As techs correct, option traders speculate on swinging premiums
Today’s tickers: EMC, GOOG, RIMM, XLF, WB, C, BID, GPS, CSCO
EMC – Shares in EMC Corp, the parent company of VMWare and celebrated maker of management and storage networks, lost 9.2% today to $20.22, erasing a six-week run of undeterred gains for the tech stock and more than tripling the loss on the broader Nasdaq index, with implied volatility gaining nearly 25% to read 47.5% this afternoon. A gauge of the option action suggests that some traders are questioning the outsized proportions of EMC’s slide today, expressing this view by selling put spreads in the November contract between the 20 and 22.50 strikes, and entering fresh longs in the December 22.50 calls. With premiums down some 54% on this contract today, some traders may see a bargain lurking on a wager that EMC Corp shares can shrug off today’s correction with confident and recover into the next month’s expiry.
GOOG – Shares in the search-engine-that-could, Google, saw 5.6% of their value up in smoke this afternoon, breaking below the $700 mark to $692.16. More than 285,000 options are in play this afternoon as option traders see the current market environment lending 25% more volatility to Google shares than they have shown historically. Much of this volume is being expressed in November 750 calls, which have traded more than 10,000 times today to buyers and sellers. A trader who shorted that November 750 call yesterday would profit handsomely from closing the position today – the contract was fetching $11.30 on Wednesday and today its value has eroded to just $3.70. On the other side, the November 680 puts are trading on volume more than double the open interest, to buyers and sellers. This contract has gained more than 350% in value overnight.
RIMM – Blackberry maker Research in Motion is down 9.2% this afternoon at $120.72, with nearly 280,000 options in play showing a volume bias to the calls. The November 135 calls are trading on volume double the prior open interest as premiums decline some 62% on the session to $1.35. A buyer of this position is wagering that RIM shares can shake off the current coil and break back above $135 within the next 8 days – and why not? Last time RIM shares traded at that level was…yesterday.
CSCO – Cisco Systems – Last evening’s Q3 earnings report, falling short of analyst estimates due to declining sales to automakers and financial services companies, was a harbinger of the broader correction in tech shares today. Shares are down 8.5% this afternoon to $30.33 with more than 318,000 options in play, 3 times as many calls moving as puts. Heaviest liquidity is seen at the November 30 line, where call open interest had doubled this week ahead of last night’s earnings report. Much of today’s volume may be tied up in risk reversal trading with puts at the same strike, which are being heavily bought this morning. The November 32.50 calls have also sold off heavily, despite having lost nearly 94% of their value today.
XLF – Financial Select SPDR – Shares in the financial services ETF 1.76% lower at $29.53 after making an auspicious break below $30 – a new 52-week low. The 350,000 options in play are trading 3 times as frequently to puts as to calls. Of interest here is a transaction involving some 45,000 lots in the December 29 puts, which traded at $1.22. Action in the January contract suggests that some traders may be wagering on some abatement to the financial sector’s current woes in January, taking advantage of the current 41% implied volatility level to sell volatility in the form of the 31/34 strangle.
WB – A look at the option positioning and implied volatility development in Wachovia (WB) shows option traders positioning defensively, perhaps in anticipation of more outsize writedowns or curtailed growth estimates. Wachovia comprises just about 3% of the holdings in the XLF, has recently been on the receiving end of analyst downgrades and is one of a raft of major financial institutions trading at multi-year lows today. Our market scanners caught wind this morning of an unusual increase in implied volatility, up nearly 18% on the session to 57.6%. A look at developments in Wachovia’s implied volatility over the past two days shows the market expectation of share price turbulence increasing more than 56% in a matter of 48 hours. Option traders today have rushed to buy December 40 puts at a rate more than double the existing open interest. Elsewhere we were interested to see some 2,600 lots sell to the bid in the January 27.50 puts – action which on the surface looks to us like profit taking on a former position given the 33% increase in premium on this position.
C- The implied volatility reading in Citigroup (C ) continues to reflect a market still discomfited about the company’s prospects despite the recent exit of its beleaguered chief executive. Implied volatility rose 22% and is making a test of the 60% mark as shares continued their 5.4% freefall to read at $31.58 this afternoon. Traders have made a run on November puts at the now at-the-money 30 strike, which were bought on a volume more than 4 times the open interest, and on premiums up 200% on the session.
BID - Sotheby’s – Talk about under the hammer! Shares in art auctioneer Sotheby’s forfeited more than 35% of their value to $32.26 today as a trio of analyst downgrades coincided with the fizzling of a much-touted sale of Impressionist paintings in New York. The development has led some arbiters of taste to predict an end to the New York art boom, and options traders are staking their bets in kind. Options trading at nearly 6 times the average level today, as traders seek fresh longs in the November at-the-money straddle. At $5.75 the position costs some 16% of Sotheby’s current share price to enter – a reflection of the angry surge in volatility. Elsewhere it looks like a trader took profit on a position in the January 50 puts, which sold today for $17.90, having more than tripled in value overnight.
GPS – Gap Inc. – Today’s reported decline in October same-store sales for the everyman retail clothing chain was offset by profit guidance beating analyst estimates, and this was good enough for Wall Street today. Shares are up 4.8% to $19.03, and while options traders are swapping Gap contracts at nearly 5 times the average rate today, the positioning appears tied up in fresh buying in the March 20 puts, which are 19% cheaper today owing to the rally in current share price.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
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