Today’s tickers: RMBS, HANS, TFSL, VIX, XLE, XLF, WFC, GE, CSCO, ABK, EWT, PPH
RMBS– Rambus shares retained some gains closing 3.7% higher at $17.12 (having been up as much as 8% during the day), on bullish analyst comments and a raised price target. More interesting still was the activity in its options which traded at nearly 6 times the daily average today. Early in the session we observed selling in August puts, which seemed to indicate traders shedding volatility – implied volatility is conspicuously elevated at 88% against a historic reading of 50% for Rambus stock, a disparity which tends to pad option prices and can turn cynical traders into sellers of premium. This afternoon it looked like a 15,000-lot calendar spread with 20-strike calls was deployed, with the trader selling this volume in the November contract for $3.17 and buying a like amount in the August contract for $1.25. Taking a $1.92 credit per contract, the trader uses this strategy when he or she anticipates a further spike in near-term volatility (usually event-driven, as in the case of an earnings announcement), which will drive up the volatility and premium of the near-month strike faster than the more distant month’s strike.
HANS– Shares in Hansen Natural Beverages crashed 13.6% to $25.00 – just two days after rallying on back of a Goldman Sachs report that revealed strong convenience store sales of energy drinks. It was bearish comment by analysts at Canaccord Adams that took the punch out of Hansen’s bubbly gyrations today, and the conflicting commentary appears to have driven an 8-fold increase in option trading volume. Puts at the 35 strike in July and August dominate most of the volume today, with a 15,530-lot block traded at each strike. Given a 45% increase in the value of this position at each month, it’s conceivable that a trader cashed profitably out of a position in the July contract for $9.15 and rolled it to August at $10.45 per contract. The position may also be a calendar put spread designed to cash in on expected disparities between the implied volatilities in those two months.
TFSL – Shares in TFS Financial Corp, the holding bank for Ohio-based Third Federal Savings and Loan of Cleveland, rose 1.4% to $11.53 today, holding more than a dollar above its 52-week low. Our attentions were turned to TFS by the initiation of a large put-position that represented the largest concentration of contracts to sell TFS Financial shares in 52 weeks. These January ’09 puts at the $10 strike traded to the middle of the market at 40 cents apiece – a buyer would be looking for erosion not just below the incumbent low but below the $10 line. Implied volatility on all TFS Financial shares ticks in at more than 32.6% against a historic reading of 20.7% on the stock – this gap has remained fairly consistent since June 19, when volatility on the regional bank’s options rose more than 53% in one day.
VIX– Pessimism in the financials gained a foothold late in the day, driving stocks sharply lower after the market had shown fairly weak-willed direction for much of the early session. The CBOE Volatility Index pulled 9% higher at 25.23, pulling back above the 25-watermark for the second time this week. Last week, as GM shares led the market sharply lower, we noticed a minor trend among option traders to sell butterfly spreads with calls in anticipation of choppy price action on the VIX away from the 25-strike – essentially playing long volatility on volatility. With little in the way of direct catalysts to push volatility one way or the other today, it looks like the short butterfly call spread returned today at strikes 25, 27.50 and 30 in the August contract, with a trader buying 2,000 lots of the middle strike and buying 1,000 lots at the 25 and 30 strikes, again in anticipation of movement in the VIX either violently above or violently below the 27.50 level.
XLE– Despite testy nerves over a series of nuclear missile test-launches in Iran and lower-than-expected oil inventories, shares in the Energy Select Sector ETF closed 2% lower at $79.76. With some 160,000 options trading, the bias was to puts by a nearly 2-to-1 margin. Earlier today we noted a conspicuous 35,000-lot trade in August 84 puts, which traded to the middle of the market at $4.40. A buyer of this position would have been playing against the geopolitical rumblings and looking for a sustained pullback below the $80 level by August 16.
XLF– Despite downward share price action in the Financial Select Sector SPDR – its shares closed 5.4% to $19.42 today – option activity throughout much of the day showed big-volume block trades occurring at strikes that could suggest some mid-term recovery for the financial sector ETF. Heavy buying action was observed earlier today in the July 21 and August 22 calls, while further out we observed what looked like 100,000 contracts worth of put spreads in the January contract between strikes 20 and 25. While a scan of time and sales is murky on the order flow, we hear that these trades were initiated by a seller.
