The equity options report for Nov. 12

Citigroup reaches single digit share price as Paulson widens TARP

Today’s tickers: C, AXP, STO, XLE, XLF, LGF and BBY

C – Citigroup – Treasury secretary Paulson shelved plans to buy illiquid mortgage-related debt today and wants to broaden the scope of the plan to target better those more stressed area of the financial system. He also wants to subject those asking for cash to a restriction to prove that they have raised private capital. The failure of the original TARP undermined investor sentiment in the financial sector and helped push shares in Citi back below $10.00. Option traders bought puts across lower November, December and January strikes making this contract the most active equity option of the day with 200,000 contracts changing hands by 2:20pm. Investors paid premiums of as high as 93 cents to secure rights to sell shares in Citigroup at a fixed $7.50 by January on volume of 12,500 lots. The right to sell shares by the January expiration cost 2.00 today where option investors bought some 7,400 contracts. Option implied volatility was 8% higher at 126%.

AXP – American Express – Two days after having converted to bank status the WSJ reveals that credit-card giant is applying for $3.5 billion under the governments TARP program. Investors reacted negatively lopping 7.6% off Amex’s share price to $20.69 and creating a fresh one-year low today. Meanwhile option traders couldn’t seem to get enough put options locking into a bearish view on the stock. Recently analysts and the media have raised the specter that credit card companies could be the next shoe to drop as the credit crunch not only makes it hard for card providers to fund debt, but also consumers struggle to repay card loans. In the December contract buyers locked into the right to sell Amex shares from the 20 strike down to the 15 strike, where 2,000 contracts changed hands at a premium of around 1.15. That would imply a break even share price at expiration of $13.85. At the 20 strike some 8,000 puts were traded. The picture has been getting worse for Amex, which has lost around two-thirds of its value from its 52-week high. It recently tried to prove that it had sufficient cash-to-hand for the next year while the lock-up in the credit card loan market dried up. A round of job losses applied to 10% of its workers was also announced.

STO – StatoilHydro ASA – Norway’s largest oil and natural gas producer may have lost around 37% of its production and can’t say when the Snorre A platform will be open again according to the company today. During routine maintenance, a leak was discovered and has forced the company to shutter production at the Vigdis oil field, which is processed at the Snorre A platform. The shares have declined 11.5% to $15.96 and are close to a fresh one year low. However, while some of the current weakness is shared by the rest of its peers as crude oil and energy prices decline, some option traders appear to be banking on a rebound by January, if not in the price of oil, certainly in the share price of StatoilHydro. Open interest in the option contract on Statoil are thinly populated with just 21,886 contracts outstanding. Today, option traders appeared to pick up 6,500 calls at the January 17.5 strike at a premium of 1.60 and 1,050 calls at the same strike in the April contract at a 2.50 premium. There is practically no existing open interest at either strike to speak of and it would appear that this positioning is predicated on a return to stable if not higher oil prices beyond a repair to the damaged flare system in the North Sea.

XLE – Select Sector Energy SPDRs – Meanwhile some substantial put transactions were put in play today as oil and gas producers share prices felt the wrath of investors in the face of the weakest price of crude oil in around a year-and-a half. Shares in the energy SPDR declined 4.8% to $46.19 while we watched heavy put trading at the November 40 and 41 strikes where around 40,000 contracts traded. In both cases the trading was in excess of current open interest readings and so indicates fresh downside risk to share prices if these bear positions turn out to be accurate.

XLF – Select Sector Financials SPDR - Shares in this basket of financial companies are sitting on a fresh one-year low today at $12.84 and there remains little respite to cause a sea-change anytime soon. Valuation arguments are passé: Government comments are spent, while analysts continue to paint a grim picture going forward. Option traders are banking on further declines in the sector in coming sessions as they have reached for 10 strike and 13 strike put protection today. The prospect of a further 22% slide ahead of next weekend’s expiration does seem remote, but costs an insignificant 7 cent premium. The cost of buying just in-the-money protection is 77 cents today, which infers a share price at breakeven of $12.23.

LGF – Lions Gate Entertainment– Motion picture and film entertainment producer Lions Gate has come under the cosh recently. Investors assume that weaker consumer spending on both leisure and over holiday season will create further weakness for the company. However, a positive analyst note spelling out reasons why all of the current share price weakness is unwarranted seems to have brought option traders to the fore today. Curiously, they seem to have chosen expiration months that would allow them to still examine the aftermath of the credit-crunch in the rear view mirror as they buy March 2009 and January 2010 call options. In the March contract and with LGF trading at $6.33 today, call buyers have secured buying rights at the 5.0 strike at a 2.0 premium. Shares would need to be above $7.00 to break even at least. At that strike some 22,520 calls have traded where open interest is less than 300 lots. At the January 2010 7.5 calls investors have secured buying rights using 17,027 contracts at a 1.40 premium indicating a breakeven share price in 15 months time of $8.90. Today’s overall volume of 40,668 lots compares to an existing reading of open interest of 113,348 lots.

BBY – Best Buy – The company’s warning over slumping profits and sales wasn’t really seen as much of a shock in the current climate, but still shaved 7.2% off Best Buy’s share price, which was recently trading at $22.16. Hence today’s option market activity wasn’t especially bearish. In the November contract, while investors bought calls at the 22.5 strike, they seemed to be sellers at the higher 25 strike. The January 15 and 17.5 puts seemed to have been sold possibly in exchange for 20 strike puts and so creating a put spread combination. In the December at-the-money 22.5 strike series, a large block of around 5,000 puts and calls traded in what appears to be a straddle. The direction of which is unknown, but the total premium of 5.20 infers a trading range between $17.30 and $27.70 before the contract expires. A long position would need to see Best Buy burst out of this range in either direction in order to make money.

Andrew Wilkinson

Senior Market Analyst

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