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Daily Options Intelligence Report

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Citigroup and automakers flourish in thin post−holiday trading

Fri, Nov 28 2008, 16:34 GMT
by Andrew Wilkinson

Interactive Brokers LLC

Today's tickers: C, GM, F, CHK, GE, CSCO & AEM

C – Citigroup Inc. – There appears to be greater sense of confidence these days about the survival of Citigroup now that the government has ring-fenced more than $300 billion of its toxic mortgage debt. Shares jumped 11.4% to $7.82 and option traders kept it the most active equity option contract in light trading on Friday. December call option buyers favored both 7.5 and 10.0 strikes. Meanwhile trading in the January 7.5 strike puts was initiated far more from keen buyers than sellers at prices between 1.25 and 1.52.

GM – General Motors – The Detroit Free Press reports that in a time-crunched bid to come up with a plan for lawmakers by next Tuesday, GM is considering ditching brands to include Hummer, Pontiac and Saab. Unconfirmed reports also suggest that GM's corporate jet might have been grounded in a request to cut costs. Shares are 10% better today at $5.30 as prospects for a bailout apparently are on the increase. The December 5.0 and 6.0 strike calls were most heavily traded but we did note that around half of the volume at the 5.0 strike was sold where premiums ranged between 88 cents and 1.21.

F – Ford Motor Co. – Option volume at Ford surged on similar optimism over an industry bailout. Shares jumped more than 20% on the session to $2.62. Meanwhile call options traded almost 10-times as frequently as put options where trading was concentrated at the December 3.0 strike and January 2.5. With option implied volatility running at 201% on the company's options, the premium paid to obtain buying rights at the December 3.0 strike is 30 cents. Volume there was 9,400 contracts.

CHK – Chesapeake Energy Corp. – Gas and oil producer, Chesapeake upset investors when it filed a replacement shelf document reserving the ability to raise up to $2 billion through offering more stock. The proceeds would be used for core operations but also acquisitions. The news has sent shares in the company sharply lower falling around 20% to $16.35. The potential worry for investors might be rooted in the decline in the price of crude oil since the company is in the process of developing shale sand projects in West Pennsylvania, Arkansas and Oklahoma. Such projects aimed at retrieving marginal or difficult to reach natural oil and gas became prominent when oil prices were on the ascent. Today other producers are shelving such projects. Option traders have targeted further downside for the share price and rushed to buy December 10 and 15 strike put options at 25 cent and 1.25 premiums. Option implied volatility on the stock rose by around one-quarter for the biggest gain among stocks today to stand at 123%.

GE – General Electric – Implied volatility continued to ease at GE as its shares rose by 4% to $16.85. Helping underlying sentiment was the outright purchase of a longer-dated bullish position via call options on the company. June 2009 calls at the 30.0 strike were purchased at a 19 cent premium on volume of 12,000 lots today in a position that would more than double the number of established positions on the stock options.

AEM – Agnico-Eagle Mines Ltd. – The price of gold recently rose to back above $800-per ounce on the resurrection of fears over the prospects for either inflation or deflation thanks to the massive debt issuance certain to occur from the U.S. treasury. Actually, that should include other G7 governments likely to assist their financial sectors to provide broad economic support. We picked up on active options volume at several gold-mining companies earlier this week and today the strategies continue. This time the combination is a little harder to read. Shares of Agnico are trading marginally higher at $36.10 today while a combination of 3,500 calls and puts traded at the January 2010 expiration. The combination is unusual in that if it represented a straddle, it's well above the current share price. Of course the investor might expect shares to gravitate towards the price over the next year in which case a sold straddle would see premiums erode. On the other hand puts might have been sold at the expense of bought calls in which case the strategy would be to watch short premium decay and long premium cost rise in value should shares rally.

Published on  Fri, Nov 28 2008, 16:36 GMT