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Daily Options Intelligence Report

Citigroup volatility makes for option day−traders heaven − financials remain pressured

Fri, Nov 21 2008, 17:33 GMT
by Andrew Wilkinson

Interactive Brokers LLC  |  View company's profile

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VIX – CBOE VIX Index – Proving that it’s hard to actually turn on a dime at least as far as investor sentiment goes a promising 20-point rally in the S&P 500 index has given way to an eight point loss. The earlier optimism vanished into thin-air and financial stocks remained under pressure. The VIX is lower by three points at 77.6 but no one is giving options away today at a discount. Remember, intraday swings like this earn the VIX its stripes and until we stop the samba-like moves, expect volatility to remain.

C – Citigroup Inc. – Almost 100,000 options have traded in both calls and puts expiring this afternoon at the 5.0 strike in Vikram Pandit’s Citigroup this morning. Once again, ghostly optimism has given way to a ghastly environment ripe for scalpers to play breaking headlines. Citi’s shares have once again sunk and are down 20% at $3.75. Implied volatility has left the building and once more surged 39% to 341%. Meanwhile option traders have boosted bearish positions outstanding as at yesterday’s close at the December 2.5 strike from 31,617 contracts as they have traded more than 78,000 lots at premiums ranging from 25-82 cents. Earlier in the session some 35,000 puts were sold at the now meager-looking premium of just 35 cents each.

WFC – Wells Fargo – Today’s largest implied volatility award goes to Wells Fargo who stole Wachovia from the clutches of Citigroup. Shares are 10.7% lower at $20.15 and option players are trading rights to sell Fargo’s stock at three-times the rate at which they are prepared to buy it. In the December contract put buyers have paid a 75 cent premium to lock into selling rights at a fixed $15.00 cost and would therefore breakeven at $14.25. In the January contract investors are setting their sights even lower and have acquired rights to sell shares at a fixed $12.50 by paying a 1.5 premium. Option implied volatility as a result of both pressure on its share price and the demand for bearish protection has risen by 37% to stand at 169%.

FITB – Fifth Third Bank – No relief today for shares at FTB, which felt the back draft from Keybank, which again reduced its dividend as profits fell. FTB investors were reminded of the same decision earlier from FTB and took the opportunity to slash 11% from its value sending shares lower to $6.85. Option traders paid 80 cents for rights to sell a million shares at $5.00 ahead of December’s expiration. Implied option volatility jumped by around one-third to 200%.

JPM – JP Morgan Chase & Co. – The at-the-money December straddle using JPM 20-strike calls and puts tells us that during the course of the next expiration cycle, shares in the company will range between $12.10 and $27.90. Curiously the delta on the 12.5 December put option indicates a 14% chance of being in the money at expiration while that on the 27.5 call indicates a 28% chance of landing in the money. Option investor interest continues to bloat on the stock with bears adding to outstanding bets that the stock will reach $12.50 within a month. Some 2,300 puts have traded today at a round 93 cents premium, while more optimist call buyers have focused on the December 30 strike and have bought 7,500 contracts at 75 cents. The odds of this landing in the money are currently under one-in-five.

TXN – Texas Instruments Inc. – Option trading is running at around three-times the usual pace for computer-maker, Texas Instruments and despite a small share price decline today to $13.97, investors are banking on a more positive outlook ahead. In a pattern that extends both December and January contracts options reserving buying rights have been bought at both the 12.5 and 15.0 strikes today on volume of around 25,000 contracts. In both months investor interest at the 12.5 strike calls appears to be fresh buying interest judging by the lack of other open positions. Implied volatility at 70% is a little lower on the day.

CYH – Community Health Systems Inc. – Shares in the nation’s largest publicly traded hospital company couldn’t stave off broad market pressures during recent sessions and fell to fresh lows. We’re not sure whether the recent demise including today’s 52-week low to $10.47 has anything to do with a recent “put-option” exercised under terms of an agreement from 2003, under which CYH has been given control of an Oregon-based hospital chain. What looked good five years hence might be an ailing concern today – but a large option position placed today takes issue with that hypothesis. In the January contract an investor has bought the 12.5 strike and sold the 20 strike calls on volume of 10,000 lots. The net premium of 1.65 infers a maximum profit should the share price quickly recapture the $20.00 handle by expiration of 5.80 per contract. At any rate the investor starts making money above a share price of $14.15.

TEVA – Teva Pharmaceuticals – It looks like an investor is playing limited downside in Teva’s stock price with a 2*1 ratio put spread for a net cost of a 15 cent premium. The shares are 3.4% weaker at $40.50 and it appears that an investor bought 5,000 January 40 puts at 2.65 selling 10,000 puts at the same expiry 35 puts at 1.25. Should shares reach the lower strike price the investor makes the distance between the strikes minus the premium or 4.75 per contract. Beneath a share price of $30.25 at expiration the trade goes sour.

HES – Hess Corp. – Integrated oil and gas producer, Hess has seen its share price rebound from its 52 week low and created interesting trading opportunities for option traders. Shares are 6% higher at $40.88 while a call seller took in the premium of 65 cents by writing 10,000 lots at the December 60.0 line. Meanwhile, in what looks like a rather ambitious play the investor paid 30 cents premium for rights to buy shares at the January expiration at twice today’s share price. Currently, the market assigns odds of this happening at just 5%.

Published on  Fri, Nov 21 2008, 17:34 GMT

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