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Thursday, December 1, 2022


General Electric butterfly predicts slump in share price

Today’s tickers: : GE, STT, NTRS, BAC & XLF

GE – General Electric – One option trader is looking for General Electric to practically lose half of its value by the time February’s option’s expiration comes about. With shares currently trading down 5.3% at $13.21 an investor appears to have placed a butterfly combination in which three neighboring strikes were traded. In this case the butterfly has a ‘body’ at the 7.5 strike price, which marks the central point of the trade was bought, which means that the trader bought put options at the surrounding strikes, known as the wings, at 5.0 and 10.0. The investor simultaneously sells twice as many puts at the 7.5 strike. This particular butterfly involved 14,000 contracts at each of the wings with 28,000 puts sold at the body for overall volume of 56,000 lots. The net cost of the trade is just 19 cents but its success requires that GE’s share price lands anywhere between $5.19 and $9.81 at expiration. The investor wins most should shares settle at $7.50 at expiration in which case the winnings are 2.31 per contract. A butterfly buyer often wants a share price to stand still at a specific point (the central strike price) but this is a particularly bearish trade since in order to achieve this its shares must first decline by 43%. Implied options volatility at GE is 15% higher today at 84% while traders had put 161,000 options to work before 11:15am.

STT – State Street Corp. – One of the world’s largest institutional money managers, disclosed dismal fourth-quarter profits, down 71% to $65 million from the previous year’s net income of $223 million. Predicting flat results for 2009, the Boston based company, hired by the government as a custodian to aid in the recovery of the markets, saw their share price dive more than 52% to approximately $17.64. With a share price decline like this right out of the gate it’s harder for option traders to leave their footprint since they too are reacting to a new catalyst. Most of today’s option volume has been on the call side but we’re just guessing here that many of those trade tickets will have the word’s ‘opening sale’ stamped on them. In the February contract, there was practically no existing open interest at any of the six option strikes between the 17.5 and 35 strike lines. Today each has several thousand lots in action. The 17.5 strike puts were heavily traded shortly after the opening bell with lucky buyers paying as little as 1.95 for selling rights before more buyers piled on the pressure and forced premiums to as high as 4.40. Investors are also paying attention to the May 17.5 and 20 strikes in today’s activity. On Friday option volatility on the stock was trading at around 89%, while at the February 20 line traders are dealing with a reading of 175%.

NTRS – Northern Trust Corporation. – A financial holding company, is following in the footsteps of its peers in the money management sector, their stock falling about 9% to $46.88. While this decline in share price is modest in comparison to the major blow felt by State Street Corp, it is yet another sign that we have not reached the worst of this financial crisis and are likely to see continued declines and hard times ahead. NTRS is not usually well trafficked in the options market with only 25,622 contracts at play ahead of today, which highlights today’s 13,135 lots in action. February expiration puts at the well out-of-the-money strikes have attracted attention today at strikes between the 30 to 40 strikes where implied volatility has stepped up a notch and at the 50 strike, implied volatility has leap to 99% from 79% late last week.

BAC – Bank of America. – Shares are down heavily again at Bank of America Corp., at $5.77. Option implied volatility stands at 186% today while options are heavily traded. The trading pattern is messy with one large buyer of more than 11,000 call options expiring in February at the 15 line. This looks like an outrageous bet on a rebound at this point with sentiment towards the financial sector reaching sub-sewer levels following the virtual nationalization of one of Britain’s largest lenders. Sellers were in control of proceedings at the February 7.5 strike where more than 20,000 lots traded largely to the bid. Meanwhile both calls and puts at the 6 strike traded on an even keel between buyers and sellers.

XLF– Financial Select Sector SPDR – Shares are 8.5% lower at $8.85 across a portfolio of financial names, while implied volatility is around 25% higher at 107%. Options volume is huge by noon at 411,000 with possibly some hefty block trades and combinations going through. Our market scanners have picked up on some heavy selling in put options in strikes expiring in February and March. In the March contract at the 5.0 strike some 26,000 puts were sold at around 25 cents. The most heavily trafficked strike was the February 10.0 strike where more than 90,000 lots have traded. The premium of 60 cents for bought calls implies a breakeven price at expiration of $10.60.

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