Monday's Options Report: GM, XLY, XLB, AUO, CFC, Echostar, Clearchannel

by: Interactive Brokers

(NYSE:GM) - Shares in top automaker General Motors lost nearly 6.5% this morning to $27.38 – a new 52-week low – following a report in the Wall Street Journal that the company has resorted to a new “Red Tag” sales event in a bid to jump-start languid consumers reeling under the double-whammy of higher fuel prices and depressed property values. Option traders responded by putting more than 80,000 options in play. About a quarter of this was situated in puts at the December 27.50 strike, which appreciated in value some 72% on the session, with volume equal to more than half of the existing open interest in play. A look at implied volatility shows option traders expecting about 16% more volatility from GM shares going forward than they have shown historically.

(NYSEARCA:XLY) – Consumer Discretionary Select Sector SPDR traded down 1.8% Monday to stand at $33.40. Activity today if 14,800 contracts compares to current open interest of 129,540 contracts. Put side activity today shows up on our put/call ratio scanners thanks heavy put-side volume. In the January contract it appears that an investor placed a 7,000 lot put spread for a net cost of 0.82 per contract. The 33 strike puts were bought at 1.24 while the 30 puts were sold at a credit of 0.42. By selling the lower strike puts the investor limits any gains on the protection afforded by holding the puts at the 33.0 strike. But the play looks interesting since the magnitude of a decline to reach the lower strike at 30.0 would be in excess of 10% at this stage. Since its July peak, shares in the consumer discretionary fund are already lower by 18%. A further 2% decline would technically be defined as a bear market and would likely cause further selling pressure. In this case the investor’s perhaps prudent, albeit late-in-the-day play, offers 2.18 maximum profits should the fund slide all the way to that lower strike, for a risk/reward ratio of 2.6 to one. The fund printed a fresh 52-week low in Monday’s session. Companies included in the fund’s composition include McDonald’s Corp., Time Warner Inc., Walt Disney Co., and Home Depot In.

(NYSEARCA:XLB) – Basic Material Select Sector SPDR traded a 52-week high as October rolled out but thanks in part to a 2.5% slide today, the fund price stands 11.3% lower just three weeks later. Investors seem to be mirroring the bear put play in the materials fund where a 10,000 lot spread has been placed across the 39 and 36 strikes at a net cost of 0.90. That gives this spread a similar 2.3 to one risk/reward ratio. Should shares decline 8.2% from today’s $39.20 the fund would reach the lower strike price here. In that case the spread ought to be worth 2.1 points at which point the gains are maximized. Basic materials had been a great place to be lately since it apparently offered investors exposure outside of the United States to those regions where economic activity continues to shine. Today’s U.S. inspired market slide is challenging that logic. Companies held within this sector fund include Monsanto Co., Due Pont., Dow Chemicals and Freeport McMoRan.

(NYSE:AUO) – AU Optronics Corp. (ADR) – Just as America prepares itself for Thanksgiving, retail analysts will be keeping a larger than usual eye on Black Friday store sales. The day after Thanksgiving marks the onset of holiday shopping and is the biggest retailing day in the calendar. With JC Penney and Macy’s already having cut quarterly earnings estimates and Lowe’s Corp. validating fears of a housing-led slowdown in consumer spending, this week will be an especially widely watched barometer of consumer health. Shares in Chinese flat panel maker, AU Optronics reversed last week’s 52-week high in its share price as investors bought puts on the stock to reflect fears of a slump in sales of notebooks, desktop monitors, digital cameras and camcorders and in-car television screens. The 7,700 lot put action in the January 17.5 puts would protect investors from a recoil below $16.15 in its share price. The shares today declined 2% to stand at $19.03. Open interest at this strike prior to today was just 300 contracts confirming that this is fresh positioning. The slide in the ADRs and the bid for put options boosted the premium by around 30% today. The put/call ratio of 19 times ensures a place on our market scanner today. The put play of 7,700 lots compares to open interest of 16,465 lots.

(CFC) – Shares in Countrywide Financial slid another 10.5% to $10.80 this morning, with some 64,000 options in play in concert with a 33% climb in implied volatility to 116.9%. Today’s news catalyst appears to be a report that investors may attempt to unload some $4 billion of the company’s debt, although the share price is still reeling from last week’s report that October mortgage-loan fundings declined 48% from a year earlier, and this – coupled with a general attitude of bottom-fishing in financial issues today- may be contributing to the bearish pile on Countrywide shares and options. Of note here is heavy buying in the December 10.0 puts, with premiums up some 57% on the session, along with heavy buying in the December 7.50 puts, which have doubled in value. A look at the delta on this put shows just about 15% chance of Countrywide shares dipping to such morose levels over the next month, but such is the tenor of today’s market that this strike has roughly the same delta, but twice the volume of the December 15 calls – which have sold off heavily as option traders apparently seek to cordon off any upside expectation for Countrywide’s tamped-down share price in the near future.

(NASDAQ:DISH) – Implied volatility in Echostar Communications shares jumped nearly 52% on the session today as its shares gained more than 25% to $50.00 following reports that AT&T may be assembling a bid for the company. A look at the option positioning shows heavy buying and selling December 45 calls, which gained some 850% in value overnight, while heavy buying in the January 50 calls on a volume of 6,000 lots shows these options commanding as much as $7.00 in premiums, implying a climb for Echostar shares to $57.00 by mid-to-late January.

(CCU-OLD) – Shares in Clearchannel Communications, the nation’s largest radio company, are down 3% to $33.47, having set a new 52-week low earlier today. As late as last week, Clearchannel’s arbitrage spread – a gauge of the disparity between the current market price versus the offered price of a company in the middle of M&A proceedings – was measured at some 10.5%. A note about the arbitrage spread – a higher reading means a wide spread, indicating doubt among investors as to whether the acquisition will go through. On the option front, we tend to look at implied volatility relative to the historic reading for a gauge of investor discomfort regarding a company’s share price, and in both respects investors appear ill-at-ease regarding Clearchannel’s forward share price action. Implied volatility in Clearchannel options rose 22% percent this morning to stand at 50% - reading more than twice the historic reading. Meanwhile, its options are trading at more than 9 times the average frequency with what appears to be put spread activity in the January contract between strikes 30 and 32.50, all trading to the middle of the market.