Friday Options Update: MS, XLF, WFC, GS, ZION, XRAY, FDRY, HA, GM

Rebecca Engmann Darst co-authored this report.

Morgan Stanley (MS) – More hefty volume in the options series on Morgan Stanley shares, which were once again caught in the crosshairs of the ongoing global rout for equities and the question mark over the broader brokerage  business model. Shares are lower by 31% and falling and stood at $8.55 by 11:23am at which time option volume totaled 160,000 contracts. Call trading is swamped by action on the put side by 2.4 times. Most volume was seen at the October 7.5 puts where 15% of volume took place today. The current premium, loaded with 681% implied volatility, is 2.5 and so infers that buyer’s insurance kicks in at a $5.00 share price for MS. The 5.0 strike is active and has traded 14,000 contracts, while the January 12.5 strike puts have registered 18,190 contracts and having slipped into-the-money overnight are now trading at 6.30 implying 2.20 dollars of extrinsic value.

Financial Services Select Sector SPDR (XLF) couldn’t sustain a powerful early counter rally, which led to audible cheers from the floors of the exchanges (yes, we heard them here in Greenwich!). Another fresh low was accompanied by yet again exuberant options volume totaling 259,000 contracts by noon. Most active were puts at the October and November 15 strike. Implied volatility surged by around one-third to stand at 131%.

Wells Fargo (WFC) – For a company whose share price is unchanged today at $27.12 there is hectic activity in Wells Fargo's options. The put call ratio indicates 5.2 times as many puts in action as opposed to puts. The times and sales shows that twice as many January 25 strike put options were bought earlier today for a premium of around 5.20. Total series volume here is 63,000 lots and offers a buyer protection below a share price of $19.80. The options are “expensive” thanks to an options implied volatility reading of 135% - suitable for many financial companies. Shares in Wells Fargo have been relatively immune from the financial dislocation until this week. The 52-week low at $20.46 was created mid-July and shares subsequently rallied to $44.67 post SEC short sale rules in September. We’re unsure as to whether the consummation of Wachovia (WB) or the legal threat from Citi’s (C) counsel even part of the problem

Goldman Sachs (GS) – Faced with a 17.5% decay in its share price today – trading at $83.65 – option traders have been busy apparently playing the bullish side of Goldman’s shares. From what we can gather from time and sales data, around 11,000 puts at the January 10 strike were sold for a 90 cent premium this morning. Later, the premium has run up to 1.40. A seller will keep the premium come expiration so long as Goldman’s shares stay out of danger. Rather a perilous strategy when the world is falling apart. The delta on the option indicates a probability of only 1% that Goldman’s shares are in any danger of expiring at or below the strike price. Time decay, always working in favor of the option write, means that the premium of the option should decay at a penny and a half per day.  Nevertheless, today’s share price has created a new 52-week low and option implied volatility, which we suspect this investor is attempting to take advantage of, is peered its head through 200% for the first time. Pass the tin hat please!

Zion Bancorp (ZION) – An equivalent 10% of existing open interest is in play on Zion whose share price is 5% lower at $27.87. The volume is focused on the November 50 puts, which appear to have been sold at 27.20 premium. The trade is unusual since it involves deep in-the-money puts. It could be the case that this stock is hard to borrow.

Dentsply Intl Inc. (XRAY) – Dental equipment manufacturer and provider Dentsply saw its shares close at a 52-week low to start the week and just like the rest of the market, its shares have kept on searching for support below. Today the company shows up on two of our market scanners. Its option implied volatility is one of the largest gainers rising 66.4% to 104.8% and its option volume is high relative to usual. The 3,000 contract volume compares to open interest of around 12,000 lots. Shares are down 1.6% today at $29.74. All of the option volume is concentrated in the November 30 strike series and took place at a premium of 4.30.

Foundry Networks (FDRY) – With its shares down by 2.6% at $15.56, options volume is relatively heavy compared to normal. While only just under 4,000 options are in play today, implied volatility is higher by 93% to 62% indicating that a strangle might be in play. The key volume today supports that view with November 17.5 strike calls ringing up volume against 12.5 strike puts. A strangle may benefit a buyer if implied volatility hurtles higher and if shares breach the boundary suggested by the total premium paid. In this case shares would need to breach $10.80 or $19.30 to start making money.

Hawaiian Airlines (HA) – This issue keeps popping up on our market scanner as a hot options issue. With only 120,000 lots of open interest, today’s 18,421 stacks up at around 10% of the overall. The activity is confirmed bullish at least at the January 5.0 strike where investors paid 1.0 premium for 4,540 contracts. Shares are down 7.7% today at $5.13. At the April 5.0 and 7.5 strikes, calls traded to the middle of the market masking the investor’s intent. The lower strike traded more than 7,000 contracts while the upper strike traded 6,786 lots.

