Today’s tickers: VIX, LEH, MER, GE, PTIE, AMLN, UNH, DBA
VIX– The culprits known – the outcome, not so much: pervasive and persistent concerns about the health of the nation’s financial institutions put a fresh sizzle into the fear index. The CBOE Volatility Index pared some early gains – having broken above 25 earlier in the session – to read 1.4% higher at 24.86. On the options front, option traders looking to jockey for volatility developments ahead of brokerage earnings and next week’s rocky expiration bought and sold calls on the index to express their views. Earlier this morning it appeared that a trader may have sold 10,000 lots in October 25 calls for $2.10 and bought an equal number of November 26 calls for $2.00, taking a 10-cent credit and betting on a perceived mispricing of risk between those two months. There was no shortage of call-buying at higher strikes either, though, as traders sought to position for more blatant upside in the VIX via long positions in October 30 calls at 85 cents apiece.
LEH– Caught at the very center of this Jupiter’s storm in volatility is, of course, Lehman Brothers, whose fight for survival has incited so much of the sector’s turbulence in recent sessions. Shares have taken back some early losses after struggling to remain above the $4 level on speculation of a possible buyout by Goldman Sachs, but today’s 36.4% decline to $4.60 neatly summarizes the bleak view. Implied volatility shot higher again today, up 34.8% to 350.1%, handily surpassing the previous highs set on Tuesday. Front-month options currently suggest a more than $3 move yet in store for Lehman – more than half the current share price – as calls outmove puts by a factor of 1.3.
MER– Knock-on effects of the Lehman drama extended to Merrill Lynch this morning, where shares dropped 12% to $20.42 in concert with a 25.8% spike in implied volatility to 131.7%. As recently as yesterday’s close we noted option traders betting on a break below $20, although the odds seemed to favor a move of that magnitude heading into October, where premiums as of the close suggested a 30% likelihood of such a move versus about 25% in September. And yet with Merrill shares currently struggling to remain above the $20 level today, put-buying interest has extended into lower and lower strikes. With more than 300,000 options trading in early afternoon, twice as many puts are trading as calls. The closest-to-the-money September straddle suggests about $4.54 of Merrill’s share price in play between now and next Friday – nearly a quarter of the current share price. Fresh volume in September puts is observed at strikes as low as $10, and as low as $5 in the October contract, where more than 2,000 lots have traded today.
GE– Yesterday we noted a trader put on a large-sized, long put spread position in General Electric that seemed to suggest a test of the company’s 52-week low by year’s end. Today shares in the heavily financially-exposed GE are trading 2.8% lower at $27.31 in concert with leading financial shares and it looks like implied volatility is set to test the 52-week high set back in mid-July with today’s rise in the volatility measure to 39.2%. Set against the historic reading on GE stock, we infer that the options market is pricing in one-third added potential risk to GE’s share price over the next 30 days. One trader entered a large 45,000-lot position at the January 30 call line that appeared to trade to the middle of the market for 95 cents. Given the premium involved, we’re deducing that the calls were sold by a client, as options traders price in a less-than 1-in-3 likelihood that GE shares will regain the $30 mark by January. The volume here amounted to some 38% of the open interest at this strike. .
PTIE– Elsewhere, a number of prominent biotech/pharma names are presenting unusual volume and volatility symptoms. Shares in Pain Therapeutics were down .47% to $8.55 this afternoon – the company has partnered with King Pharmaceuticals on an extended-release painkiller called Remoxy, which last month was awarded expedited review by drug regulators. A 10,000-lot put spread in the January contract between strikes 5.00 and 7.50 sent overall volume to 51 times the normal level today. Based on the premiums paid, we’re inferring that this was a long spread, initiated for a debit of 90 cents, which represents the maximum amount this trader can lose on the transaction – and the spread he or she must earn back on a decline below $7.50 by mid-January. If Pain Therapeutics trade between $5.00-$6.60, the trader earns the maximum profit on this spread – namely $1.60. Shares have traded as low as $6.80 over the past 52 weeks.
AMLN– Implied volatility in Amylin Pharmaceuticals shares rose 44.7% to 120.9% earlier today today, setting a new 52-week high and ranking among the very biggest implied volatility gainers on our platform today. Compared with the 84.6% level of deviation that Amylin shares have shown historically, this suggests the options market is pricing in about 40% more potential volatile price action than is already charted into Amylin stock. With more than 73,000 options trading as shares read 1.5% lower at $19.16, we’re noting fresh and heavy buying interest in out-of-the-money puts at the October 15 level. These puts are fetching a price of $1.40 apiece, requiring a near-30% drop below current levels that would hang-drop Amylin below its standing 52-week low of $19.45. A look at Amylin’s 300,000-strong open interest shows an even split between puts and calls, making today’s 5-to-1 privileging of put positions a conspicuous indicator of sentiment.
UNH– Shares in UnitedHealth are trading 1.6 % higher at $29.77 as an increase in options trading volume to about 4 times the normal level showed traders appearing to sell December volatility via straddles at the 30 strike. A 10,000-lot position traded here earlier today with the trader taking in a $5.55 premium (18% of the current share price) while betting on United Health shares remaining at current levels by the contracts’ expiration on December 19. The trader hopes time decay will work in his or her favor with this trade, whittling the value of the position down and allowing him or her to close it at a cheaper price heading into expiration.
DBA– Shares in the Powershares DB Agriculture Fund, a closed-end fund tied to agricultural commodities, declined .37% to $32.23 today as what appears to have been a 25,000-lot sold strangle in the January contract represented 21 times the normal level of activity seen in the stock. While we are waiting on confirmation of the trade direction, it looks as though the trader may have taken a $4.40 credit in the expectation of shares remaining hemmed in the range of the strike prices by January 16. Implied volatility on all of the fund’s options at 36% shows a minor elevation against the 34% historic reading on the underlying stock.
