Wednesday Options Outlook: KRE, STI, WPI, IYR, BGG, SWY

Includes: AGN, BGG, IYR, KRE, STI, SWY
by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

KBW Regional Banking ETF (NYSEARCA:KRE) – Regional banks continue to be a particularly raw bruise site in the already-buffeted financial sector. Option traders continue to seek out unusual out-of-the-money put positions in the KBW Regional Banking ETF. With the index share price down 4.2% to $32.19 amid continued slump for small regional banks, it appears that a trader may have sold a large position in September 22.50 puts for 20 cents apiece in order to buy into December 30-strike puts for 20 cents. The trader is confident enough that there won’t be a collapse in the regionals by mid-September that would take shares below the $22.50 level (they’ve traded as low as $21.72 over the past 52-weeks) but is looking to guard against a pull back below $30 by year’s end.

Suntrust Banks (NYSE:STI) – Put volume in Suntrust Banks hit its highest level since July 15 today as shares slumped 6.7% to $40.01. With puts outmoving calls by nearly 6 to 1 this afternoon, we are observing heavy buying interest in front-month puts at the 35 and 40 strikes, with traders zeroing in on long positions at the 35 level in September and October. Suntrust shares are down 36% for the year to date. While puts haven’t traded on volume this heavy since the ultra-volatile days of mid-July, implied volatility on all of its options has come off about 46% from mid-July levels, still rising 24% this week alone. Front-month options, which expire Friday, suggest 6% of Suntrust’s share price may be in play between now and then.

Watson Pharmaceuticals (WPI) – Unusual option activity is taking shape this after in Watson Pharmaceuticals, the maker of generic versions of Vicodin painkillers as well as oral contraceptives . Despite flattish share price action (shares are down .39% to $28.24), call volume set a 52-week high today, with overall option volume coming in at about 7 times the normal level. The interest here appears to overwhelmingly target the 35 call strike – a position that implicitly requires a break of Watson’s 52-week high of $33 set back on September 28. Volume at this strike in the September contract traded to the middle of the market, but the interest in November and January was largely to buyers. Implied volatility on all Watson Pharmaceuticals options has shown a gradual and steady increase over the past 2 months – up about 36% during that time. Today, at just below 34%, the implied volatility reading on all Watson options compares to a historic reading of 22.3% on the underlying stock, suggesting that the options market is pricing in the potential for more than 50% additional price risk over the next month. We should also note that over the past month, call open interest in Watson Pharmaceuticals has swelled some 77%, and call positions now outnumber puts by a factor of 2.6.

iShares DJ US Real Estate (NYSEARCA:IYR) – Defensive positioning in the iShares DJ US Real Estate index sent overall volume to 8 times the normal level. Shares are down 1.7% at $63.39 at present, but are up 15% over the past month since setting a 52-week low back on July 15. The option activity today suggests that traders are looking for the index to give back most of those gains by year’s end while leaving the July low intact. This occurred via a long put spread at the December 56/60 strikes, with the trader appearing to offset the $1.80 purchase price of that spread by selling 8,500 calls at the December 70 line at $2.25.

Briggs and Stratton (NYSE:BGG) – Traders are positioning for a volatile move in shares of Briggs and Stratton, the maker of small engines for outdoor power equipment and power generators, ahead of that company’s earnings report on Thursday. Shares in Briggs & Stratton have suffered mightily for the company’s exposure to the housing market, stripping them of more than a third of their value so far this year. Ahead of the company’s earnings report we registered a rise in options implied volatility of 56%, bringing the measure to 96.2% - twice the historic measure on the stock. With shares down 2.5% to $14.62 today we can see that front-month options are suggesting about 15% of Briggs and Stratton’s share price hangs in the balance between now and Friday, and option traders have seized the opportunity to position defensively – seeking not just fresh positions in August 15 puts but also in September puts at strikes 12.50 and 15. All of this volume contributed to sending activity in Briggs and Stratton options to 37 times the normal level.

Safeway (SW)Y – Options in supermarket chain Safeway continue to command interest. With shares down 1.2% to $27.86 we observed an increase in options trading volume to 5.8 times the normal level centered in the December 30 call strike, these trading at more than twice the open interest to buyers at $1.80 per contract. The positioning here would seem to imply a move to the upside by year’s end – Safeway shares have tended to trade below the $30 line since mid-June, one or two tests of that level notwithstanding. This marks a second consecutive session of confident call volume in Safeway.