General Motors (GM) – Heaviest volume is apparent in the October 5.0 strike puts where 10,930 contracts are in play today at a premium of 83 cents. Share in GM were higher by 5.4% at $5.02 rebounding from yesterday’s lowest trading price since before many of us were born.

Comments

[Joey:]

How to Fix GM – Advice from someone who worked there.
1) Cut down from five regional offices to two. One in Atlanta (east
of Lake)and one in LA (west of Lake). That means Chicago, New York,
and Dallas are closed. With about 250 people working in each location
(750 total) at an average of $100,000 each, that is a yearly savings
of $75 million. Operation cost (rent, equipment, etc.) at the three
locations will save another $1.8 million. Benefits for the 750
employees will save another (at $20,000 each) another $15 million.
2) Next, there is an average of three offices per state (local
offices in cities across the country), if we close them, that is
another $3 million in office space.
3) Next, the District Managers work out of their house and the Zone
Managers (or whatever term is given to them), could be let go. They
make around $150,000 a year and there are about 75 of them. Again, a
savings of $11.25 million. With benefits, a total of $12.75 million
in savings.
4) Next, cut around 150 jobs at the Detroit GM Headquarters. A
savings of around $18 million with benefits.
5) Next, cut Buick down to two cars (Enclave and Lucerne), cut
Pontiac to one (G6), cut GMC to two (Yukon and Sierra), cut Saturn to
one (Vue) – and put all cars to a new umbrella called “United
GM”. This will save GM billions
6) Next, cut advertising in November, December, January, February,
March, April, and May (with the exception of auto show advertising
for a three week period during the show and its incentives). This
will save GM around $1.4 billion.
Total Savings for GM = $123.75 million in salaries for # 1-4, $1.4
million in savings for #6, and for #5, I do not know the exact number
but it should be a savings of around $25 billion.

2008 Oct 10 03:38 PM

[PeteK:]

Joey, what about the union ? they are the one who squeezed the business to death. Also, workers loyalty to the company, none !!

2008 Oct 10 06:45 PM

[Joey:]

Peppio, the unions have always been there. Even when GM was doing extremely well like the 50's, 60's, 70's and 80's, only there were more Union employees then there are now. Now, its the robots doing the work with only about 1/4 of the employees GM use to have. If you check out Detroit and Flint, that is where GM has the highest percentage of GM cars and imports do not sell as well. The loyalty of the union employees is there, there just is very few of them. Besides, many of the GM cars are made in Canada, Mexico, Australia, etc. Less and less GM vehicles are being made in the U.S.

2008 Oct 10 07:34 PM

[John Cordes:]

How about this, quit paying lobbyists to pursuade the Congress to protect the status quo in the auto industry from the demands of the market place. Instead spend that money on innovation and retooling to build the kind of cars people actually want to by. Cars with high fuel efficiencies, safety and style, instead of gas guzzling light trucks and suv's protected by tarriff from competition and exempted from the lowest cafe standards in the world. No wonder American automobile manufacturing is going broke.

2008 Oct 11 08:45 AM

[CLH:]

Yes the destruction of the auto pants was caused by the unions who suck the blood of both the company and the workers.

We must have a national right to work law. No one should be denied a job because they wont join a union. Of course this means getting rid of the democratic party .

2008 Oct 11 09:26 AM

[User 277274:]

UNIONS KILLED THESE CAR COMPANIES AS THEY DID TO THE AIRLINES,AS WELL. BUT WHY DO UNIONS NEED THEIR "BOSSES" IF NOT TO GET MORE FOR LESS WORK?
MANAGEMENT IS STUPID TOO! I SAW THE NEW DODGE RAM TRUCK COME OUT (WITH 500 HP) AS GAS SOARED IN PRICE.
FINALLY, THE COMPANIES LET THEIR DEALERS CHEAT PEOPLE FOR SO LONG THAT THE AVERAGE PERSON WOULDN'T HELP THEM NOW IF THEY COULD. IN THIS BUSINESS, CUSTOMER+SUCKER!

2008 Oct 11 11:28 AM

[Urbane Gori...:]

Unions didn't kill the auto business in the US.... The auto business kept its head in the sand (as it has done for the last 20 years) and decided to pay advertisers to build sell the 500 HP vehicles (that you pointed out) rather than building the vehicles that we need. Unions are there to protect the rights of their membership. You can't trust the government or employers to do so. Having been an employee of unionized and non-unionized businesses, I do know the benefits of both.

Airlines have the benefit of being supported by our tax dollar in ways that rails do not. Airlines have been brought down by rising energy costs, their inability to hedge the price of gas properly and deregulation, which caused a market scramble to offer the cheapest seats possible, leading to a price war.

Oh yeah... If you accidentally click the 'CAPS LOCK', you will continue to type in CAPS mode.. Click it again and it turns off.. OK.. I shouldn't have said that...

jegan ;-)

2008 Oct 11 03:55 PM