Monday Options Update: XLK, JPM, NCI, DIS, NTAP, FWLT, BBI, XLK

Rebecca Engmann Darst co-authored this article.

Financial Select Sector SPDR  (XLF) – A colossal short squeeze in financial issues following word of a massive proposed bailout of US financial institutions and a ban on short sales of the same gave the deceptive impression of a flat close to the week. Today brought a return to uneasy reality for most traders, who are still struggling to make heads or tails of the broader implications of a baleful and burdensome bailout that has already brought down the cleaver on an era of securitization and could essentially do the same to the age of easy credit. With that in mind, and with many traders likely left on the sidelines figuring out the upshot of the short-sale rule, we find shares in the Financial Select Sector SPDR down 5.4% to $21.16, more than a dollar off Friday’s impressive close. With some 157,000 options in play over the noon hour, we’re seeing evidence of many traders trimming call-side positions in the front month at strikes of 20 and above. Put-buyers appear to be active in the October 20 puts, where the $1.21 purchase price is 10% higher than Friday’s levels.  

JP Morgan (JPM) -  Few major financials (with the exception of the newly-reconfigured Morgan Stanley), are trading on substantial upside today, and that’s especially true of the traditional “strong suit” of the bunch, JP Morgan. Implied volatility in JP Morgan options rose 23.4% to 67.4% (versus 97.5% historic), making it one of the day’s top volatility gainers, as shares slid nearly 10% to $42.47. Most of the 40,500 options in play today are trading in the front month, and in calls at strikes of 42.50 and above – a look at the premiums paid suggests that call buyers may be buying these calls on the dip in premiums of as much as 40% today. As for where we’ll see JP Morgan shares venture between now and October 17, front-month options suggest as much as a $6.30 move (14% of the current share price) – a prospect that could turn many option traders into sellers of volatility at these levels, as we suspect some traders are doing by selling puts at the 40 and 42.50 strikes. 

Navigant Consulting (NCI) – One man’s poison is another man’s meat, as they say, and so it goes with the current financial sector woes. Take, for example, Navigant Consulting, the Chicago-based consulting firm specializing in risk management and structural change for the financial and other sectors. It’s hard to imagine this gang not thriving in a hothouse of demand from financial companies in need of reinvention. While the share price is down 1% at $20.41, Navigant brushed its 52-week high of $22.73 back on Friday, and a look at the options activity, which is moving at 39 times the normal level today, indicates traders looking for a break past that high by October 17. The 5,700 lots trading in calls at the October 22.50 strike are well in excess of the open interest here, and are commanding 60 cents apiece from buyers. 

Walt Disney (DIS) - Shares in entertainment and theme park conglomerate Walt Disney are down 2% to $33.64 this morning, still within about $2 of its 52-week high in a year that has seen the company hold on to 5% in positive returns. This has still solidly outdone the S&P consumer discretionary index this year. In one conspicuous strategy this morning – as the perceived likelihood grows of a protracted consumer recession lasting well into 2009 -  a trader appears to have used a 5,500-lot long put spread to position for a new leg lower heading into the new year.  The trader in this instance incurred a $1.20 at the outset of the trade and is looking to capture a fairly narrow spread for very limited reward – at best, with Disney shares trading between $32.50 and $35 upon January expiration, this trader reaps $1.30, just a dime’s profit. 

NetApp (NTAP) – An analyst downgrade out of Wachovia this morning stripped shares in data storage equipment maker NetApp  of 8% of their value to read $19.42 over the noon hour – just barely holding its own above the 52-week low of $19 set back on March 20. Wachovia’s analysts cited an outlook for softer spending patterns, especially in the financial sector, in cutting its rating on NetApp. Having come off only slightly from Friday’s record highs, implied volatility on all NetApp options at 66.6% is already pricing in an elevated risk premium against the 49.4% historic volatility reading. One trader appears to have positioned in favor of some stabilization by year’s end, despite today’s decline in share price. In another 5,500-lot play, we saw a trader enter an opening long position in the December 20/22.50 call spread, paying a $1.10 debit in expectation of a recovery above the $20 line by December 19, but capping any upside at 22.50. As we observed in the Disney put spread, the risk/reward profile of this strategy is quite subdued, as the trader is looking to capture a relatively slender trading range against the promise of no more than $1.40 in profit – just 30 cents more than he or she loses if NetApp shares continue on their present trajectory and fail to retake the $20 threshold. 

Foster Wheeler (FWLT) – An interesting contrarian play caught our attention in Foster Wheeler, the global engineering and construction giant whose shares have eroded more than 40% in value this year amid ever more moribund global growth prospects. Shares are down just .28% over the noon hour at $45.99 and implied volatility at 65.6% indicates option traders pricing in far less risk than the 82.6% degree of deviation that shares have shown historically. In an unusual 3,437-lot trade, one player positioned long of the February 45/50 call spread, a position whose relatively rich time value would ordinarily carry a cost of $2.52 to the long buyer, looking for shares to trade within a $5 range. The trader in this instance appears to have funded his or her exposure via the sale of 35-strike puts at $2.16 apiece, bringing the initial trade cost down to 40 cents. In this case, the sale of the 35-strike puts introduces some element of risk, as there’s always the chance that Foster Wheeler’s share price will dip below $35 (in fact, the share price was at $33 earlier this month), forcing the trader to deliver shares at an unfavorable price.   

Blockbuster Inc. (BBI) – Shares in Blockbuster Inc. are down 12% to $2.68 today, putting the retail video rental chain within a dollar of its 52-week low. An increase in options trading volume to nearly 15 times the normal level showed virtually all of the open interest at the October 2.50 line in play, most of this trading to the middle of the market at 35 cents per contract, which could indicate the closeout of a large position or entry of a new long or short position. 

Technology Select Sector SPDR (XLK)  – Finally, the Technology Select Sector SPDR found support on news of planned stock buybacks by the likes of Microsoft and Hewlett-Packard. With the share price up .67% to $20.99 at present, options trading volume is approaching twice the normal level owing to fresh activity at the October 22 call line at 25 cents per contract.