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Saturday, September 24, 2022


Sprint tanks…but some call-buyers are undeterred

Today’s tickers: S, USO, SDS, XLF, WM, BAC, C, VIX, HUM, CVH, WLP, AET, UNH

S – While most of the rest of the market bathed in a bullish lather today, a concoction of very bearish factors came to a froth in wireless telecom Sprint. The troubles began with an analyst downgrade that came after closer examination of Sprint’s latest 10-K filing, which concluded that the company faces a possible increase in wireless acquisition costs and handset subsidies. Add to that the company’s ongoing embroilment in a price war with other U.S. mobile carriers and a presentation tomorrow at a Bear Stearns industry event tomorrow, and you can color traders spooked. Today’s near-10% decline to $6.07 has put its shares at a 20-year low. The upshot was an immediate 25% increase in implied volatility to more than 90% – making Sprint one of the day’s top volatility gainers and showing about 30% more price risk to Sprint shares over the next month than they have shown historically. What interested us most of all however was the fact that option volume in Sprint scarcely bears the mark of “disaster preparedness” that one might expect from such a catastrophic drop in its share price. Instead, traders took the opportunity afforded by lower call-side premiums to buy calls at strikes of 6 and 7 for as little as 15 cents apiece – a cheap bet that all may not be lost for the most battered and beleaguered of the wireless carriers. Elsewhere, we saw directionally neutral but long volatility trades in play at the April 6.00 line, where the $1.05 cost of the straddle combination would protect the buyer in the event of a decline below $4.95 or back above $7.05. And it looks like one trader profited handsomely from the closeout of a put position at the May 7.00 line that was entered yesterday for 95 cents. With the value of puts swelling on back of today’s share price action, the 10,000-lot position was closed out today for $1.38 – yielding a 45% profit margin in the space of a day.

USO – After five successive sessions of record highs for crude oil, futures pulled back slightly on today’s Fed liquidity action. Still, it’s hard to imagine the end of the road for energy stocks, which is why we were so fascinated with today’s spike in put volume in the United States Oil Fund, an ETF concentrated in futures contracts for West Texas Intermediate Light crude. With puts outtrading calls by more than 7 to 1 today, put volume in the fund is showing its highest level of volume on our books today as implied volatility suggests 42% more price risk to the fund over the next month than it has shown historically. Granted, this is a share with an enviable 70% positive return over the past 52 weeks, and today’s .55% pullback to $85.16 still has the fund within 50 cents of its 52-week high. The option action suggests a gradual comedown unfolding, first given volume in March 86 puts at $2.47, buying interest in April 83 strike on volume 10 times the open interest, and what may be put-spread activity between strikes 65 and 70. Open interest shows nearly 3 times as many put positions open as calls, a proportion that has gradually but steadily increased since late-January, as option traders may have looked to position protectively in advance of an inevitable slowing of momentum in its share price.

SDS – This afternoon’s sustained gain in the S&P 500 had us wondering if option traders might be staking contrarian bets on another downside jag before the end of the March contract. For clues, we looked to the Ultrashort S&P Proshares Fund, a contrarian ETF on the index. Not surprisingly, today’s upside in the S&P elicited a 4% pullback in the value of the ETF to $67.45, but option traders responded by putting the equivalent of nearly a third of its total open interest in play – with calls (i.e. bearish plays on the S&P) outmoving puts by nearly 10 to 1. This is largely situated in March calls at strikes of 68, 69 and 70, the latter two strikes being bought heavily as premiums came off by about 50%. A buyer of the March 70 strike pays the $1.10 premium in anticipation of another move higher for the fund to within $1.10 of its 52-week high if the S&P tanks once again before March 20. Today’s premiums suggest exactly a 1-in-3 chance of that happening.

XLF –Today’s move by the enigmatic, arcanely resourceful, Fed to ease liquidity woes by expanding its securities lending program under the so-called Term Securities Lending Facility provided a morale booster to financial issues. The financial sector ETF rallied 3.6% in short order to $24.48, and much of the 488,000-plus contracts circulating show a decidedly bullish bent to the front-month action. This is patching through in a number of ways, including the massive buying interest in March 25 calls. While these were bought for about 60 cents this morning, some of this volume may involve call spread activity with traders selling the next strike higher for 27 cents to temper the upside expectation. Besides the long call spread, the short put spread appeared to be in play at strikes 24 and 26, a trade yielding an initial credit of $1.25 in anticipation of share price movement past the 26 strike. In what may safely be termed a moxie-upside trade, some traders were emboldened to buy calls at the June 30 strike for 50 cents apiece, despite this position pricing in a less than 1-in-5 shot at profitability by June.

VIX – Today’s rally in shares had the expected, inverse effect on composite implied volatility in the S&P 500 as measured in the CBOE Volatility Index. Having failed to breach the 30-line yesterday despite a snap to the upside on a broad stock market slump, VIX volatility declined 3.9% in afternoon trading to stand at 28.23. Given the fact that volatility has been loath to stick by a serious pass at the 30-line for months despite deepening credit problems in the financial sector, we noted a wave of VIX call-selling yesterday that seemed to divine just this kind of short-order pullback in the volatility reading. The same calls that were shorted so zealously yesterday for 75-80 cents apiece once again attracted heavy traffic today, trading to the middle of the market for 60-65 cents, giving the trader as much as a 20-cent profit for contract by closing out the position today.

