Today’s Tickers – XLF, GS, VIX, GM, AA, VLO, Q, ALU, UA & SUNW
XLF - For the second day in a row stocks rebounded, but the excitement remained contained as is evident in low volumes. The financial sector rebounded 0.6 % to $34.21 in line with the broader market. And despite the fact that put trading outpaced call activity by a factor of 3.76 by 10:30 am masked a less bearish undertow. Put sellers were evident in the August 33 puts (25,000 lots) and in the September contract at the 35 and 37 strikes (33,000 lots in total). There was still more activity in the 33 and 34 strikes also. Implied volatility, which stood at 30 % on Thursday, has declined by 15% to 25.46% in Tuesday’s session. The most favored call strike today is at the September 34 level where investors have paid 1.5 on volume of 10,800 contracts.
GS – Volatility players appeared to be holding options volatility in shares of Goldman Sachs steadfast Tuesday. Activity was two-sided in the August contract with at-the-money combinations perhaps indicating that investors don’t see Goldman’s share price remaining within the $190-$200 window for long. Before last week’s meltdown, shares were confined to a range between $215 and $235. The climax last week saw the shares base at $189. While traders were kind to Goldman Sachs on Monday, Tuesday isn’t looking as positive with shares down 0.3% at $195.03. The fact that shares can’t make headway coupled with the stall in falling implied volatility could mean that investors are expecting still more fireworks from the investment bank.
VIX - Volatility watching remains an enjoyable past time. In true knee-jerk fashion options implied volatility tumbled out of the gate to mark day two of the rebound sending the CBOE VIX index to an intraday low of 19.68. However, speculators soon lifted it back above 20 for a 2.6% decline on the day. Investors continue to target the August 15 and 16 strikes betting on a near-term collapse for the VIX. While at the 19 and 27.5 strikes call buyers paid premiums of 1.95 and 0.50 for portfolio protection. Again, volume was notably light.
The Dow Jones industrial average was 0.63% higher around lunchtime at 13,443.40. The S&P 500 index rose by 0.56% to 1,482.07, while the Nasdaq composite index added just 0.29 per cent to 2,590.90.
GM – Shares in General Motors pared gains for a 3.25% rally to $33.67 as investors digested a quarterly profit reversing a loss in the same quarter one year ago. Net income of $1.56 outpaced expectations of $1.13 per share according to Thomson Financial. Notably the bulk of profits came from European operations where $236 million compared to $143 million a year ago. In North America profits of $78 million compared to losses of $95 million in the same quarter last year. Declining fleet sales, firmer buying incentives and a softer U.S. market were blamed for a 0.4% marginal decline in global market share to 13.3%.
Implied volatility on GM options has been on the wane since Thursday at the height of share selling and following today’s earnings has slipped 20% to stand at 43%. Call options in the September contract were especially busy at the 37 strike where volume of 36,900 traded between 0.8 and 1.1 earlier today. August calls at the 35 strike traded as high as 1.1 from the outset before going offered and trading down to 0.8. Despite the positive surprise on the profit side, investors must consider the ongoing challenge to the domestic auto-industry from well-managed and quality driven Japanese companies.
AA – After having been jilted at the altar, Alcoa’s share price seems to indicate that the decline may be over for now at least. Shares today are 2.2% higher at $39.41 and investors are expressing optimism through call option buying. Having rebounded off the June lows around $37.50 it wouldn’t be a surprise to hear renewed discussion of a buyer for Alcoa anytime soon. As such, investors bought the August, September and October calls on decent volume with 10,900 lots trading in the far month. The premium of locking into a share price of $40.00 today was 3.3 or $330 per 100 shares in Alcoa.
VLO - This morning’s active trading volume of more than 52,000 lots has catapulted Valero Energy Corp to the list of top ten movers by volume. The refinery operator posted rising Q2 profits of more than 18% today, beating street expectations, but curiously, its shares are down 0.83% this morning, trading at $68.50. The disparity has not been lost on volatility traders looking to cash in on share price fluctuation, with heavy traffic in the August series at the 75 call and 70 put strikes. Comparable levels of volume at each strike are a reasonable indication of strangle positioning in play. A buyer of the 75/70 strangle pays a combined premium of $3.90 in anticipation of an upside break to 78.90 or a downside break below $66.10, while the seller is looking to capture premium by beating market volatility expectations and hemming share prices within the range of the strike price.
Q – Options on Qwest Communications are trading at nearly four times the average daily volume, and implied volatility has gained 14.7% from yesterday’s session, now standing at 37%. With Qwest’s share price trading down 0.1% at $8.63 volume today has centered on the August 7.50 strike, where 5,200 lots were logged to the call side, and 2,000 were logged to the put. This volume appears to be largely new positioning, and in both cases the lots traded to the ask price. Qwest is due to report Q2 earnings tomorrow.
ALU - After chalking up larger-than-expected Q2 losses to merger absorption costs and margin pressures due to flagging synergies, shares in Alcatel Lucent (ALU) are down 11% and counting this morning, now at $11.79. This morning’s 17,000-plus lot active volume is nearly five times the daily average for this ticker. More than 11,700 lots have traded in the calls at the September 12.50 strike on existing open interest on premiums down nearly 70% on the day. That could indicate traders’ inclination to shed existing calls, but could also mark an investor’s firm conviction that the share price setback won’t last for long. Today’s lunging price decline today has put the shares at a three month low. As recently as earlier in July shares traded at a six-month high of $14.57.
UA - Options traders have flipped more than 15,500 contracts in Under Armour Inc (UA) this morning – equivalent to some 24% of its total open interest. The run on options comes after the athletic wear manufacturer reported a 50-plus percent spike in Q2 net revenue and increased its earnings guidance for the rest of the year. Premiums are up more than 200% in the front-month August calls, at the 55 and 60 strikes, with shares posting near-15% gains on the day, blowing past a 52-week high to command $63.36 at the top of the noon hour. There’s also volatility to capture on this ticker, with the market pricing in 43.6% fluctuation in share prices against 38.2% historical variability, which could explain the level of fresh put side-positioning at the August 60 strike. More than 1,000 puts have traded at this strike, logged to both bid and ask.
SUNW - Some 48,500 options contracts in Sun Microsystems (SUNW) have changed hands this morning, correlated with a 6.75% gain in share prices following a better-than-expected Q4 earnings report. With shares currently trading at $5.23, more than five and half times as many calls are moving as puts. More than 16,000 lots have gone through at the deep-in-the-money August 5.0 strike, on premiums up more than 50% from yesterday.
Andrew Wilkinson Rebecca Engmann Darst
Senior Market Analyst Equity Options Analyst
ibanalyst@interactivebrokers.com
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