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Thursday, December 1, 2022


Sony’s loss prediction creates put demand as ADRs slip

Today’s tickers: SNE, GE, AFL, ALL, SHW & PCA

SNE – Sony Corp. ADRs – As the recession gouges new depths in consumption the lower the stock market goes as any remaining confidence evaporates. As that happens, investors look to the safety of the Japanese yen as a safe haven, which puts this nation’s exports on hold. Shares in Sony took a thump today as the company announced that previously enacted cost cutting efforts hadn’t done enough to prevent what might turn out to be its first ever annual loss. Meanwhile the Bank of Japan hinted at deflation while the outlook from other consumer electronics-manufacturers warned of worse to come. Temporary jobs in Japan are to be slashed and the sad truth that demand for televisions is on the wane causes Sony to offer early retirement to some workers. Demand for put options allowing investors to sell shares at a fixed $20 ahead of expiration in February was evident as investors paid 1.70 premiums to acquire 3,000 lots. Shares in Sony shed 13% on today’s news to $19.57. Investors buying puts would break even at a share price beneath $18.30. Implied volatility on Sony’s options saw one of the largest gains among stocks today as our market scanners picked up a 16% jump to 69%, which compares to a historic share price volatility of 50%.

GE – General Electric – The GE story is building a head of steam with more investors raising questions over whether the conglomerate will eat its words and cut its dividend tomorrow. If that happens – and more importantly – even if it doesn’t, there is growing speculation over the company’s ability to retain a AAA credit rating. Of course that’s out of management’s hands and at the mercy of the agencies on Wall Street. This week there has been a storm brewing in the options market where investors have bought an astounding volume of bearish put options. Once again today GE is the leading company on our market scanner in terms of option activity where more than 230,000 option contracts have traded by 11am. The 1.7 put/call ratio confirms the bearish nature of today’s activity. Specifically there is a further build at the March 5.0 strike put where the 26 cent premium is the current price of the 26,500 options that have traded today. Some of today’s activity could be wrapped up in volatility positioning ahead of earnings. The largest blocks of options trading today involve 13 and 14 strike calls and 10 and 11 strike puts for February expiration. In combination this activity could be a bet on a change in volatility post Friday’s earnings. Today implied volatility is 13% higher at 99%.

AFL – Aflac Inc. – A supplemental health and life insurance company, has seen its shares slump about 33% today to $24.48 amid concerns about its exposure to losses tied to the declining value of hybrid securities issued by European financial institutions. Investor fear of nationalization of European banks, such as RBS, has contributed to the decline in hybrid security prices, of which Aflac carries $7.9billion of exposure. Analysts warn that even just a small percentage of potential losses would have a disastrous effect on the insurer. AFL topped our market scanners this morning as investors rushed into an above average volume mix of puts and calls, the volume of contracts trumping open interest by 120% by midday. Puts are being purchased at 1.34 times the number of calls, indicating that many are bearish and seek protection as AFL continues to decline. Implied volatility is through the roof today as risks surrounding the shares rise. At midday implied volatility was above 125% and higher by more than half yesterday’s 82% reading. Fresh buying interest was evident at each available put strike in the February contract down to the lowest 7.5 strike, which looks like disaster insurance at this point. In the May contract the 5.0 strike was traded 1,394 times where premiums ranged between 20 to 55 cents.

ALL – Allstate Corp. – Insurers are under the cosh once again today with our scanners picking up sharpest rises in implied volatility in Metlife and Allstate whose measures have risen around 20%. The 8% drop in shares at Allstate to $25.90 was accompanied by some heavy put buying. Investors paid elevated premiums for February 22.5 and 25 strike puts where more than 2,000 lots changed hands and in both cases exceeded the total number of established positions. In the March contract at the 22.5 strike price investors built new positions totaling 5,275 contracts at a 2.30 premium. Assuming this is downside protection, investors are then bracing for a share price decline to $19.20 before those puts kick-in.

SHW – The Sherwin Williams Co. – An extended slump in housing market activity didn’t do much to help sales at this paint-producer as revenues dropped 8.3% causing a halving of profits. Shares in the company declined 14% to $47.47 while the fact that one-in-four of the outstanding open interest in its options saw the company attract attention on our ‘hot by option volume’ scanner today. Although the activity was on the put side we could have witnessed some closing trades going through. Notable was the 50/55 put spread in the March contract, which doesn’t really make much sense on an opening basis at in-the-money strikes. The spread went through at net premiums of around 3.7. In the February contract at least 1,000 puts were sold at 1.90 while buyers paid as high as 2.15 during the morning. The company noted the economic contraction was ‘severe and widespread,’ and that it was likely to worsen before it got any better. Today’s activity in the option market in response to share price weakness seems to indicate that this was the bad news some savvy investors want to take advantage of.

PCAR – PACCar Inc. – The light-to-heavyweight truck manufacturer was the victim of what appears to be a well-constructed option package of the bearish variety today. Its shares are 6% lower at $25.50 as our market scanners pick up on above average volume. The trade seems to involve three blocks of 5,000 contracts apiece. On the put side the May 25 strike was bought at 4.10 against the sale of the 17.5 puts at 1.40. This creates a put spread at 2.70, which ordinarily would make money below a share price of $22.30. However, the trade appears to have been funded by the short sale of May calls at the 35 strike price for a 1.0 premium, further reducing the cost of the trade and effectively boosting the breakeven point by a further dollar. Of course the risk to the investor increase should the share price jump to $36.00 at which point the trade goes increasingly sour.

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