Following a week of extraordinary equity and credit market activity investors clearly thought long and hard about the likely impact of central bank intervention, which stretched to a third day Monday. As the session began, investors looked to the financial sector as if it was Fileen’s Basement itself. The increased degree of volatility for stocks and the fact that credit markets required central bank intervention created siren voices hunting for interest rate cuts. We think it’s only polite to note that equity investors are still sitting on year-to-date gains of 6.9 percent in the Dow industrials while the S&P 500 index has returned just under half of that amount.
Having failed to push share or index prices lower than the levels set this time a week ago and having sat through a rise in volatility not seen since 2003, investors are emerging from below deck and asking, “is that it?” But there’s an eerie calm accompanying Monday’s trade.
VIX – Having ended the week on a high-note, volatility has eased Monday and has fallen by 8.3 percent to 25.92 as measured by the CBOE Volatility index. The VXN, measuring implied volatility across the Nasdaq market is lower by a similar amount, which still suggests that the alarm bells in the financial market are ringing in the background, but that by now investors have become accustomed to the noise.
Options action in the VIX has been seen in the August and September calls at the 25 lines, where it does appear that a spread trade may have been trading involving almost 30,000 contracts in both contracts. Although trading is reasonably balanced in both camps to start the week, the action ever-so slightly favors the call side where in-the-money 20 and 22 strikes are trading as are 27 and 30 strikes, all in the August contract as we approach weekend’s expiration. Some 890 lots at the 35 strike have also traded between a quarter and 0.45. At the put side the September 15 contract seems a cheap bet at around 0.25 today. The teens for the VIX do seem a long way off especially now that major investment houses are discussing a “paradigm shift” for volatility.
By 12:30pm the Dow Jones industrial average was 0.1 percent lower at 13,255.00. The S&P 500 index was 0.23 percent higher at 1,456.21 while the Nasdaq composite index dropped 0.14 per cent to 2,552.92.
XLF – Financial Select Sector SPDR shares rebounded by 0.75 percent Monday as investors had a risk rethink. Yet options traders retained a more cautious tone with put trading leading call trading by a factor of 2.5 times. With shares in the ETF at $33.59 the 34 strike put series traded on volume of 11,000 lots at 1.7 while the 33 series traded 6,000 lots at a price of 1.25. Implied volatility in the fund declined to stand at 34.75 percent. The September 35 calls were also actively traded as were the December 32 puts.
XLE – Energy Select Sector SPDR shares are joining the broader rally. Last week the price of crude fell to a one-month low. This week analysts caution not to expect drivers to expect ongoing gasoline price declines. The price of the stock is 1.3 percent to the better at $68.62 while options traders can’t seem to reach a consensus on the ETF. The call side volume appears in the December contract at the 70 and 77 lines. At the upper strike, a seller could be reaping in the 1.80 premium to offset the 4.60 cost of the lower strike with a ratio call spread. Meanwhile on the put side the January at-the-money has traded at 4.6 some 2,300 times implying a breakeven at $63.40 for the trade.
DIA – Diamonds Trust Series - a.k.a the Dow industrials is trading 0.9 percent higher today at $133.29. Volume of 42,700 lots is evident in the ETF with just under half of that trading to the put side at the 125 strike at around 1.7. This smacks of investor pessimism since it appears that a buyer snapped these up adding to existing open interest of 18,000 at that strike.
YUM – Yum! Brands Inc – The parent company behind the Taco Bell, KFC, Pizza Hut and Long John Silver’s brand fast food franchise picked up handsomely after NPC International Inc., the largest franchisee of Pizza Hut restaurants nationwide, reported $1.4 million in Q2 profits, having ended last year’s second quarter $16 million in the red. The 6,850 contracts circulating this morning represent more than 4 times the average daily traffic for Yum! Brands, whose shares took a 1.20 percent move lower today, at $30.82. Today’s volume largely consists of strangle selling involving 3,000 lots at the January 30 puts and 32 calls at a combined premium of $2.75. A seller of this strangle is betting that shares in Yum! brands will remain hemmed in a range, the size of the premium received, by the January contract expiry. Last week, the company announced plans to double revenues by 2010 on its rapidly expanding rupee market, by adding 30-40 restaurants annually on the Indian subcontinent over the next three years.
ABB– ABB Ltd ADR – Shares in Swiss engineering group ABB are trading 1.42 percent higher this morning at $22.82, with options trading at 6 times the average frequency. Today’s 6,150 active contracts represent about 17 percent of the total option interest, with 7 and a half times as many calls moving as puts. The group announced today that it has begun construction on a $13.5 million turnkey substation installation for mining giant Rio Tinto in Western Australia, its sixth such project in the region.
FNF - Options volume accelerated relative to the average daily norm in Fidelity National Financial Inc (NYSE:FNF), the niche insurance and claims management provider. The pickup in options volume followed its announcement that it had acquired ATM Holdings Inc, which deals in title and closing services to the residential mortgage sector. Fidelity National Financial shares are flat at the noon hour, at $20.59, with 10 times as many options trading as usual, equivalent to nearly a quarter of its open interest. Today’s activity is almost entirely centered on the put side, where we observed spread activity at the August and September 22.50 strikes.
GS – Goldman Sachs - Investors seemed to have been largely pacified by today’s news of a $3bn bailout of Goldman’s Global Equity Opportunity Fund by the investment bank in conjunction with former AIG chair Hank Greenberg, who ante’d up one-third of the shore-up investment. Despite acknowledgement that the fund has lost some 30 percent of its value for the year to date, a loss that culminated in last week’s precipitous subprime-driven selloff, Goldman shares are trading 1 percent higher at$182.33. Options traders have put 43,450 contracts in play, calls out-handing puts by a factor of 1.6 although overall open interest continues to favor the put side. With implied volatility at nearly 48 percent, we’re observing what looks like extensive front-month straddle and strangle activity in the 175-185 price range, but note that the September 210 calls have also been fairly well-trafficked, with more than 3,000 lots trading predominantly to the ask.
GM – General Motors Corp. (NYSE:GM) Shares have risen $1.7 percent to $34.44 Monday inspired perhaps by news that it may “rent” batteries for its new Chevy Volt electric vehicle by 2010. By so doing the pricing of the vehicle will compare to the price of family vehicles. A Chevy Malibu owner might spend $145 each month on gasoline while the Volt might require just $25 per month. The difference could be used on rental payments for the battery in order to balance the cost for the sophisticated technology and materials needed for the battery. Options traders tool little note today of the launch looking forward three years. In the January 2010 options series one single contract traded at the 30 strike price reserving the right to buy 100 shares in GM for $30. The buyer paid $1,180 for that right, implying a breakeven price of $41.80 by then. Currently options traders forecast shares will be trading somewhere around $43.00 by the time the Volt hits the street judging by the delta on those call options.
EMC Corp – A harbinger of the demand for tech-sector shares, EMC Corp (EMC) is the fifth most actively traded options series on our scanner today, with shares surging 7 percent in the run-up to the IPO of its software subsidiary, VMWare. The market’s thirst for front-month call options on this ticker, which convey the right to buy shares upon options expiry, may be interpreted as a proxy for a general thirst for shares. Current volumes certainly speak to this notion. About 11 times as many calls are changing hands as puts, with front-month premiums up as much as 140 percent. Heaviest volume registers at the at-the-money August 19 calls, where more than 30,000 lots have traded. Implied volatility on these options stands at 54.4 percent, compared to 36.6 percent historic volatility for EMC Corp shares, though look for implied volatility to pull back somewhat once the IPO confetti has settled.