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House Republicans help send fear soaring

Today’s tickers: VIX, CTX, POT, XLF, NCC, SOV, GD, AAPL, RIMM, C & BGG

VIX- CBOE Volatility Index – The failure of the house to pass the $700 billion bailout bill has sent stocks into freefall this afternoon. As a result shudders have been sent up the backbone of the financial system. Treasury yields have slumped to 3.66% from 3.80% last week, but the ugly impact has been delivered to the fear gauge, which at a reading of 46.16 is up some 33% on the session. The options market is reasonably busy, but it’s the character of today’s trading that is more important. The Oct 30 strike calls are most voluminous as the fear gauge easily takes out the recent 42.50 peak and so on to another 52-week high. Most of the 30,000 lot volume traded early in the session to either the mid or the bid price of around 3.10. The current bid on the same calls is 5.00. The same month 35, 37.5 and 40 strikes all appear to have been bought as investors look for higher strike prices as the VIX increases and maintains its vigor. At the January strike an investor has sold a previously unpopulated 55 strike call for a premium of 20cents.

CTX- Centex Corp. – Homebuilder Centex has dropped 10.3% today to $15.52 while put options at the money have been popular. At the October contract an investor appears to have ditched 10,125 lots at 80 cents while in the January contract an investor bought around 25,000 lots at 3.0. The trades could be related with prior open interest at least matching the size of the sold puts, while the January position appears to be fresh. The investor here is looking for Centex to decline below $12.00 by expiration (delta argues a one-in-three chance) or could be a hedge against a long position in the underlying. With share prices at more and more banks tending towards single digits, one wonders whether an investor isn’t predicting the same for the overlooked core problem.

POT- Potash Inc. With the financial bailout package unfolding before our eyes, the reality is once again a realization that the degree to which financial toxins have become entwined in the global body is greater than anybody guessed. The simultaneous failure of European financial institutions serves to remind us that other central banks and treasury officials elsewhere have some of their own nursing to do especially in light of the revelation that the alternative (for the U.S. economy) is not likely to be a pretty sight. The rally in the dollar coupled with the prospect of weakening demand has helped bury commodity prices. Shares in this fertilizer manufacturer have slipped 7.4% to $136.52 and stand well-off a 52-week high at $240 and change. Around 13% of open interest is in action today with a notable trade occurring in the December contract at the 170 strike, where 4,800 lots appear to have been sold at a premium of 9.90 per contract. The calls have a 35 delta inferring a one-in-three chance of landing in the money within three months. Elsewhere the October 130 puts appear to have been bought in defense of further reckless share price declines, while there also appeared to be evidence of selling higher strike October calls as if a door was slamming firmly shut behind upside potential for this company’s share price.

XLF- Financial Select Sector SPDR – A 7.5% decline in the price of the key sector SPDR was a clear interpretation of events as investors sold stock in component financial stocks. However, the options activity was far more balanced with buyers and sellers keeping the put/call ratio at around a value of 1.0 indicating a more neutral picture. Even at the December 20 strike puts where volume rang up 38,000 lots by 12:30pm there was no discernible pattern to net. In the October contract the 19 strike calls were purchased while the 22 strike was sold. The 19 strike puts were bought while the 18 strikes were sold. In the November contract the 17 puts were sold while the 23 strike calls were sold. This lack of pattern makes interpreting today’s activity about as clear as mud.

NCC- National City Corp. – With a 52-week high of $27.21 shares of this regional bank are in free-fall today trading with a 46% los at $1.99. Fears that this will be the next victim of the credit crunch have taken a firm grip sending options volume to 76,000 lots before noon. Calls are trading at close to three times the put volume, which is most likely occurring as investors sell calls with the aim of buying back before expiration. The greatest series volume occurs at the October 2.0 strike where calls are changing hands at 50cents. Options are trading three-times as actively as usual.

SOV- Sovereign Bancorp –Shares are trading at two-thirds of Friday’s value at $5.55 while options traders have around 10% of the open interest at play in today’s session with 12,461 lots changing hands. The 5.0 strike puts in October and November are in demand trading at premiums of 1.50 each. The January 2.5 puts are trading at five-times Friday’s closing premium at 60 cents. Options are trading three-times as actively as usual.

GD- General Dynamics Corp – Shares in defense company General Dynamics are 1.9% lower today and stand at $73.47 although options volume of 8,296 lots is 3.75 times the norm. The October 80 and 85 puts both traded 3,000 times and we’re concluding that an investor is selling the deepest-in-the-money puts at the higher strike here and rolling down a strike to protect against a rebound in the stock. The existing positioning here was built at around 1.20 in early September and appears to have been sold today at a hugely higher premium of $11.60. At the time shares were trading at $91.22 and in the meantime options implied volatility has jumped as much as 68% to read 44.2%, helping buoy the price of the puts despite the passing time decay.

AAPL- Apple Inc – Broker downgrades citing a worsening of the spending environment are once again weighing heavily on shares at Apple Inc. where some 130,000 lots have traded in the first 45 minutes of trading. Apple’s shares have lost 13% already and stand at $111.22 while options trading is relatively balanced. Beneath $115 shares are at a 52-week low as puts with strikes from 130 through 80 are heaviest in volume at the October strike. Implied options volatility took off today rising 37% to 88% ensuring that not only does it appear on our options most active market scanner but also amongst our biggest volatility gainers. Historic volatility stands at 60%.

RIMM- Research In Motion – The Apple news confirmed last week’s not-so-rosy earnings from RIMM whose shares took a 25% haircut Friday. Today they are lower by a further 9% to $64.40 with options volume right up there on the heavily traded leader board. Implied volatility at 94% is off to the races as uncertainty on the outlook becomes impaired. Thanks to the second day in a row whereby the stock is making a fresh 52-week low, historic volatility on RIMM has now broken above 100%. 77,000 options are in play in early trading.

C- Citigroup Inc – Despite a bailout package resolution confidence in the financial system is waning. Over the weekend Citi agreed to takeover Wachovia, which according to the regulator “didn’t fail.” However, Citigroup announced a halving off its dividend in order to preserve capital and its shares are down 1.3% to $19.84. Options volume is heavy at a total of 116,000 lots with puts at the December 20 strike most popular. Here options are trading at a premium of 3.15 indicating an expiration price of the shares at $16.85.

BGG- Briggs & Stratton – An investor sold 5,000 calls at the October 20 strike for a premium of 20 cents. Shares are 1.8% lower at $17.45 today and have rebounded from an $11.00 low since July. They are, however, on the decline after the capitulation of the rally, which saw them as high as $21.51 last week. There is only a small amount of open interest in this stock where 12,590 lots of open interest is at play. Today’s sale could be one of two things. The volume is slightly above the existing stake at this strike and could be a closing position.

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