Today’s tickers: GM, F, VIX, LEH, GS, JNJ
GM– General Motors – As collective bargaining talks with the UAW reach critical pitch, options traders appear to be echoing a generalized vote of confidence on a stand-and-deliver outcome for the automaker. A 1.5% gain in share prices to $34.75 has elicited active options volume on a scale of nearly 144,000, making it the day’s most actively traded non-ETF option series by a long shot. Three and a half times as many calls are trading as puts, contrasting sharply with the general bias toward puts in the overall open interest. Astonishing levels of volume have gone through in the September 37.50 calls, which have traded more than 35,000 times today, primarily to the middle of the market, on premiums up 25% on the session. Call-side volume has been pronounced at the same strike in the October contract where some 15,000 lots have traded, also primarily to the middle of the market. Upside exposure to October GM share price movement at this strike level was selling at a quarter one week ago – today the same contract is commanding $1.55. Heavy volume is also being logged in the October 42.50 calls, where some 11,000 lots have traded this morning – five days ago the open interest at this strike was virtually nil, making the willingness on the part of the market to seek exposure at this level remarkable indeed. Implied volatility stands at more than 62% today – a full 20% above the level of price volatility that GM shares have shown historically.
F – Shares in Ford, meanwhile, have tacked on gains of 2.6% today, standing at $8.24. Nearly a quarter of today’s 38,000-plus active option contracts have been traded in the March ’08 10.00 calls, which traded to the middle of the market at $0.55. Some of this volume may be the closing out of positions entered earlier in September when the same level of springtime upside exposure was selling for $0.45 apiece. Note here the disparity in implied volatility, which currently stands at 48% - a 10% risk premium on the degree to which Ford shares have swung historically, but still well below the arched degree of anticipated volatility in GM shares.
VIX – Volatility is on an intraday ascent this morning against a slightly weaker opening for U.S. shares but, more importantly, in rapt anticipation of this week’s Fed rate announcement, shifty signals from former Fed chairman Alan Greenspan on the necessity of a rate cut, and a week of tell-all earnings from major U.S. broker-dealers. The CBOE VIX Volatility Index is showing a 7.38% gain on the day to 26.74, while call-side positioning in the September contract is pronounced at the 25 strike. Also noteworthy, however, is a glut of volume in the October 22.50 puts, which traded nearly 11,000 times.
LEH – Catbird seat or canary in a mineshaft? Investment bank Lehman Brothers has the dubious position of being first-out-the-gate among major U.S. investment banks to report quarterly earnings tomorrow, in what will be the market’s first balance-sheet peek of how the broker-dealers are valuing their exposure to the recent subprime debacle and credit seizure. With shares down 1.8% at $58.42, today’s active volume of 62,500 contracts is relatively light compared to its 969,000 total open option positions. Puts are outmoving calls by a factor of 1.7, roughly in line with the overall proportion of open put positions to calls. While positioning in the September and October contracts appears geared toward at-the-money straddles and strangles, we note the heavy localization of volume in the January contract, which seems to be the time horizon that option traders are picking for directional positioning in the major investment banks. Lehman’s January 50 puts were sold to the bid and the middle of the market at prices around $3. We also observed heavy-ish buying in the January 55 and 57.50 puts.
GS – Goldman Sachs share are also trading some 1.7% lower at $187.31 on the eve of this most scrutinized of quarterly earnings weeks. The 39,000 active option contracts are trading with a volume bias to the calls, with premiums higher on the put side. We observed selling in the September 195 calls against buying in the 190 calls. Another 2,200 lots traded in the January 170 puts on premiums up 11% on the day.
JNJ – Options activity in OTC drug and consumer staple giant Johnson & Johnson piqued our volume scanners today with some 35,600 contracts in play, and more than 3 times as many calls moving as puts. More than half of today’s volume was localized in the January ’08 65 calls, which sold heavily to the bid at prices of $2.00-$2.05. As this volume lies well within the level of outstanding open interest, this volume may have been the closing out of prior open positions to take premium on the contract.
Andrew Wilkinson
Senior Market Analyst
Rebecca Engmann Darst
Equity Options Analyst
ibanalyst@interactivebrokers.com
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