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Friday, March 29, 2024

Agnostic Fed rate action disappoints market looking for conviction…

Today’s tickers: XLF, VIX, C, T, CECO, WYN, XLY, WM, CSCO

XLF – Financial Select Sector SPDR – Shares in the financial sector ETF were conservatively lower ahead of the Fed’s rate announcement, but losses quickly snowballed after agnostic quarter-point cuts in the Fed funds and discount rates failed to satisfy the market’s craving for action. The XLF recovered some of its post-Fed losses to close today 1.5% lower at $30.33, with implied volatility ticking above 37%. Today’s action followed a massively liquid options trading session for the XLF in which traders unabashedly put twice as many calls in play as puts. For some perspective on the degree to which the market was caught on the wrong foot by the Fed’s perceived lack of follow-through, consider that among the early session’s most active XLF contracts, the January 30 puts traded mostly to the middle of the market at $0.83, well below the current bid/ask on this contract. June 35 calls traded to the middle of the market early in the session at $1.38, well above the current bid/ask on this contract.

VIX – CBOE Vix Index The negative response to the Fed’s simultaneous 25 basis point cut in both the funds and the discount rate also showed up through a jump in the volatility index. The VIX added 13% to close at 23.59 this afternoon. The December contract was active at the 22.5 strike where premiums rose by 42% to 1.35 as volume ramped up to almost 32,000 contracts. Earlier in the session lower strike December puts through the 17 strike were bought in expectation that the Fed’s actions wouldn’t disappoint. However, the real action came post announcement as some traders bought more downside protection against the prospect of a weaker equity market tone heading into year-end. Call options at the 25 and 27.5 strikes also saw high volume of 13,000 and 9,000 contracts at 0.60 and 0.30 each. Notably, though the 200-point Dow sell off and the 25-point slump in the S&P have not propelled the VIX into the stratosphere. The reaction is remarkably calm under the circumstances. Investors’ disappointment possibly stems from the Fed’s apparent failure to deal with ongoing pressure on money market rates as is evident through upward pressure on LIBORs. Some investors may have missed the point that the Fed can set official rates but they can’t set market rates.

C – Just on the cusp of the Fed’s rate announcement, Citigroup confirmed reports that early frontruner Vikram Pandit would become the company’s new CEO, following in the troubled wake of Charles Prince. News that on any other day might be perceived by option traders as a bullish event was eclipsed by the market’s turn south following the Fed action, and Citi shares lost more than 4.5% to close at $33.19. Its 758,000 active contracts made it the day’s most active option series by a long shot, with December 35 calls trading heavily to buyers and sellers on a total volume of 391,000 contracts as the value of this position declined 61% this afternoon. March 32.50 puts also traded evenly to buyers and sellers, on a combined volume of about 13,800 lots, with the current $2.08 premium reflecting about a 39% chance that this put will land profitably by March expiration.

T – Shares in the country’s largest phone company, AT&T remained 4% higher at $39.46 this afternoon, after the company boosted its quarterly dividend and announced plans to repurchase more than 6% of its outstanding stock by 2009. AT&T also predicted double-digit EPS growth for 2008, thanks in large part to its prosperous iPhone partnership with Apple. With more than 128,000 options trading this afternoon, AT&T was one of the early volume movers according to our scanners. A look at the volume distribution shows traders rushing to take profit on open call positions at the December 40 strike. These sold off heavily this morning, open interest having nearly quadrupled in the past week to stand at more than 66,600 contracts before the boost in share price made these contracts 240% more valuable than they were yesterday. Calls at the January 42.50 strike looked like the center of profit-taking as well, selling off on a total volume of some 11,500 contracts. Implied volatility pulled back more than 10% early in the session, and currently reads 28%.

