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Carnival’s dividend suspension sends option volatility raging and shares to five-year low

Today’s tickers: CCL, AXP, WFC, HUM, PG, BUD, HIG & PRU

CCL – Carnival Corp. – It’s a pretty nasty squall economically speaking and cruise-line companies must be wondering about the affordability of winter cruises as well as the prospects for 2009. Today Miami-based Carnival announced the suspension of its first quarter dividend, which will save the company $1.3 billion. However, the statement highlighted the desperate straits ahead that will require the skilful and precise captainship of management to avoid the rocks. It’s hard to raise cash at present. Consumers are staying at home and one would imagine that luxury items such as cruise trips could easily be foregone. Investors punished Carnival despite its strong cash flow position for today’s prudence and sent shares lower by 16.6% to $24.00. Option investors were quick to pounce and chose to secure selling rights at the 22.5, 25.0 and 27.5 lines in November, while an equally large block of 1,195 contracts was bought at the December 22.5 line where only 263 positions existed ahead of today’s reading. Greater uncertainty surrounding the outlook gave option traders reason to boost implied volatility by 27% to 94% today as shares reached the lowest value in five years. It’s not all doom and gloom though as the well out-of-the-money calls are still trading to investors expecting a rebound. Today buyers lapped up calls at the 40.0 strike in December.

AXP – American Express – Shares in credit card lender Amex have been languishing at low levels lately and are rallying a small amount in response to a 10% reduction in workforce yesterday. Option traders today sense that a weaker share price might be ahead as they deploy defensive put option positions in the January contract. Amex has reported diminishing profits in the face of increasingly difficult conditions for consumers to repay credit card debt. There now faces the real possibility that credit card portfolio underperformance might deliver a ratings downgrade and push up the cost of wholesale funding at the company and further erode profitability. In the December contract, with shares trading at $27.75, investors bought the 17.5/25 put spread at a net premium of 2.40. That transaction in about 10,000 contracts involves the sale of the 17.5 strike and simultaneous purchase of the higher 25 strike. The maximum profit on the trade is 5.1 should shares fall to the lower strike by expiration.

WFC – Wells Fargo – There appears to be some bearish positioning through the options market despite a 6.8% rally in the share price today to $34.00 at Wells Fargo. With little or no open interest at the December 38 strike call line, an investor sold around 15,000 call options at a premium of 1.15. This could be plain bearish betting that the rally in the stock or for financial shares in general is set to soon subside or it could be half of a covered call position with an investor buying stock and writing calls as well. As with Amex above, a large bear put spread involving around 15,000 contracts appears to have been placed at the 20 and 30 strikes in the December contract. The net premium appears to be 2.0 giving a maximum potential gain of 8.0 if shares hit the skids. The volume at both these strikes is building independently and so far we’re seeing lower strike volume read 48,000 and volume of 33,600 at the upper strike. These are fresh positions given investors’ existing positions.

HUM – Humana Healthcare – One of our largest volatility movers today is Humana, where shares are weaker to the tune of 7% at $27.55. Implied options volatility is up 27% to 105%. Healthcare earnings have been poor and investors are nervous over what a changing political agenda might mean for healthcare insurance companies. Today’s activity appears to show investors banking on still more volatile share price movements given the purchase of both 25 strike November puts and 30 strike calls. If this is a combination made by the same investor using similar amounts then it appears to be a long straddle, which would pay off if shares in Humana moved by more than the current premium paid on the combination. Shares would need to exceed a price range of $21.10 and $33.90 or implied volatility would need to continue rising to see this position work.

PG – Procter & Gamble – We keep seeing bloated options volume in P&G day after day and we believe that this is due to a forthcoming corporate action. At the end of next week shareholders can convert stock in relation to a planned Folgers and Smuckers merger and the current gyrations in both possibly makes some arbitrage position worthwhile, which accounts for high but balanced amounts of activity in both calls and puts at out of the money strikes in the November contract.

BUD – Anheuser Busch – An analyst today stated that the InBev merger will likely proceed at the agreed $69 per share offer price and that’s boosted BUD shares by 0.8% to $62.50. The options tend to corroborate this view, today at least, given the sizeable 18,000 lot positioning in the December 65 strike calls where the premium currently stands at 3.10. At 53% implied volatility investors are still casting a significant degree of caution into the mix. Traditionally volatility would dry up post announcement. This race is clearly far from over.

HIG – Hartford Financial Services Group – Although the stock is higher by 3.7% at $10.00 it remains the most volatile among equity options series today with an elevated implied volatility reading of 262%. One analyst noted that the company has few options to raise fresh capital but investors aren’t yet balking. Perhaps that’s due to the fact that shares more than halved in value yesterday. Today we are seeing good two-way traffic across the November series where puts at the 7.5 and 10 strikes are active, while 10 and 12.5 strike calls are most popular.

PRU – Prudential Financial Inc. – Feeling the fallout is competitor Prudential whose share price is lower today by 8.6% at $26.50. Option market activity is concentrated in the December puts at the lower strikes, warning of investors’ fears that more selling might be on the cards. Investors paid premiums of 4.20 for 3,000 17.5 strike puts, 4.50 for 2,000 puts at the 20.0 line and 6.20 for 1,500 puts at the 22.0 line. Implied volatility is running at 205%.

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