&P Proshares, which rose 5.4% to $71.02 amid tumult for the blue-chip index. Implied volatility at 57.1% hit its highest level since the Bear Stearns bailout (albeit about 4 percentage points below that level) and a significant elevation from the 42.8% historic reading. Calls are outmoving puts by a factor of 3.6 with conspicuous volume at call strikes 73 and 75 in the September contract, suggesting a preparedness among many traders for further upside in these stocks ahead of expiration on Friday. 

Walgreens (WAG)  -  Finally, in a single non-financial move, Walgreens shares slid 3.7% to $34.73 as an increase in options trading volume to nearly twice the normal level showed up in put positions in the October contract at strikes 30, 32.50 and 35. October 32.50-strike puts have traded nearly 12,000 times this morning. Implied volatility at 34.0% compares to a historic reading of 28.2% on the underlying stock.

Comments

[tinman:]

at .86 shares of BAC per MER (BAC at $27, MER @ $19) isn't it a no brainer to buy MER calls and BAC puts?

2008 Sep 15 03:33 PM

[omooc:]

A hypothetical question. Suppose I buy a $5 put on a stock, XYZ, and suppose the stock is delisted. Suppose I do not own the stock and the stock is delisted, how is the settlement done?

2008 Sep 16 10:18 PM

[User 263610:]

whats the deal with the new BAC options that deliver 18 shares and 5.57 in cash?

2008 Sep 18 10:55 PM

[User 263610:]

whats the deal with the new BAC options that deliver 18 shares and 5.57 in cash?

2008 Sep 18 10:55 PM