Monday's Options Report: GE, XLF, DIA, UNTD, Activision, E*Trade, DNA, PAY, SHW

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Includes: ATVI, DIA, ETFC, GE, PAY, RHHBY, SHW, UNTD, XLF
by: Interactive Brokers

(NYSE:GE) – An analyst downgrade citing downside vulnerability in the conglomerate’s consumer finance unit pressured shares in General Electric, down 2.7% this morning at $37.24. The development elicited option volume of some 110,000 contracts, making it not only one of the day’s most active option traders by volume, also a top implied volatility gainer – the implied vol reading is up 16.4% this morning to 27.5%. Activity appears to be drawn to December puts at the 35 strike, which were freshly bought on a volume of more than 57,000 lots this morning and imply the right to sell General Electric just a notch above the standing 52-week low of $33.34. Some traders may have looked to take profit in existing put positions at the December 37.50 strike, those contracts having more than doubled in value since Friday.

(NYSEARCA:XLF) – Financial Select Sector SPDR felt the chill winds blow today as credit-rating agency, Moody’s, prepared the biggest credit-rating cuts on subprime related debts. The 0.9% drop to $30.79 across financial shares contrasted to a tiny rally in the broader market by lunchtime. Last week the share price rebounded sharply having reached $28.14 one week ago. Option investors today seemed content to brace for a further worsening for the sector as the year winds down. The December puts were active at each strike as low as 28. Even in the January contract, the tone appeared negative with a concentration of put activity stretching from strike prices between 25 and 31. Confirming the prospect of loftier uncertainty is the fact that implied option volatility increased by 5.8% to stand at 36.5% on the XLF fund.

(NYSEARCA:DIA) – Diamonds Trust Series. The Dow Diamonds, which is the ETF that tracks the performance of the Dow industrial average, has option investors slightly more bearish than bullish about the remainder of December’s trading. Judging by the strike prices at which investors are playing the market today, they seem to be more apt to take out insurance to the downside than they are likely to look for much more of a year-end rally. Option put buyers are stretching to the 127 strike to take cover against a decline that would be 5.1% lower than the current index price. Yet on the call side, option traders seem willing to pay up for premium at the 138 strike, which would need a rally of 3.1%.

(NASDAQ:UNTD) - A near 15-fold increase in option trading activity coincided with a 16% hike in implied volatility for United Online Inc , the provider of consumer internet subscription sites including Classmates.com, which is set for an upcoming partial spinoff and IPO. Today’s option action is occurring against the backdrop of a 7% decay in its share price to just below $14. Heavy buying and selling interest in calls at the December 15 strike compares to a Friday session in which option traders sent put option volume in United Online to its highest level in more than a year. Implied volatility on United Online options is elevated at 62%.

(NASDAQ:ATVI) – Shares in Activision gained an early 16% headstart on the session on this morning’s announcement that Vivendi SA is acquiring a controlling stake in the company, hatching the world’s largest producer of video games with a single peck. With shares trading at $25.76, blasting handily past the previous 52-week high, option traders put more than 25,000 contracts in play, closing in on the equivalent of a quarter of its open interest. Given the buoyant mood on the market, we were interested to see pronounced activity in December puts, where traders sold contracts at the 22.50 strike and bought them at the 25 strike on a volume of some 4,500 lots as premiums deflated some 85% on the session. The action seems to suggest a near-term price ceiling for Activision’s newly augmented share price – notable as the company heads into the peak holiday retail sales season.

(NASDAQ:ETFC)– E*Trade Financial – The saga of the online brokerage’s share price continued this morning, being on the receiving end of an analyst downgrade the week after receiving a $2.5 billion cash infusion. The news resulted in a thermidorean reaction of sorts for E*Trade’s turbulent share price, with an 8% setback for shares at $4.22 coinciding with more than 64,000 options in play. A breakdown of the volume shows 2.5 calls moving for every put. Option traders have bought heavily into December calls at the 4.0 strike, these commanding about 45 cents today, while buyers and sellers have trafficked in the December 5 calls – much of this may be the closing of positions opened last week, further to a 55% increase in open interest at that strike in the space of a week.

(DNA) –Shares in drug maker Genentech took a dent today on news that U.S. regulators found the company’s drug Avastin failed to extend longevity in breast cancer patients and may even have contributed to increased mortality. Genentech had pinned high hopes on winning breast-cancer treatment approval for Avastin, which has been used in treating lung and colorectal cancers due to its ability to curtail blood supply to malignant tumors. Options in Genentech, meanwhile, are moving at 3.7 times the average volume against a 3.8% decline in share price to $73.38. The selling of puts at the December 70 strike compares to buying at the same strike in the January 70 contract. We also noted fresh buying in December calls at the 65 strike, well below the standing 52-week low of $71.43. A look at the 28% implied volatility reading indicates option traders anticipating about 33% more share price fluctuation from Genentech going forward than they have shown historically.

(NYSE:PAY) – Verifone Holdings Inc. – Options in the world’s largest maker of electronic payment solutions are moving at nearly 7 times the average volume today, against a near 46% plummet in share price to $26.00, following an announcement that due to accounting errors, the company will have to rescind its earnings statements for the first three quarters of the year and reannounce them all. Traders made haste to sell January puts at strikes of 25 and 30 as premiums ballooned more than 2000% in the case of the latter strike.

(NYSE:SHW) – In Friday’s Options and Futures Intelligence Report, we erroneously referred to Sherwin Williams as the owner of Benjamin Moore paints. The error is noted and duly regretted.

VIX – CBOE Volatility index saw rather subdued options trading to commence the trading week with only 12,500 lots crossing the tape ahead of lunchtime. But we can gain some insight into investor sentiment regarding the fear-gauge as we head for December’s expiration. An investor appeared to sell a chunk of 2,500 lots in the 25 strike at a credit of 2.50. This indicates that the investor expects volatility to remain buoyant and at the extreme expects an index reading of 22.50 to mark the near-term floor for volatility. On the call side in the December contract the most active strikes were at the 25 and 30 strikes, where buying appeared to match a steady 3.6% increase in today’s value of the VIX to 23.69.