Today’s speech in Berlin on (of all things) global imbalances, by Federal Reserve Bank Chairman Ben S. Bernanke will be scrutinized with hairsplitting exactitude by a market aching for definitive clues to the Fed’s perception of risks to economic growth. Bernanke’s speech follows dissenting remarks from Fed members Frederic Mishkin and Janet Yellen, both of whom voiced concerns over the impact on consumer spending emanating from the housing market slowdown, dispelling the image of a monolithic Fed just one week before its much anticipated rate decision.
Ambivalence on the rate and growth outlook contributed to a mixed performance for U.S. stocks on Monday. Volatility continued its northbound trek, with the CBOE Volatility Index showing a 4.35% gain on the session, a modest intraday pullback after making an attempt on the 30-mark earlier in the session on rate outlook ambivalence. Heaviest option volume appeared at the 30-level in the September contract, which traded more than 11,000 times. Call spread activity at the 25 and 35 strikes may have been in play in the October contract.
That said, futures are suggesting a gap higher for U.S. stocks this morning, with contracts on the S&P, Nasdaq and Dow Jones Industrial Average all trading above fair market value. Asia-Pacific shares turned in a mixed performance overnight, with Shanghai’s CSI 300 Index – the region’s bullish outlier these many weeks – dropping 4.7%. European shares are in mostly higher territory this morning.
Recapping options market activity from late Monday, we observed a big volume pickup in McGraw-Hill (MHP), the well-known manufacturer of school textbooks and lesser-known parent company behind Standard & Poor’s, has enjoyed a spate of buzz surrounding its option activity in recent sessions, and an announcement hit the wires yesterday afternoon that the company’s CEO will present forward-looking information on the company’s industry prospects at an investment bank symposium next week. With shares closing half a percent lower at $49.01 this afternoon, the brunt of the day’s trading activity involved 10,000 lots traded on either side of the January 2010 40.0 straddle. A goodly number of the volume involved here traded to the middle of the market, making it hard to establish the order flow definitively. But let’s let the $21.10 sticker price of the position – 43% of today’s share price - speak for itself. A buyer of this position is banking on dramatic share price volatility for McGraw-Hill shares, which are currently trading $22 below the 52-week high. A seller of this eminently forward-looking straddle is playing against an anticipated run on volatility in 2010. An options odyssey!
Asset manager Legg Mason, whose shares have taken a buffeting in lock step with market volatility, closed 4% lower at $77.84, having traded as low as $76.80 on analyst concerns over equity outflows at the company. With options trading at nearly 10 times their average volume, we noted that volume was heaviest at the October 70 puts and the November 90 calls. The 2,000 lots trading at the latter strike went mostly to the middle of the market at $1.45. A buyer of this position would be taking advantage of the sharply discounted $1.45 premium to lock in Legg Mason shares at a price of $90 – still $5 below its average share price for the year to date – by the fall.
Shares in beleaguered mortgager Countrywide Financial took a 5% hit today. The mortgage provider, whose ticker in recent weeks has become virtually emblematic with the ruinous tide of the subprime mortgage debacle, announced Friday that it would cut 10,000-12,000 jobs from its payroll in the wake of the housing recession. Observers have taken Countrywide’s announcement as a possible yardstick for job casualties in the mortgage sector at large. Options traded on a volume of 110,000 lots, twice as many puts as calls. We noted what might have been strangle positioning in the October contract, at the 15 puts and 20 calls. Put-side activity also appeared to favor the January contract, where 17,700 lots traded at the 17.50 strike, and 13,200 lots traded at the 20 strike. Implied volatility on these options stands at 90% - a tender understatement in light of the 152% licking that Countrywide shares have taken in recent months.
