Today’s tickers: JPM, WFC, GE, THC, XLE, AKS, COF, XLY, MAT, GD, RTN, HRB
JPM– As recently as Friday we noted in this space that implied volatility in JP Morgan Chase options was at its highest level since March 17 as shares faced a grueling 52-week low. Since that time, the share price of this would-be “alpha wolf” in the financial space has eroded further (despite recovering late in the session to close .18% higher at $33.99) and its implied volatility, the 30-day forward-looking measure of perceived risk has continued to mount, up nearly 10% since Friday alone to 64.5%. This stacks up against the 47% historic reading on the stock, suggesting heightened and imminent risk of whipsaw action in JP Morgan’s stock price relative to its historic tendency. Interestingly, while we observed heavy buying activity in July 27.50 puts at 55 cents, which would require a very dramatic erosion below the 52-week low indeed (placing the share price at only slightly more than half the level of its 52-week high), it’s possible that some of this volume was involved in spreads at the 32.50 strike, most of which were sold for $2.00. Short credit spreads using puts at these strikes would imply traders taking in a $1.45 credit in the expectation that both puts would expire worthless as shares remained above the $32.50 level, essentially capping the downside. Call buying at the July 35 strike would also be consistent with that thesis. Long put spreads at the aforementioned strikes, however, would indicate traders battening down the hatches for a leg lower and the 35 call strikes may be hedges against short positions in the stock.
WFC– Shares in Wells Fargo joined sector peers in setting a fresh 52-week low today, before rebounding late in the day to close 1.5% higher at $24.11. While implied volatility at 62.4% shows an extra anticipated risk premium against the 46.9% historic reading on the shares, this level is slightly below the mid-March highs. Still, with nearly 4 puts trading for every call today on a volume of more than 92,000 lots, the defensiveness is about as subtle as a bull (…or rather, a bear) in a china shop. As we observed in other leading financials, to wit JP Morgan Chase, given the elevated volatility the tendency among traders has turned to spreads, which control trade costs, sacrifice profits for more adept management of risk, and allow traders to hone in on specific downside or upside moves. This appears to be the case among July put spreaders at strikes 22.50 and 27.50, where it looks like traders are buying the higher strike for $4.35 and selling the 22.50’s for 90 cents to break even at $24.05. It also looks, however, like some traders opted for a diagonal calendar put spread, selling out-of-the-money October 20 puts for $1.50 to fund the purchase of August 22.50 puts for $1.75 in a play that looks to capture on an anticipated spike in implied volatility on the closer-month August puts. This trader likely feels that despite the effects of time decay, the $1.75 price tag on the August put will increase before August 15 as Wells Fargo shares melt below $22.50.
GE– Shares in Wells Fargo joined sector peers in setting a fresh 52-week low today, before rebounding late in the day to close 1.5% higher at $24.11. While implied volatility at 62.4% shows an extra anticipated risk premium against the 46.9% historic reading on the shares, this level is slightly below the mid-March highs. Still, with nearly 4 puts trading for every call today on a volume of more than 92,000 lots, the defensiveness is about as subtle as a bull (…or rather, a bear) in a china shop. As we observed in other leading financials, to wit JP Morgan Chase, given the elevated volatility the tendency among traders has turned to spreads, which control trade costs, sacrifice profits for more adept management of risk, and allow traders to hone in on specific downside or upside moves. This appears to be the case among July put spreaders at strikes 22.50 and 27.50, where it looks like traders are buying the higher strike for $4.35 and selling the 22.50’s for 90 cents to break even at $24.05. It also looks, however, like some traders opted for a diagonal calendar put spread, selling out-of-the-money October 20 puts for $1.50 to fund the purchase of August 22.50 puts for $1.75 in a play that looks to capture on an anticipated spike in implied volatility on the closer-month August puts. This trader likely feels that despite the effects of time decay, the $1.75 price tag on the August put will increase before August 15 as Wells Fargo shares melt below $22.50.
THC– Shares in Tenet Healthcare gained 1.6% to $5.65 after reporting that it had completed the sale of two California hospitals for $41 million. Earlier today Tenet also reported that it had reached an out-of-court settlement with a real estate investment trust owning seven hospitals leased by Tenet subsidiaries. Despite fairly upbeat news for the stock, an increase in option trading volume to 14.5 times the normal level appeared heavily concentrated in November 5.0 puts, trading at 50 cents apiece on more than 3 times the open interest in seeming anticipation of a near-25% decline for Tenet shares by November, making today the heaviest volume day for Tenet Healthcare shares since last September. Open interest has shown a skew toward puts since mid-June, now weighing in heavier than the calls by more than 2-to-1.
XLE– US stocks reversed losses in afternoon trading, after oozing into bear market ague earlier this morning. The culprits for this morning’s slump are well-known – ongoing hemorrhaging in the financials and what has tended to feel like horizonless gains for oil. Yesterday’s break past $143 for oil prices was met with a swift pullback on suggestion that the U.S. dollar might be nearing the end of its catastrophic ebb against other currencies, and lower U.S. demand materializing. The pullback was quickly backtalked with troubling tensions between Israel and Iran, news out of OPEC of a record high in the daily average oil price, and the near-ish advent of hurricane season. So it was against this manifold backdrop that we found the Energy Select Sector SPDR .52% high at $88.91 and trading on volume of more than 147,000 lots to rank it handily among the top -10 most active tickers on our platform. Early action showed traders looking for a new break of the $91.16 52-week high by August 16, expressing this view via 90-strike calls which traded for $3.26. Any substantial positions for a pullback in oil look to have settled on the September contract, where we picked up a 20,000-lot put spread between strikes 75 and 85. Here it looks as though the 85-strike puts were bought for $4 while the lower strike was sold for $1.37. A third leg of this trade appeared in September 95 calls, where the 20,000 lots traded to the middle of the market at $2.70, which may have been used as a funding mechanism for the long put spread.
