Today’s tickers: CFC, XLF, MER, C, SIRI, URBN, OVTI
CFC – We’re hearing vague and unsubstantiated chatter this morning that Countrywide, the beleaguered mortgager that scooped up for a song by Bank of America back in January, could be on the receiving end of a sweeter takeover offer. Of course, this morning’s rumor – formless and shapeless though it is – may just boil down to conjecture about other theoretical corporate takeouts that might benefit from a helping hand from the Fed since their historic intercession in the Bear Stearns imbroglio a week ago. The idea may be that “some” market players – never mind who – “might” be emboldened to make a bid for distressed if they had some assurance that the Fed had their back. Until last week, that sort of thing “just wasn’t done.” Still, there’s no word yet as to which major bank player, apart from current suitor Bank of America, might be in a position to present a more attractive offer for a company that has come to embody virtually every symptom of the housing market head-trip. Let it suffice to say that the rumor machine hasn’t trickled down to the share price, which is flat at $6.13 at present dispatch. What it has done, on the other hand, is sent implied volatility in Countrywide options more than 27% higher at 100.9%, making it one of the top volatility gainers on our platform today. What’s also noteworthy here is the exodus of traders into out-of-the-money calls at the $7.50 strike, which have been bought on volume of more than 11,000 lots today – half the level of prior open interest – for about 25 cents apiece. This premium reflects a better than 1-in-4 chance that Countrywide can breach the $7.50 mark by April’s expiration.
XLF – Financial Select Sector SPDR - A 1% decline in the financial sector ETF this morning smacks of a healthy easing after two sessions of gains for financial shares. With the price of the ETF at $26.39, put-buyers have come out in force, with twice as many puts trading as calls on a combined volume of more than 84,000 lots in the first 90 minutes of the market. Of note here is fairly clear-cut put buying in the April contract at strikes of 22 and 25, where nearly 40% of this morning’s volume is situated. Prices on both these positions are 20-25% higher today owing to the decline in share price, and while premiums are currently reflecting an almost 1-in-3 chance of XLF shares breaking below $25 over the next few weeks, the probability of a break below $22 is only about 9%. Buyers have taken their chances nonetheless.
MER - Merrill Lynch – Earlier today, analysts at JPMorgan Chase slashed profit estimates for Merrill Lynch by 45% on concern that the investment bank may not escape further write downs. Shares are down 1.6% at $47.59 as a result. While implied volatility in Merrill Lynch has come off sharply since last week’s revelation that it was suing XL Capital Assurance after the company attempted to cease insuring the kind of CDO contracts that could leave Merrill vulnerable to just these kinds of write downs. Still, the 89% implied volatility reading suggests the option market still sees about 10% more price risk to Merrill Lynch shares over the next month than they have shown historically, and the fact that twice as many puts are trading as calls suggests a desire among traders to seek protection against possible declines. Put-buying at the close-to-the-money April 45 strike isn’t so mystifying in that regard, although the $4.00 price of the position today would require a 13% drop below currently levels just to break even. The hunger for puts extended even to April’s 35 strike line and below – with nearly 8,500 lots trading at the aforementioned strike for $1.85 apiece.
C – Citigroup - Citi shares appeared to buck the prevailing trend among financial issues with an open in positive territory, but the tide has since reversed and its shares are .26% lower at this dispatch, trading at $23.24. Yesterday we observed collar trading in the September contract that may have been the work of a nervous shareholder looking to enhance the yield on an underlying position while protecting it from the kind of market turbulence that has sent Citi shares as low as $18.00 in recent weeks. A look at the implied volatility reading in Citigroup shares shows traders actually expecting about 3% less volatility out of Citi shares over the next month than they have shown historically, which may have represented so-called “perfect timing” (if such a thing exists) for a trader to go long the May 20/25 strangle for a combined price of $2.25. The position would generate profit for the trader with a break above $27.25 or below $17.75 – a near $10 range in the month of May. Evidence of selling at the May 15 put strike suggests that the 30-premium on this out-of-the-money strike may have been the funding mechanism for the long volatility position.
SIRI – Sirius Satellite Radio – Yesterday’s news out of the US Justice Department that would approve the $4.6 billion merger of Sirius and XM Satellite Radio Holdings, dispelling concerns of a monopoly on radio broadcasting, didn’t carry over into big gains for Sirius stock today. With shares down nearly 1% at $3.12 (XM shares are also trading lower as of this dispatch), we nonetheless discovered an increase in trading volume to 3.6 times the normal level. It appears that traders are sloughing off call positions at the $4.00 line in the April and June contracts, where open interest had built up heavily in the front month yesterday on back of the announcement. Traders here seem willing to accept paltry premiums of 5 cents for the April position and 15 cents for the June contract, in the expectation that no break past the $4.00 threshold – a break of the 52-week high – will be forthcoming in the next few months.
URBN – Urban Outfitters – For the second time in three sessions, rangy hipster retailer Urban Outfitters features on our “Hot by Option Volume” market scanner. Last Thursday we observed fresh volume at the September 35 call line that would seem to suppose a break to all-time highs on the heels of the back-to-school shopping season. Today its options are trading at 3.5 times the normal level as shares are 1.8% lower at $31.90. Again, we observe traders placing their marks at the 35 call line, this time in the June contract, where it appears that most of this morning’s volume has traded to the middle of the market at around $2.00. The trader in this case may be looking for a more expeditious break of the 52-week high we mentioned last week, taking advantage of a 13% comedown in call-premiums on back of today’s share price movement to do so. Current delta readings show option prices reflecting a 40% likelihood of Urban Outfitters breaking the $35.00 level by June, while the odds in September are somewhat higher at 47%.
OVTI - Omnivision Technologies – Shares in Omnivision, the maker of CMOS image-sensor semiconductors used in cameras and cell phones, are trading .50% higher this morning at $18.76. Meanwhile, its options volume has more than tripled, with a glut of activity in the June contract that appears to be long-volatility position well in advance of its May 30 earnings report. The fact that implied volatility is ticking in 12% below the historic reading translates to lower option premiums all around, and traders may feel that Omnivision – a stock that’s up nearly 20% for the year to date, outperforming the Russell 2000 Technology Index by a whopping 28 percentage points - has plenty of room to move on back of its next earnings cycle. To that end, it looks like traders are buying at-the-money June 20 calls for $1.50 apiece, as well as 17.50/22.50 June strangles for a combined premium of $2.20. The price of this position offers protection for the buyer with a break above $24.70 (within 50 cents of its 52-week high) or below $15.30.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
