Monday's Options Report: Citi, GM, Shanda, BEA

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Includes: BEAS, BIIB, C, GM, SNDA, XLF
by: Interactive Brokers

C – Citigroup Inc. – A 2.7% share price decline to $46.58 has reversed an initial positive response to Citigroup earnings earlier. Comments from an executive noted a likely extension for mortgage delinquencies and consumer spending to later this year. That doesn’t bode well for investors already thinking about wiping the slate clean for 2008. The initial positive response to the 57% drop off in Citi earnings has now soured the market. Some 146,000 options are in play on Citigroup this morning with the vast interest at the October 45 line where 21,000 puts have traded between 0.07 and 0.20 with any fresh interest expecting a black October before the month is out on fresh financial sector worries.

XLF –Financial Sector SPDR– The Citigroup comments have soured the financial sector and are weighing on the broad market. Shares had recovered from the summer lows, but have given back 2% today to stand at $34.82. Volume of 80,000 contracts has an unusual bias as told by the put/call reading, which indicates strong call activity. Much of that is taking place in the November 35 line where 20,000 lots have traded at the middle of the market. The December 38 calls have traded 20,000 times at around 0.32, while the 35 puts in the same months have also traded 10,000 times. There has also been substantial activity in the March 35 call line where 28,000 lots have traded where it appears some fresh buying may be occurring on today’s share price weakness.

GM – General Motors – Traders seem to be taking advantage of a near 5% slump in GM shares to $40.80 early Monday to place more bullish bets through call options. While there was heavy selling of the October 40 calls at 1.80 premium earlier today (some 4,000 contracts traded to the bid as shares in GM fell), the November 42.5 calls seem to be well bought also. GM today announced that in regard to the recent accord with the UAW, it will contribute $32 billion to start the fund. Implied volatility on the options jumped 15% to stand at 54% in comparison to a 47% reading on the underlying shares.

SNDA – Shanda Interactive Entertainment – Options volume equivalent to around one-in-three of current outstanding open interest is trading early on Monday in this Chinese online gaming portal. The company is now registered in Nassau but has proved its worth in online gaming at home and abroad. It owns and has acquired plenty of trademarks or patents and its share price is fast approaching its 2005 all-time high at above $44 per share. So far in 2007, the stock has doubled in value. In today’s session there is a speculative tone to the action with much of the volume at the November 40 strike, where 16,400 contracts are in play. At that strike only 3,851 contracts of open interest already exist. Shares are already higher by 3.3% at $38.50. The October 40 calls have also traded on healthy volume as speculators appear to be positioning for a near-term rally in shares above $40 before the contract expires.

BEAS – BEA Systems – Plenty of in-the-money call activity in BEA Systems where options traders are hoping that Oracle will improve its bid after the company rejected a $17 per share bid. In early Monday action shares are 2% lower at 18.47. There is plenty of confusion amongst traders given BEA’s management arranged and then cancelled a meeting with Oracle late last week. Shares leapt last week from around $14 and investors seem to be in agreement that BEA can obtain more. Implied options volatility at 33% is still heading lower as the prospect of an agreement falls into place, but is possibly helping options traders take advantage of the volatility element of share pricing. In the October contract it appears that there was plenty of selling at the 12.5 strike at around 6.0 implying a closing share price at expiration at no higher than $18.50. Meanwhile the 17.5 strike in both November and December are active.

BIIB– Biogen Idec – Is once again in the news following Board approval to managers to investigate selling the company following enquiries from sources including Carl Icahn. The company is best known for its Avonex drug for multiple sclerosis treatment. It also produces Rituxan with Genentech and announces earnings on October 23. Shares are higher by 20% and around 20% of equivalent open interest is in play today. With shares at $83.90 the November 85 and January 80 calls are most desired contracts early on. The former contract settled at a nickel on Friday and is now trading at 2.60, having reached 5.30 earlier.

VIX – the Volatility index is making a comeback play as the core of the market gets hit. Front month volatility is already 10% higher at 19.43 as investors reach for the calls on the series. The December contract has broken through 20 already indicating that investors fear that this is not merely a spike, but that larger concerns maybe at play. The October at-the-money calls are most active from strikes at 18 through 22.5 feeling the volume. In the November contract the 25 line has seen almost 11,000 lots trade as high as 1.1 today indicating a willingness to protect any volatility surge above 26.1. The buying in that contract extends as high as the 30 line in today’s session.