Visa put options lose appeal as volatility bubble bursts after earnings
Today’s tickers: V, CTX, BAC, GE, PRU, WFC & DLTR
V – Visa Inc. Class A Shares – The credit card company skipped right past Wall Street’s forecast by 12 cents, and recorded fiscal first quarter earnings of 78 cents. Shares have surged amid the good news and stand 11% higher this afternoon at $54.84. Option trades throughout the day lifted Visa onto our ‘most active by option volume’ market scanner, and some interesting plays were observed. Traders engaged in classic volatility selling, taking advantage of the 20% decline in implied volatility due to the recent earnings report. Put selling was heavy in February with over 1,600 puts sold for 33 cents at the 45 strike, over 1,000 sold at the 50 strike for a premium of 1.20, and nearly 800 puts sold at the 52.5 strike price for a gain of 1.94 per contract. Similar sales were seen in the March contract where over 1,000 puts sold for 46 cents at the 40 strike as well as 1,200 puts sold for 1.19 each at the 45 strike price. Calls were snapped up in February, with 6,500 purchased for 1.37 at the 55 strike, and over 4,800 calls bought for 10 cents at the 62.5 strike. Shares would need to increase by an additional $7.76 in order for the Feb. 62.5 call purchases to result in profits. Finally, a wide strangle was purchased by one investor set to expire in January 2010. The trader purchased 3,000 puts at the January 30 strike for 2.29 apiece, and simultaneously purchased 3,000 calls for 10.00 each at the January 55 strike price.
CTX – Centex Corp. – Shares of the single-family home construction company rose by 6% today to $9.76, building up from its 52-week low of $4.91. CTX made an appearance on our ‘hot by option volume’ market scanner after the purchase of about 8,200 calls at the February 10 strike price for 76 cents each. These calls were in-the-money for a short period of time today when shares had rallied 10% to $10.08. But, in order for these call buyers to profit from these near-term bullish positions, shares will need to increase to a breakeven of $10.76. Perhaps investors have a little more confidence in the company after listening to its fourth quarter conference call where it cited an increase in January sales. Sales in the first month of 2009 were greater than the sales amassed in the final quarter ended December 2008. Centex also reported an increase in the proportion of first-time buyers, which now represents 55% percent of the business up from 45%.
BAC – Bank of America – Speculation on the viability of Bank of America to withstand the current depression came to a head with more intense speculative selling of its shares today. We can hardly say that today’s new share price low is out-of-the-blue, but it is amazing just how quickly speculation intensifies on behemoth financial names. Already having shed two-thirds of its value so far in 2009, BAC is down 14% at $4.05, while frenzied option trading has seen volume of 300,000 contracts in the first 75 minutes of action. Implied options volatility has surpassed the 215% prior panic value and today is 16% higher at 220% compared to yesterday’s reading. The activity does show more put buyers than sellers in general, which does indicate that speculators are looking at a horrible end to this story. The Feb 2.5 and 4.0 strike puts have around 40,000 volume each with breakevens for buyers seeking downside protection against further share price losses at $2.27 and $3.25 respectively. On the call side the 6.0 strike expiring in two weeks is the single most active contract, where more than 50,000 options are in play. A slug of 10,000 were recently sold to the bid at 38 cents, but the broad picture is balanced here. However, as we look out over time, there is a healthy does of optimism apparent at the 10 strike calls for January 2010, where the bias among the 14,000 contracts that have so far changed hands is tilted towards bulls who anticipate a share price of $10.71 by that time.
GE – General Electric – What are we supposed to make of a fresh 52-week low for shares at General Electric today at $10.66? Currently down 2% at $11.04 we’re unsure what the options market is telling us given the fact that one quarter of today’s volume can be attributed to a 50,000 lot sale of puts with a striking price of 9.0 expiring in February. While the trade is recorded at a mid-market price of 28 cents, we can see that puts were subsequently left offered at the price hinting that the undertone was bullish. Shares would therefore need to collapse by 21% from current before a seller starts to feel any losses from taking delivery of shares at the strike. Elsewhere, in the June contract one investor sold 10,000 calls at one dime at the 20 strike hinting that he sees no chance of a doubling in GE’s share price by mid-year. The investor here is taking in $100,000 premium in the expectation that the outlook is dull.
PRU – Prudential Financial Inc. – Shares have jumped 8.5% today to $28.60 in the immediate aftermath of a bullish options play where an investor initiated a 10,000 lot credit spread in February. Just ten minutes after the opening bell, 10,000 puts were purchased at the February 20 strike for 55 cents in exchange for the sale of 10,000 puts at the February 25 strike price for a premium of 1.65 per contract. The net premium pocketed on the trade is 1.10. This investor seems confident that the share price will remain higher than $25 in order to keep these puts out-of-the-money until expiration. If shares should decline, this bull will begin to lose money at a breakeven of $23.90. But, the maximum amount of losses incurred, should shares dip to $20 or below, is capped at 3.90 per contract.
WFC – Wells Fargo – While the banking sector has largely turned around in late-morning trading, the positive tone excludes both BoA and Wells Fargo. In the case of WFC, its shares are 8.7% lower at $15.92 and the pace of put buying in the February contract attracts our attention. The put/call ratio of 2.04 implies twice as many puts in play today, while we can clearly see that put buyers were out in force at strike prices ranging from 12.0 to 16.0. Options volume overall stacks up to 312,000 lots making WFC one of today’s busiest. A Bloomberg News columnist provokes an insightful question surrounding the value of its mortgage-servicing rights, which is the way the bank shows future income streams in today’s money from mortgages it has written. Needless to say, questions raised over accounting issues are highly likely to unsettle even the most arduous bulls in this environment, which is likely why investors are paying premiums of 1.50 to protect against share price losses beneath $14.00. In that case they face an expiration breakeven of $12.50.
DLTR – Dollar Tree Inc. – Shares of the discount variety store have declined by nearly 15% today to $35.70, despite standout performance in this recessionary climate. DLTR adds strength to the otherwise atrophied retail sector and reported a 9.5% increase in sales to a record $4.64 billion for 2008. It appears that option investors are taking advantage of falling call premiums and snatching up rights to buy shares in the February contract. At the February 35 strike, 500 in-the-money calls were purchased for 1.94 each, whereas the 37.5 strike saw 700 calls purchased for 1.14. Investors aren’t fully gung-ho on the stock, however, and many sought protection by buying puts. 800 puts were purchased at the February 32.5 strike for 57 cents, and another 800 were snapped up at the 35 strike for 1.11 apiece. Interestingly, some investors opted to purchase in-the-money puts at the February 40 strike for a premium of 3.35, perhaps as a near-term bearish stance as shares continue to decline.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
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.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
