Friday January 4, 2007
Implied volatility and volume hits new altitude in airlines, commodities
Today’s tickers: UAUA, CAL, INTC, DELL, ABX, BBBY, XME, YRCW, BGP, MGM
Earlier today, the Air Transport Association released a report forecasting a third-consecutive year of profits from major air carriers, which have “moved aggressively to redeploy assets and adjust aircraft…to trim unprofitable flying” in the face of difficult economic headwinds and high fuel costs.
UAUA - We continue to observe volatility developments in UAL Corp., the parent company behind United Airlines. The holding company rated as one of the day’s top implied volatility gainers according to our market scanners, with a 17.4% advance in the implied 30-day volatility reading to a vertiginous 101.9%. This measures up to 1.7 times the 59.1% historic volatility reading, occurring as United shares trade 3% lower at $30.79. With 14,400 options in play this morning, puts and calls are trading with near-equal frequency. While action in the front month showed an inclination to buy puts at the January 35 strike, we observed fresh buying in at-the-money February 30 calls as premiums on the at-the-money call came off 10% to $2.95.
CAL - Options in another major airline, Continental (CAL) rated among the most actively traded option families with 21,600 options in play against a 3% decline in share price. The past 2 weeks has seen a massive divergence in implied versus historic volatility in Continental, in step with rising fuel prices and conjecture over the outlook for industry consolidation, and the implied reading at 84.7% suggests traders anticipating a 30% greater degree of share price fluctuation from Continental than it has shown historically. While the ratio of 1.28 puts to every call reflects the highest proportion of defensive puts to calls since mid-October, it is worth noting that the 14,600 puts in play at the January 20 strike today traded mostly to sellers. Calls at the February 25 strike, meanwhile, were bought.
Elsewhere, a soft surprise in non-farm payrolls data gave the markets a needed impetus to wither into sell-off territory for a second straight session, sending VIX volatility up 4.3% to 23.46.
INTC –Intel – Intel’s stumble continued today with a 6.5% decline to $23.07 after a J.P. Morgan analyst downgrade of the chipmaker. With nearly 175,000 contracts in play in the first two hours of trading, Intel is one of the day’s most active option families according to our scanners. Two and half calls are trading for every put today, with traffic logged to buyers and sellers in the January 25 calls, which traded nearly 25,000 times. Front-month puts at the $22.50 strike traded mostly to buyers on a volume of some 19,000 lots, as the value of the position appreciated 220%. While traders looked to freshly short calls at the February 25 strike, we suspect this may have occurred in tandem with buying at the February 25 level, implying some stabilization in prices over the next month.
DELL – Dell Inc. – A near 6% decline in Dell’s share price to $22.32 was part and parcel of broader slump in tech stocks, bringing Dell to within 75¢ (3 %) of its 52-week low. Option traders have put some 66,500 lots in play, trading more than twice as often to puts as to calls – and what’s notable here is the willingness to enter fresh longs in February 22.50 calls on volume of 19,500 lots – 4 times the existing open interest. Calls at the 25 strike in the May contract also traded to buyers, with current premiums reflecting about a 37% chance of this position landing profitably in May.
ABX – Barrick Gold Corp Com - Shares in Barrick are 1.3% weaker this morning at $48.07, still within about $1.25 of the 52-week high, and with 40,000 options in play, it’s one of the most active tickers to register on our market radar this morning. Puts are outpacing calls by a moderate factor of 1.2, with puts at the January 45 put bought freshly on a volume more than twice the open interest today. Call spread activity in the April contract between strikes of 50 and 60 could imply massive upside, capped at the $60 level, in the spring.
BBBY– Bed Bath & Beyond – Our “Hot by Options Volume” scanner detected an increase in trading volume to 4 times the normal level as shares in the housewares chain dived 8.6%, plunging 7% below the standing 52-week low. In options trading we observed traders appearing to bail out of positions in January 27.50 calls, where open interest had increased nearly 6-fold this week. Buyers and sellers shifted instead to January puts at strikes of 25 and 27.50, while we observed what may have been a move to take profit in puts at the 30 strike. The value of this $5 position increased 66% overnight.
XME – Metals and Mining SPDR- The value of the commodity-rich ETF, whose components include the likes of Newmont, Hecla, Peabody, and Freeport-McMoRan declined 3.2% to $66.46 this morning, as what may have been put spread activity in the March contract between strikes of 50 and 70 bumped the total volume reading to 37 times the normal level. A look at the lay of open interest in this ETF gives the impression of a popular destination for hedgers, with open put positions outnumbering calls by 19 to 1.
YRCW – YRC Worldwide - This morning’s Fitch downgrade of YRC Worldwide and two of its trucking units to BBB- status with a negative outlook cited concerns over the impact of a faltering US economy on the trucking giant’s credit metrics. Shares plunged 12.4% to $12.12, while options activity accelerated to 4 times the normal volume, matching up to 13% of its total open interest. Fresh long positions appear to have been sought at the February 12.50 straddle, a position that at $2.45 costs a whopping 20% of the current share price to enter, but would cover the buyer in the event of a break above $14.95 or below $10.05. Fresh volume was also observed in in-the-money puts at the February 17.50 strike, which traded for $5.45 to the middle of the market.
BGP – Options in beleaguered book chain Borders Group are trading at nearly 16 times the normal volume today, and implied volatility advanced 16% to exceed 82% earlier today. This occurred as shares in the company turned the page on a new 52-week low of $9.31, down 3.5% from yesterday’s close. Puts are outmoving calls by some 13 to 1 this morning, but we can discern some willingness to take contrarian positions and bet on a stabilization of Borders prices south of January. Puts at the January 10 strike traded freshly to the middle of the market at $1.05, protecting a buyer in the event that shares remain in single-digit territory but providing a seller with a tidy premium credit if shares recoup slightly and volatility comes off a bit. Calls at the February 10 strike were bought freshly at $0.70.
MGM – Options in MGM Mirage Inc., the holding company of Las Vegas casino resort destinations including the Bellagio and Excalibur, are trading at 7 times the average volume today, as shares decline 5.3% to $73.90. Implied volatility surged 14.5% to 47.5%, making the company one of the day’s top implied volatility gainers as options traded at their heaviest volume in more than a year. Defensive positioning appears in the ascendancy as traders sought long put positions at the 70 strike in the January and February contracts.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
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