Today’s tickers: ZION, KEY, JEF, AKS, DIA, RIO, NVDA, VCLK, BIG
ZION– Despite welterweight volumes trading on an abbreviated pre-holiday session, option activity in regional bank suggested more punishing declines in store when the market resumes trading after the weekend. Implied volatility is higher across the board and put trading is elevated on most sector names after Zions Bancorp shares tanked 14% on talk of its exposure to bad home loans in Arizona and Nevada. This followed comments from an analyst at Stifel Nicolaus as quoted on Bloomberg. Implied volatility in Zions Bancorp is up 27% today and a read of the option activity shows buying at the July 25 and 22.50 strikes, implying further erosion under these new lows. Other sizable spikes in implied volatility were observed in Corus Bankshares and Keycorp – while many these companies are due to report earnings before expiration, explaining some of the positioning (i.e. Zions Bancorp), the skew to puts has been fairly consistent throughout the sector.
KEY– As we observed above with Zions Bancorp, bad news out of one regional bank has lent an extremely defensive posture to activity in other regional bank names. KeyCorp option implied volatility rose 14.7% to 85.5%, even as shares tweaked out a half-percent gain to $11.17. While today’s volume was thin at just under 8,000, puts outtraded calls by 8-to-1 with fresh buying in 10-strike puts in the July and August contracts, suggesting erosion below the 52-week low of $10.80 over the next two weeks – even before Keycorp numbers are out on July 22 (corresponding with the August option series).
JEF– Option volume in Jefferies Group, the investment bank and institutional securities firm, rose to 6 times the normal level as shares traded flat at $15.88. The action here appeared to settle on the July 17.50 straddle, where a 4,000-lot position traded to the middle of the market at a combined premium of $2.30. Jefferies is due to report earnings on the eve of July contract’s expiration, which suggests a trader making an earnings-related volatility play. Implied volatility on all Jefferies Group options ticks in at 71% against a historic reading of 58% the underlying shares, a disparity that has remained largely stable since mid-June. This straddle position, if purchased, would protect the buyer in the event of a break to the upside past $19.80 or below $15.20 to the downside – well within the range of Jefferies’ shares over the past 52 weeks, which have seen the stock as low as $13.56 and as high as $30.48.
AKS– Steelmakers continued to grapple with kryptonite-like weakness today, AK Steel throwing another 7.2% of its market cap into the smelter to read $52.50 over the noon hour. Despite weakness in the sector, and with implied volatility on all AK Steel options ticking in at 83% against a historic reading of 55%, we saw what appeared to be call buying occurring at AK Steel’s 60 and 65 strike in July, carrying into fresh longs in August 60 calls. Traders may be availing themselves of lower call-side premiums as a result of the stock slump to wager on a relatively fast recouping of this week’s abysmal losses.
DIA– Shares in the “Dow Diamonds,” the ETF indexed to large-cap components in the Dow Jones Industrial Average, are showing a .68% gain to $112.91 at present dispatch, in a variable morning for US stocks that has the Dow average currently showing a hard-won 82-point gain. With 135,000 lots trading by the noon hour, we see a relative balance between puts and calls, although a sizable 10,000-lot trade went through this morning at the July 110 put strike. This appeared to sell to the bid at $1.35, representing nearly a third of the open interest at that strike. If the order flow information here is correct, this would seem to bet against a drop of that magnitude below the 52-week low of $111.85.
RIO– Companhia Vale do Rio Doce – Shares are 1% off at $32.02 following news that the company will sell $12.8 billion in shares in Brazil and internationally. The company is looking to finance a new campaign of acquisitions. With more than 76,000 options in play, CVRD ranks among the top-10 most active tickers on our platform. Similar volumes at these strikes suggest that a customer may have used a diagonal calendar put spread between the July 35 and September 30 strikes, possibly selling the front month put for $3.10 and buying the September put $2.00. This strategy would allow the trader to take advantage of more rapid time decay in the value of the front-month position and even wager on another $2 decline for CVRD shares by September, taking a $1.10 credit in the process.
NVDA – Nvidia – Shares in the second-largest maker of computer graphics processors tanked 30% to $12.59, crashing through the 52-week low on a premarket profit warning. Option volume is currently twice the normal level and its implied volatility is up nearly 21% to 73.6%, making it one of the shortened session’s top gainers. Heavy two-way traffic has settled on the July 12.50 strike, as well as the 20’s, which have sold heavily, but which we attribute to likely profit taking given that the price of this position is $7.10 – up from $1.70 two days ago. Fresh volume in the deep out-of-the-money August 10 puts have mostly sold to the bid, possible evidence of traders wagering on a bottom for Nvidia shares by mid-August.
VCLK – ValueClick – Shares notched .40% higher to $14.89, still lingering at the lows, on no news catalyst. Option volume has more than tripled against the normal daily average, however, with out-of-the-money call spread activity in the September contract between strikes 17.50 and 20. All of this volume is being logged to the middle of the market, making it difficult to ascertain directionality – a trader betting on recovery would have bought the lower strike and sold the higher to wager on price action in the $17.95-$20.00 range (requiring at least a 20% recovery from current prices) by September. A skeptic would do the reverse – taking a 45-cent credit in the expectation that ValueClick shares will remain at depressed levels into the fall. Implied volatility at 62.6% compares to a historic reading of 42.5% on ValueClick stock.
BIG– BigLots Inc – Shares in the close-out retailer are down 1.5% to $31.66, still only about $3 off the 52-week high – a trend attesting to the success of stores that sell cut-price remainders to cost-conscious shoppers, and to their own savvy (as was the case yesterday with Family Dollar) in attracting rebate check spenders. Option activity is showing an increase in volume to 2.5 times the normal level, but this appeared to involve a 2,000 lot put spread in the October contract at out-of-the-money strikes 22.50 and 30. Again, we can’t confirm the order flow of this trade, which was logged to the middle of the market, but a bear would enter the trade at a debit, seeing at least a decline to $27.75 according to current premiums – while a believer in the Big Lots story would take the $2.25 spread between the premiums as a credit, betting on buoyancy above the $30 level into the fall. Big Lots shares have traded as low as $12.40 and as high as $34.67 over the past 52 weeks.