CECO – Options in Career Education Corporation registered a 5-fold increase in trading volume according to our data, with shares closing 1.7% lower at $28.00. The hike in volume was accompanied by an early 14% spike in implied volatility to 69.5%. This reading has since pulled back sharply to 54.3%. Shares in the for-profit vocational and technical education company, which serves some 90,000 students on campuses worldwide through a number of educational brands including Le Cordon Bleu Schools North America, American InterContinental University, and Sanford-Brown Institutes and Colleges, are currently priced at a 10% premium to the standing 52-week low. Option positioning suggests traders bracing for volatile price action, with immediate downside risk, over the next month. The 5,000 lots trading in the December 25 puts were freshly bought at around 75 cents apiece – an 87.5% increase in the space of a session.

Action in the January contract showed buying in the 25/30 strangle at a combined premium of around $2.70. This particular option strategy predicts either a break to the upside past $32.70 or down below $22.30 by January expiration. A look at this year’s price action in Career Education Corp. shares shows a real tendency toward pattern volatility, with shares making tests of $36 on two occasions, first in early May and then again in late October, before dropping to the $24-26 level again.

WYN – Option traders are heeding hints from Wyndham Worldwide’s CEO this morning, who hinted that the country’s largest hotel company, owner of the Ramada, Wyndham, Super 8 , Days Inn, and Travelodge franchises, might be in the market for further acquisitions to abet growth. The news, accompanied by earnings guidance for 2007 and 2008 that fell well short of street expectations, sent shares in the company down 10% to $27.48 this afternoon. The decline in share price, elicited by the heightened uncertainty over the company’s growth plans and prospects for the coming year, sent implied volatility 21% higher to 37.5%. Option traders sought protection in at-the-money January 30 puts, where fresh longs were entered at around $2.30 apiece. The move suggests traders looking to pad against at least another 50-cent downside move in Wyndham’s share price, putting it within a dollar of the standing 52-week low.

XLY – Option activity was brisk this morning in the Consumer Discretionary Select Sector SPDR, the ETF whose components include rate-sensitive leisure industry strongholds from McDonalds and Walt Disney to News Corp and Amazon.com. Shares in the fund closed 3% lower at $33.80, but fresh positioning involving 20,000 lots in the March 30 puts sent its volume to more than 4 times the average daily volume. Indeed, this transaction alone matched up to more than 11% of the total open option interest in the ETF. It appears as though these contracts were mostly bought at prices of 55-60 cents apiece, making it an unusually bold directional wager on a sizable decline in the consumer discretionary sector by next spring. A move below 30 would send the ETF well below its current 52-week low of $32.68. Overall open interest shows more than twice as many open put positions as calls.

WM – Yesterday’s admission by Washington Mutual that it will resort to drastic retrenchment tactics from job cuts to office closures to convertible share sales to shore up liquidity in the face of staggering mortgage losses has sent its share price on a 11.7% downward spiral to $17.54 in early trading. With more than 391,000 options in play, Washington Mutual was one of the day’s most liquid option families, and a look at the 77.8% implied volatility reading shows option traders forecasting a rocky road ahead for the mortgage lender – indeed WaMu’s implied vol is twice that of the broader financial sector. While front-month activity shows a clear bias toward put positioning at strikes as low as 15, nearly 40% of the early trading volume in Washington Mutual options was centered in January 2009 calls. These were freshly bought at strikes of 20, 30 and 40, suggesting option traders making a bid for protection against share price soreness in the coming months, but an outlook for recovery further out.

CSCO – Shares in Cisco, the leading supplier of Internet network equipment, held on to a 1.2% advance to $28.00 after the company got a tandem vote of confidence from the market early in the session. First came AT&T’s announcement that it plans to use Cisco’s CRS-1 routers in a major upgrade of 25 nationwide Internet hubs forming AT&T’s backbone network. The company also benefited from bullish contagion in the tech space following Texas Instruments’ boost in earnings guidance. With more than 124,000 option contracts in play, our scanners show more than twice as many calls trading as puts, with pronounced liquidity in December 27.50 calls, which traded to buyers and sellers, open interest having doubled to more than 33,000 lots over the past 5 sessions. Calls at the December 30 strike also attracted traffic from buyers and sellers, trading at a quarter apiece.

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