AKS – This morning’s news out of Tokyo that leading Japanese steelmakers including Nippon Steel had agreed to a near doubling in the price of Australian iron ore in negotiations with Rio Tinto had a deleterious effect on other steelmakers in US options trading. Shares in AK Steel Holding Group closed off more than $5 (8%) from yesterday’s close at $63.36, but option traders are flocking to the counterintuitive call side, sending call volume to a 2-week high. At present we see more than 4 times as many calls trading as puts amid what looks like heavy call spread activity between strikes 70 and 75, and outright buying at the out-of-the-money 80 strike call, where the equivalent of more than a third of the open interest is in play.
COF – Capital One Financial shares gained 5.6% to $40.14 after the stock was raised to “neutral” from “sell” by analysts at UBS. Capital One shares have shed 17% of their value this year, and fully half their market cap looking at the 52-week rear view. But investors’ discomfort with its undiminishable exposure to the shaky auto and home loan sectors is clear from the fact that implied volatility weighs in a full 21 percentage points higher than the historic reading – that’s 72.8% versus 54.2% according to our data – suggesting more than a third additional price risk being factored into its option premiums. This disparity has remained more or less constant since early June. On the options front, its 35,000 active lots qualified Capital One for our scan of top-50 most active options. At least one trader took a contrarian tack via a 5,000-lot out-of-the-money put spread in the August series at strikes 30 and 35. It looks here as though the trader sold the lower strike puts for $1.20 against the purchase of 35-strike puts for $2.55, entering with a $1.35 debit (which also represents the maximum capital at risk for this trader) a transaction that first breaks even for the trader at $33.65 – that’s 13% more downside from current levels. Another 10,000-lot transaction in January ’09 $50 calls looked to us like covered call selling, with the trader taking in a $3 credit per contract with the proviso that he or she will hand over Capital One shares at $50 if exercised on the call. Current premiums suggest slightly better than 1-in-3 odds of a January exercise on that bet.
MAT – Yesterday we noted an increase in January call volume in one very conspicuous consumer discretionary company, Barbie maker Mattel as implied volatility remained high, pending a ruling in its catty court infringement case against the maker of Bratz dolls. Implied volatility remains at that consistent elevation – ticking in at 47% against a 29.6% historic reading on the stock – as shares traded .82% lower at $16.98. What’s notable about today’s action, which has culminated in an increase in option trading volume to 2.5 times the normal level, is that some option traders are playing the opposite side of the Mattel story, buying fresh long positions in October 15 puts for 75 cents apiece that imply a more than $2 drop below Mattel’s 52-week low of $16.42. Shares are within a dollar of that low right now, and it looks like the trade du jour favors recessionary pressures pulling the hair of America’s princess a lot harder than a Bratz doll ever could.
XLY– In other news out of the consumer discretionary space, we registered triple the normal level of option activity in the Consumer Discretionary Select Sector SPDR, an ETF weighted with the kind of S&P consumer favorites such as Walt Disney, Time Warner, Target, and Nike that are likely to blister badly as consumers swelter under hot prices for necessities like food and gasoline. Shares in the closed-end fund closed 1.3% lower at $28.12, setting a new 52-week low, and it looks like option traders are bracing for 42% more potential risk to its share price over the coming month. The action we registered today appeared in the form of call buying at the August 31 strike at 21 cents per contract, which looks to us like a protective hedge against a short in the whole ETF.
GD– One day after news that it won a $3.1 billion Air Force contract for IT support and a $16.5 million delivery order from the U.S. Army to expand the technology infrastructure at Fort Meade, shares in defense contractor General Dynamics closed .29% lower at $83.61. In keeping with the tepid response among traders, the 4-fold increase in option trading volume we registered on our platform by mid-afternoon was found not in baldly directional trades, but in long collar activity in the November contract. Here it seems that the trader bought November 80-strike puts at $4.30, funding part of the purchase with the sale of 95-strike calls for $1.60. All else being equal, this is an indicator of bullish sentiment because the trader likes General Dynamic stock enough to hold it long – but he’s nervous enough to protect the position from downside erosion by buying a protective put, and the short call at the other end of the collar essentially functions as a covered call at which he must relinquish his stock position if shares break higher. General Dynamics shares have traded as high as $94.78 over the past 52-weeks (a level reached in December), making that price level not at all out of reach.
RTN– This wasn’t the only defense sector play trading on unseemly volumes. Shares in Raytheon rose 3% to $57.57 as we registered an increase in option trading volume to 4.3 times the normal level, firmly situation in out-of-the-money calls at the November 65 strike. These traded on volume nearly triple the open interest at $1.05 per contract, and may represent covered-call writers or buyers betting on 15% upside for Raytheon shares by November. The $65 level is not unknown territory for this stock, having traded at that level as recently as May.
HRB– One day after posting a profit that piggybacked on dollar weakness, shares in tax preparer H&R Block closed 3.8% lower at $20.57, but we noticed a deferred uptick in option volume to 4 times the normal average that suggested some wary investors not putting much store in the upside thesis. Heavy volume today is noted in July 20 puts, where roughly half the 21,000-strong open interest is in play, possibly taking off a large position at that strike and entering a fresh 20,000-lot position at the same put strike in October, where the $1.65 premium otherwise requires about a 14% decline for H&R Block shares by October. Implied volatility at 44% remains elevated above the 38.5% historic average.