WFC– Flitting call activity in the XLF didn’t extend to Wells Fargo – shares reversed early gains to close 3.4% lower at $23.84. The more than 93,000 active options qualified the super-regional bank for our scan of most active option contracts, but these traded more than twice as often to puts as to calls. Also interesting here was a heavy degree of buying interest in October 22.50 puts, where the 10,000 active lots match up to nearly a third of the open interest at this strike, and which would seem to imply a break below the 52-week low of $22.50 by mid-October.
GE– Options volume in General Electric is heating up ahead of the company’s Friday announcement. Shares closed 3% lower at $27.21 in keeping with sentiment on the broader market, and with more than 149,000 options trading it was one of the most active tickers on our platform throughout the day. Implied volatility remains elevated at about 39% against a 27.5% historic reading on the stock, while the most actively traded contract on our screen was the July 28 call, with the equivalent of nearly half the open interest here in play. Early in the session traders bought this strike on fairly heavy volume of more than 13,000 lots. Call buyers may have been emboldened by yesterday’s relatively easy earnings report from Alcoa, and feel less discomfiture positioning for upside share price action today than they might have a couple of days back. Other front month action shows heavy activity in puts at strikes 25 to 28, with premiums up some 50% at each strike. Put-buyers were also out in force at the August 26 strike, driving the volume here to more than twice the open interest.
CSCO – Shares in Cisco dipped 5.6% to $21.60 after the company’s CEO told Reuters news agency that its customers aren’t looking for a rebound in tech spending until late 2008 or early 2009. The CEO’s frank remarks were redoubled by negative forecasts for its earnings by analysts at J.P. Morgan and UBS. Interestingly, while Cisco’s share price action didn’t put too fine a point on the unimpressive results the market is looking for from the world’s largest computer network equipment maker, it seemed to elicit a heavy degree of buying interest in August 23-strike calls early in the session. The equivalent of more than half the open interest at this strike was at play, consisting mostly of offers lifted at 54 cents per contract (a 40% discount from yesterday’s levels). This may be closing purchases of previously opened call positions, or calls bought to hedge a short position in Cisco stock – or even a counterintuitive play on share price action in the wake of its August 5 earnings. We should caution that there’s no shortage of bearish plays on Cisco either, however, with buying pressure in August 21 puts picking up heavily in afternoon trading at nearly 10 times the open interest.
ABK– Ambac – Shares in the monoline insurer gave back some early gains to close 3.7% higher at $2.20, still 30 cents shy of the lowest strike available in its options. This may explain the evidence of goodwill buying in July 2.50 calls at 25 cents apiece, but we also observed buying pressure at the August 2.50 put line, trading for 65 cents. Option traders currently see about a 47% probability of Ambac remaining below the $2.50 level through mid-August. Similar volumes and order flow at the January 2.50 line suggest long straddle activity in that month – a combination which costs $1.80 (more than half Ambac’s current share price) but would cover the buyer in the event of a recovery past $4.30 in January or – even more ominously – a decline to 70 cents. These plays combined sent total option volume in Ambac to 8 times the normal level.
EWT– Following news that Taiwanese companies have sustained $1.4 billion in losses emanating from exposure to subprime loans, shares in the iShares MSCI Taiwan Index showed a 1.1% decline to $13.47. A 10-fold increase in option trading volume detected by our market scanners showed fresh call spread activity involving 21,000 lots in the September contract at strikes 14 and 15. Both sides traded to the middle of the market, leaving the order flow a bit of a mystery. Let it suffice to say that a buyer of the spread would pay a 35-cent debit on the transaction in the expectation that the ETF will trade within quite a narrow 65-cent range by September – perhaps a bit uncharacteristic for a stock that’s already traded as low as $13.31 and as high as $17.34 within the past 6 months. A seller of that call spread would take the 35 cent spread as a credit, betting on sustained restriction from the $14 line for the ETF that would make both calls expire worthless.
PPH– Pharmaceutical HOLDRs Trust – Shares in this pharma-indexed ETF closed flat at $69.76 as we registered an increase in its option trading volume to 2.4 times the normal level. Front-month calls at the 70 strike were bought on volume of more than 2,000 lots at $1.40 per contract, implying continues gains past current levels over the next week and a half. Further out it looks like a 1,000-lot strangle may have gone through between January’s 65 and 75 strikes, a combined position costing $3.67. A buyer is looking for a break to the upside past $78.67 or a decline below $61.33, while a seller expects shares to trade in a $65-$75 by mid-January, entitling him to the $3.67 premium. Shares in the trust have traded as low as $66.57 and as high as $82.66 over the past 6 months.
