Today’s tickers: SPG, PLD, BEAV, XLV, SMH, MER, ORCL, GS, WHR
SPG – Option traders are positioning in accordance with ominous words out of Goldman Sachs today on the state of the commercial real estate and REIT markets. In a report out today, Goldman noted that while commercial REITs have outlasted the broader market in the present cycle, their fundamentals are only now starting to deteriorate, with some segments of the sector likely to buckle further on low demand for retail and leisure activities, tight credit, and the likelihood of higher interest rates adding to funding pressures. Earlier this week, a report from New York-based research firm Real Capital Analytics predicted a rise in US commercial property defaults for similar reasons. Having already noted an unusual level of bearish option trading activity in the country’s second-largest owner of regional shopping malls, General Growth Properties, earlier in the week, today two more commercial REITs put in appearances on our scan of relative volume gainers. Shares in Simon Property Group declined 2% in early trading to $94.60, and a near-8-fold increase in option trading volume appeared centered in July calls. We can confirm that 100-strike calls traded to the middle of the market at $2.02, while calls at the next-highest strike commanded 92 cents. A trader looking to bet on continued doldrums for the mall REITs would likely play this as a short call spread, pocketing the $1 credit in the expectation that Simon Property Group shares will remain well below the $100 line through July.
PLD – Directionally neutral volatility plays were the preferred vehicle for option traders in another commercial REIT today. Shares in ProLogis, the world’s largest owner, manager and developer of industrial space, declined 1.3% to $57.41, while an increase in its option trading volume to more than 9 times the normal level appeared in a 1,030-lot position at the October 57.50/60 strangle. We are not able to confirm the order flow of this position, which would have traded on a combined premium of $8.35 – fully 14% of the current share price. This rich premium, fortified by the fact that implied volatility in ProLogis options is showing its largest disparity against the historic reading on the stock in two months (the market is looking for 31% more risk to ProLogis shares over the next 30 days), could be a powerful inducement to a seller of premium who believes that ProLogis shares will remain bound between the $2.50 range of the strike prices. Over the past 6 months, shares have traded as low as $51.66 and as high as $69.14. Selling the strangle would predict stagnant share price action around current levels into the fall.
BEAV – Two days post news of a plan to buy Honeywell’s aerospace distribution unit for just over $1 billion in cash and stock, options in B/E Aerospace are commanding 3 times the normal level of interest. This marks the second time in the past week that B/E Aerospace options have put in an appearance on our “Hot by Options Volume” scanner – last Friday, its options activity showed heavily bearish positioning on 16 times the normal level as implied volatility spiked 20%. With implied volatility hovering around those elevated levels – the 66% reading compares to a 55% historic volatility reading on the stock – option volume shows traders fairly convinced that any meaningful recovery in its shares will be stymied. This was in evidence today in a 6,500-lot bear call spread in the July contract, where the trader sold 30-strike calls for $1.10 against the purchase of calls at the 35-strike for $0.45. The resulting 65-cent credit represents the maximum profit the trader can obtain if both calls expire worthless by July 18.
XLV – Shares in the Health Care Select Sector, an ETF indexed to a smattering of health care equipment makers, drug makers, biotech and service companies including Johnson & Johnson, Merck and Pfizer, pitched a .87% decline to $30.68 this morning, keeping it just barely above its 52-week low watermark. A 6,000-lot put spread in the front month contract sent option trading volume to 41 times the normal level, where it appears that the trader in this case pared the $1.35 credit on the sale of puts at the 32 strike with the 55-cent purchase of puts at the 31 strike. The residual $0.80 would allow the trader to take in a credit on the transaction while positioning in favor of a pull higher for the XLV that would leave both positions to expire worthless. The total volume involved in this position was equivalent to nearly one quarter of the entire open interest in the XLV.
SMH – The outlook is hardly as hale and hearty for the chipmakers, following a decisive cut in the year-end sales growth forecast by Semiconductor Industry Association. The news was predictably impactful on option trading in the Semiconductor Holders Trust, which declined 1.8% to $31.03 as option traders speedily put more than 61,400 options in play. It looks like holders of June 33 puts picked today to cash out some positions, given the 24,000-strong volume there selling mostly to the bid at $2.00. Most of the open interest at that strike accumulated in mid-May, when the fetching price ranged from $0.92-$1.22, yielding a tidy profit for traders who timed their transactions accordingly. An expectation of continued price doldrums into the summer was in evidence in heavy put buying at the July 31 line.
MER –The news last night out of Merrill Lynch might have made the market think the vulnerable brokerage had dodged a bullet. On Tuesday, a U.S. District Court judge ruled in favor of Merrill Lynch in a dispute with XL Capital Assurance ordering the insurer to stand by $3.1 billion in CDO guarantees for Merrill Lynch that it tried to terminate. A ruling in favor of XL Capital would have left Merrill holding the bag on billions of dollars of exposure to the CDS market. Shares are down 3% to $36.71, and an early spike in implied volatility suggested that option traders were looking for more price turbulence – not less - from Merrill Lynch as a result. The current 69.7% implied volatility reading suggests 58% more price risk to Merrill shares over the next 30 days, and wit nearly 3 times as many puts trading as calls the posture among option traders appears very defensive indeed. Besides brisk traffic in front-month close-to-the-money puts, we observed possible evidence of put spread activity in the July contract between strikes 30 and 35.
GS - Options activity in Goldman Sachs is already showing signs of pre-earnings tension, given today’s 14% spike in implied volatility to 51%, suggesting 68% additional price risk to Goldman Sachs shares over the next 30 days (the company reports earnings next Tuesday). Early action suggested heavy buying interest in June 170 calls, where nearly a quarter of the active interest this morning is concentrated. This may be occurring in concert with long strangles involving June puts.
ORCL –With two weeks yet to go before its own earnings announcement, Oracle options are drawing an unusually brisk level of traffic from option traders, with more than 45,000 options active in the first market hour. Shares are down .89% to $22.31, with heavy volume in July 24 calls trading at twice the open interest, selling primarily to the bid. Selling pressure far in excess of open interest was also observed in December 21 puts, at $1.45 per contract. Implied volatility on all Oracle options shows the market pricing in about one-third more risk to Oracle shares over the next 30 days.
WHR - Reports that the world’s largest maker of home appliances, Whirlpool, may pursue a joint venture in a Russian unit of Turkish electronics maker Vestel has occasioned a 2.3% decline in Whirlpool’s share price to $67.46. The attendant spike in option trading volume shows action in out-of-the-money puts at the June and July 60 strikes, most of which is being bought in seeming anticipation of greater pressure on Whirlpool shares over the next month. Implied volatility on all Whirlpool options indicates the market pricing in 25% additional price risk to Whirlpool shares over the next 30 days.
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 to be 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.