WM – While the financials benefited mightily from the Fed’s breath-of-life bid this morning, option activity in Washington Mutual showed evidence of other rumor-based momentum in play. Shares rebounded 16.8% to $11.73 this afternoon, bringing implied volatility off more than 15% but still loitering around all-time highs at 126%. This morning’s scuttle involved talk of a possible capital infusion, with names ranging from Goldman Sachs to even Warren Buffett, with the talk eliciting heavy buying pressure in March 12.50 calls at around 45 cents apiece. Open interest in this strike has built up more than 6-fold this week, but today’s volume has already exceeded even the 8,500-strong open interest heading into this morning – suggesting that option traders are seeking fresh exposure to share price upside in Washington Mutual over the next 9 days.

BAC –Shares rallied 2.8% to $36.31 today, but implied volatility in Bank of America at 48.7% still shows evidence of heavy-laden price risk – 30% more price risk than the historic average to be precise. This may be due in large part to the ambiguity of possible FBI action against Countrywide and what the implications may be for its on-call lifeguard, Bank of America. Much of today’s volume is wrapped in January 30 calls, which sold heavily for $7.90. If these are closing sales, the volume may be indicative of a trader taking some of a large-size position off the table despite doing so at a loss. Open interest here accumulated in mid-April at more than $17 per contract, before Bank of America shares lost more than 34% of their value in the interim. Downside expectation remained intact via put-buying at the April 32.50 strike for 35 cents, and again at the August 35 strike, at prices of $3.65-3.70.

C – Today’s 6% boon for Citigroup to $20.92 sent more than 280,000 options trading by Tuesday afternoon. Implied volatility came off some 19% after this morning’s Fed action (though it still shows option traders expecting a third more price risk to Citi shares than is typical historically), making long volatility positions like the March 20/22.50 strangle more economic to enter. This combination costs 81 cents to buy today, generating profit for the buyer with a break above $23.30 or below $19.20. In April, it appears that some traders looked to unload the April 20 puts for $1.55-1.59 apiece today.

WLP –- Managed-care companies dominated the ranks of option volume and implied volatility gainers after WellPoint slashed its earnings guidance, eliciting an analyst downgrade of the entire sector that sent WellPoint and its peers tumbling. WellPoint shares are down 28.2% to $47.33, sending implied volatility up 64.2% to 48.3% and option volume to 8 times the normal level. Much of today’s action has settled on the June contract, where deep-in-the-money puts at the 65 strike – the strike equivalent to the 52-week low heading into today – were bought, fetching 350% higher premiums today than yesterday at $15.60. The selling action we saw in June calls at the 55 and 60 strikes may have helped to defray the cost of this put-side position. Further out, puts at the September 45 strike sold to the bid for $2.15.

UNH – UnitedHealth, meanwhile, registered a 12% decline to $39.66, while its implied volatility rose 16% to 38.5%, and option traders sent volume to 7 times the normal level, with today’s volume logged 4 times as often to puts as to calls. Despite the preponderance of put volume, it looks as though some traders are wagering on a short-term stabilization in UnitedHealth’s share price compared to its peers. One clue to this can be found in apparent short put spread activity in the March contract between strikes 40 and 45, where the trader bought the lower strike at 90 cents and sold the higher strike at $4.50, initiating the trade with a $3.60 credit representing the maximum potential profit in anticipation of a recovery past both strike prices and the prior 52-week low, which was $44.56 heading into today. As was the case with WellPoint, we observed some volume in the September puts as well, but the inclination here was to buy rather than sell the position, with contracts at the 40 strike bought for $3.90-3.95 implying yet another leg lower into the fall.

AET –Although Aetna, the third-largest U.S. medical insurer, was quick to reiterate its earnings and enrollment forecast in the wake of WellPoint’s cost-pressure shocker, it wasn’t enough to avert a similar 12% decline in share price to $40.92 that sent implied volatility 21% higher to 44.45%, and option volume to 12 times the normal level. Front-month volume was concentrated at the March 45 put line, where premiums surged 450% to $3.30. The same strike attracted volume to the middle of the market in the July contract at $5.55. Put/call interest is evenly split in Aetna, but that may be set to change now that implied volatility shows traders anticipating 25% more price volatility over the next month than has been shown historically.

HUM – Shares in Humana declined 29.7% to $44.14 – spackling the downtrend for the year that has seen its shares surrender more than a third of their value so far. With options trading at more than 11 and half times the normal level, we observed two-way traffic at the May 55 call line, with the 25-cent bid-ask spread showing buyers and sellers staking bets as to whether Humana can make a pull back to its prior 52-week high of $56.25 over the next two months. The August contract showed a willingness to go long volatility that struck us as noteworthy given the very high cost of this trade. It appears that some traders bought the 50/55 strangle for a combined premium of $9.10 – some 18% of today’s share price – in the anticipation that Humana shares will jump up past $64.10 or down below $40.90 by August.

CVH – Option volume in Coventry HealthCare came in at more than quadruple the norm today as its shares took a 14.5% punch to $42.23. This represented the equivalent of nearly a quarter of its open interest, and the clear trend here was to sell April 45 calls, taking in premium of 60-65 cents in a speculative bet that Coventry shares won’t breach the 45-line by April, making those calls likely to be exercised. While Coventry shares have lost more than a quarter of their value for the year to date, open interest heading into today shows a privilege to bullish calls by a factor of 1.5.

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