Today’s tickers: VIX, NWS, MS, XLF, WFC, GS, ZION, XRAY, FDRY, HA & GM
VIX – CBOE Volatility Index – Fresh lows for stocks, fresh investor fears, same reasons, new high for the fear gauge – up 14.4% at 73.11. With everyone talking about capitulation, for which we fail to see a catalyst by the way, there is some contrarian trading in the October VIX options that might throw some crumbs of comfort out there to the wounded bulls. We noted earlier on the VIX chart that Thursday marked the sixth consecutive close above 55. With option expiration 11 days away, we can see that according to option pricing the chance of closing at or below 55 at that time is just one-in-five. And despite today’s flurry of put activity at the October 45 strike, where 11,000 lots have traded in anticipation of capitulation by then, the option market tells us that the likelihood is a mere one-in-ten.
Yet the most active contract today is found at the 60 call, where an investor has sold 16,414 lots at a premium of around 4.20 earlier today. Never mind the fact that the premium has subsequently risen by 25%, this is still a hairy trade. Since open interest at the strike is a mere 4,971 lots, this investor is creating a fresh and sizeable position with potentially unlimited losses should the fear gauge keep rallying. The trade might not be simply naked. In other words this investor might have an established trade of similar size parked at a lower and in-the-money contract. Depending on what price that was established (if at all) the trader could be locking into a juicy credit spread. Elsewhere there is call activity at the October 80 strike where premium is 1.40.
NWS – News Corp. – Option activity in News Corp is suddenly active according to our market scanner. It appears that an investor is reacting to today’s devilish 6.66% share price reduction to $8.40 by rolling down outstanding put protection from the 10.0 strike to the 7.5 strike in the October contract. Open interest at the higher strike is identical to the volume in what appears to be a protective spread.
MS – Morgan Stanley. – More hefty volume in the options series on Morgan Stanley shares, which were once again caught in the crosshairs of the ongoing global rout for equities and the question mark over the broader brokerage business model. Shares are lower by 31% and falling and stood at $8.55 by 11:23am at which time option volume totaled 160,000 contracts. Call trading is swamped by action on the put side by 2.4 times. Most volume was seen at the October 7.5 puts where 15% of volume took place today. The current premium, loaded with 681% implied volatility, is 2.5 and so infers that buyer’s insurance kicks in at a $5.00 share price for MS. The 5.0 strike is active and has traded 14,000 contracts, while the January 12.5 strike puts have registered 18,190 contracts and having slipped into-the-money overnight are now trading at 6.30 implying 2.20 dollars of extrinsic value.
XLF – Financial Services Select Sector SPDR – couldn’t sustain a powerful early counter rally, which led to audible cheers from the floors of the exchanges (yes, we heard them here in Greenwich!). Another fresh low was accompanied by yet again exuberant options volume totaling 259,000 contracts by noone. Most active were puts at the October and November 15 strike. Implied volatility surged by around one-third to stand at 131%.
WFC – Wells Fargo. – For a company whose share price is unchanged today at $27.12 there is hectic activity in its options. The put call ratio indicates 5.2 times as many puts in action as opposed to puts. The times and sales shows that twice as many January 25 strike put options were bought earlier today for a premium of around 5.20. Total series volume here is 63,000 lots and offers a buyer protection below a share price of $19.80. The options are “expensive” thanks to an options implied volatility reading of 135% – suitable for many financial companies. Shares in Wells Fargo have been relatively immune from the financial dislocation until this week. The 52-week low at $20.46 was created mid-July and shares subsequently rallied to $44.67 post SEC short sale rules in September. We’re unsure as to whether the consummation of Wachovia or the legal threat from Citi’s counsel even part of the problem.
GS – Goldman Sachs – Faced with a 17.5% decay in its share price today – trading at $83.65 – option traders have been busy apparently playing the bullish side of Goldman’s shares. From what we can gather from time and sales data, around 11,000 puts at the January 10 strike were sold for a 90 cent premium this morning. Later, the premium has run up to 1.40. A seller will keep the premium come expiration so long as Goldman’s shares stay out of danger. Rather a perilous strategy when the world is falling apart. The delta on the option indicates a probability of only 1% that Goldman’s shares are in any danger of expiring at or below the strike price. Time decay, always working in favor of the option write, means that the premium of the option should decay at a penny and a half per day. Nevertheless, today’s share price has created a new 52-week low and option implied volatility, which we suspect this investor is attempting to take advantage of, is peered its head through 200% for the first time. Pass the tin hat please!
ZION – Zion Bancorp. – An equivalent 10% of existing open interest is in play on Zion whose share price is 5% lower at $27.87. The volume is focused on the November 50 puts, which appear to have been sold at 27.20 premium. The trade is unusual since it involves deep in-the-money puts. It could be the case that this stock is hard to borrow.
XRAY – Dentsply Intl Inc.– Dental equipment manufacturer and provider saw its shares close at a 52-week low to start the week and just like the rest of the market, its shares have kept on searching for support below. Today the company shows up on two of our market scanners. Its option implied volatility is one of the largest gainers rising 66.4% to 104.8% and its option volume is high relative to usual. The 3,000 contract volume compares to open interest of around 12,000 lots. Shares are down 1.6% today at $29.74. All of the option volume is concentrated in the November 30 strike series and took place at a premium of 4.30.
FDRY – Foundry Networks. – With its shares down by 2.6% at $15.56, options volume is relatively heavy compared to normal. While only just under 4,000 options are in play today, implied volatility is higher by 93% to 62% indicating that a strangle might be in play. The key volume today supports that view with November 17.5 strike calls ringing up volume against 12.5 strike puts. A strangle may benefit a buyer if implied volatility hurtles higher and if shares breach the boundary suggested by the total premium paid. In this case shares would need to breach $10.80 or $19.30 to start making money.
HA – Hawaiian Holdings Inc. – This issue keeps popping up on our market scanner as a hot options issue. With only 120,000 lots of open interest, today’s 18,421 stacks up at around 10% of the overall. The activity is confirmed bullish at least at the January 5.0 strike where investors paid 1.0 premium for 4,540 contracts. Shares are down 7.7% today at $5.13. At the April 5.0 and 7.5 strikes, calls traded to the middle of the market masking the investor’s intent. The lower strike traded more than 7,000 contracts while the upper strike traded 6,786 lots.
GM – General Motors – Heaviest volume is apparent in the October 5.0 strike puts where 10,930 contracts are in play today at a premium of 83 cents. Share in GM were higher by 5.4% at $5.02 rebounding from yesterday’s lowest trading price since before many of us were born.
