Monday Options Outlook: FRE, FNM, AA, EWZ, JNPR, YHOO, WB, XLF

by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

Fannie Mae and Freddie Mac (FRE), (FNM) – Shares in Fannie Mae and Freddie Mac dove 9% and 11.3% (to read $17.10 and $12.87, respectively), crashing below their 52-week lows, after Fannie announced the issuance of $3 billion in two-year notes and Freddie confirmed that it had sold $2 billion in three-month reference bills. Implied volatility in both tickers skyrocketed, with Fannie Mae’s measure of perceived price risk up 41% to 142% - rising more than any other company traded on our platform. Freddie Mac was not far behind with a 38% rise in implied volatility to 153.6%. Front month puts were bought heavily in both companies, with traders favoring Fannie Mae’s July 18 puts at 95 cents per contract, while the July 12.50 and August 15 puts in Freddie were also heavily bought. A 2,200-lot put spread in Fannie Mae’s September series showed a trader pinned to the 10 and 17.50 strikes, and while the order flow cannot be established given that both sides traded to the middle of the market, a bearish trader would initiate the trade with a $2.25 debit that first breaks even with a decline below $15.25, while a more optimistic soul would take the $2.25 spread as a credit in hopes that Fannie Mae can recover at least to within a dollar or so of its previous 52-week low.

Alcoa (NYSE:AA) – With Alcoa on deck to report earnings tomorrow, becoming the first Dow component to unmask its quarterly numbers, shares are up 5.3% to $34.54 after aluminum prices hit a record in London trading earlier today. The jag higher in aluminum prices was attributed to a production halt in China due to power shortages – power shortages being a pricey x-factor that has historically kept production costs high for Alcoa. According to a Bloomberg article out today, energy costs swallow up some 30-40 % of the cost of producing aluminum. While a look at the price of the closest-to-the-money straddle today shows option traders currently pricing in a potential $3.18 move on back of the numbers – that’s 9% of the current share price – a look at today’s order flow shows relatively more calls being sold at the July 35 line and relatively more being bought at the 37.50 line. The same tendency extended to these strikes in the August 35 and 37.50 strikes - which may suggest short calls spreads going through as traders position for share price declines. Put-buying at the July 30 strike certainly speaks to the earnings shortfall/long volatility scenario.

iShares MSCI Brazil Index (NYSEARCA:EWZ) – You’ve probably heard of the “running of the bulls” in Pamplona – in a similar vein, current sentiment would suggest that most of the bulls have been run out of America. Where’ve they gone? Brazil, it seems – with the BRIC complex, and Brazil in particular, drawing guarded kudos from some analysts as a pocket of strength in a challenging global market, due to the fact that what inflationary pressures it has are being driven by economic strength rather than currency weakness. Shares in the iShares MSCI Brazil Index, ETF indexed to Brazilian stocks rose .81% to $83.74 today as volume in excess of 37,000 options qualified the fund for our scan of top-50 most actively traded options. Notable here was a 5,500-lot put spread that a trader opened at the July 80 and 85 strikes, selling the higher strike and buying the lower in a short strategy that allows the trader to bet on further upside between now and July 18 while taking in a $2 credit concurrently. This $2 premium represents the maximum realizable profit if shares in the EWZ trade above $85, leaving both put options to expire worthless.

Juniper Networks (NYSE:JNPR) – Shares in Juniper Networks gained 2.4% to $23.30 today after analyst at Piper Jaffray upgraded their recommendation on the stock from “neutral” to “buy.” While the move lent vivacity to Juniper’s options – its more than 29,000 active lots qualified the company for our scan of top-50 most active option families ahead of the noon hour – a breakdown of the volume shows a not-insignificant measure of ambivalence to the trading. Out-of-the-money puts at the July 20 sold mostly to the bid for a measly nickel apiece, possibly representing traders closing out those positions in anticipation of stable price action over the next few weeks. But fresh buying in the August 21 puts at 54 cents apiece suggests a degree of defensiveness heading into Juniper’s earnings on July 24. Shares in the company, which makes firewall security systems to protect against computer malware like Trojans and viruses, have declined nearly 12% over the past month, double the underperformance of the S&P information technology index, of which it is a component.

Yahoo! (YHOO) – Shares in Yahoo! gained 11% to $23.65 on news out of this morning’s Wall Street Journal that Carl Icahn and Steve Ballmer are holding reciprocal talks on the future of Yahoo; Icahn venturing so far as to state that a Microsoft takeover of the search engine company is still possible if the current board is dumped. Meanwhile, Yahoo calls traded out the wazoo, with bullish call positions trading at more than twice the volume of puts, principally at the July 25 strike, where more than a fifth of the morning volume is situated, this position gaining 146% in value from Thursday. Bullish interest has extended to the 27.50 call strike, where the 20-cent premium reflects only about a 13% likelihood of it landing profitably by July 18. Implied volatility at 69.2% compares to a historic reading of 57% on Yahoo stock.

Wachovia (NASDAQ:WB) –The slow grind lower for Wachovia continues today with a 9% decline to $13.55. With more than 45,000 options in play it qualified for our scan of early market movers, and a breakdown of the action showed some evidence of straddle selling at the July 15 line – possibly evidence of traders looking to play against Wachovia’s extremely elevated 108% implied volatility and its invigorative effect on option premiums. Further evidence of waning confidence in its ability to hold current support levels was seen in put buying at the July 10 and 12.50 strikes. Overall open interest shows puts and calls evenly split.

Financial Select Sector SPDR (NYSEARCA:XLF) –After trading flat for most of the morning, the Financial Select Sector SPDR succumbed to persistent doldrums in the sector to read 3% lower at $19.31, but with 340,000 options trading nearly twice as often to calls as to puts. This morning we noted that front-month order flow seemed to indicate call spread activity between the July 21 and 22 strikes, with traders buying more of the lower strike and selling more of the higher. While August 21 calls sold to the bid, we also noted what appeared to be a 10,000-lot straddle sell at the August 22 line. If our read of time and sales is accurate, the trader would have taken in a $2.85 premium on the position, representing the maximum profit achievable provided that XLF shares close at $22 by August 15 – a 10% upside move from current levels.