Today’s tickers: BAC, C, FRE, MS, JPM & RYL

BAC – Bank of America Corporation – Shares are 5% lower at $7.30 despite an earlier 6% rally at the open. Options investors have been heavily trading BAC today but the pattern is mixed. Some traders have decided to hop off the train, likely taking profit, and were seen selling in-the-money calls at the May 6.0 strike price where more than 18,000 calls sold for an average premium of 3.13 apiece. Elsewhere, investors hope for further upside gains on the stock in the next 24 hours as we head into March contract’s expiration day. At the March 9.0 strike price 9,000 calls were picked up for 20 cents each, whereas the April 9.0 strike drew sellers of 5,000 calls for a premium of 1.01 per contract. It looks as though investors selling calls in April find the 1.01 premium too rich – in other words they don’t see a continuation in the rally above $10.01 by April expiration. Option implied volatility has stepped up to 166% from the 150% reading yesterday.

C – Citigroup, Inc. – The sun has set on Citigroup’s early morning rally of 22% as shares are currently off by more than 5% to $2.90. Option traders who spotted the slim likelihood that shares would break through $4 by expiration tomorrow were seen selling more than 17,000 calls at the March 4.0 strike price for 23 cents earlier, could buy those practically worthless calls back for just four cents on the back of the share price reversal. At the April 3.0 strike investors scooped up protection by buying 6,000 puts for 67 cents each. With about 30 days until the April contract expires, optimistic traders picked up about 9,000 calls at the April 4.0 strike price for 51 cents, and more than 5,000 calls at the April 5.0 strike price for a premium of 29 cents apiece. In order for investors to profit off of the April 5.0 calls, shares would need to rally by about 82% from the current share price to the breakeven point at $5.29. Investors tread carefully in the June contract where some 14,000 calls were sold for a premium of 65 cents at the 4.0 strike price, while the June 5.0 strike had more than 20,000 calls sold for 40 cents apiece. It appears that these call-sellers do not see Citigroup’s shares experiencing any amount of significant growth as we head into the summer months.

FRE – Freddie Mac – Both Fannie and Freddie have seen share price gains of 20% today to about $1.00 after the Fed’s Wednesday announcement that it would double its commitment to agency mortgage debt. Option traders continue to look for upside potential in a way reminiscent of the nature of outlandish downside bets when financial companies started to crumble. The January 2.5 strike calls are active at Freddie Mac today, where investors at least tripled the premium paid on rights to pay a fixed price for the shares within 10 months. While yesterday’s call trading took place at premiums between 15-20 cents, investors today have paid up to 60 cents for the same rights. Clearly that lifts the required breakeven at expiration from a share price of $2.70 to $3.10, which means that from today’s $1.00, shares still need to rise % before investors profit from such an outside bet. Implied volatility on those options is running at 171% and infers an evens chance of these options landing in the money according to the 53% reading of delta.

MS – Morgan Stanley – Joining the chain-gang of banking stock losers, MS has experienced a 10% decline in shares to $21.62 today. Perhaps investors are jumping ship from financial services firm after JPMorgan reported that MS needs more capital. Investors were seen selling more than 27,000 calls at the March 25 strike price for a premium of 35 cents each. On the put side, one trader maintained a bearish posture and initiated a calendar roll by selling 10,000 puts at the March 22 strike price for 32 cents apiece while purchasing 10,000 puts at the April 22.5 strike price for a premium of 2.63 each. Bearish investors were also seen picking up 10,000 puts at the April 20 strike price by paying 1.66 per contract for downside protection.

JPM – JPMorgan Chase & Company – The financial holding company’s stock is off by more than 5% to $25.53 amid declines across the board for financials today. Despite the falling share price, one investor has taken a bullish stance on JPM by picking up 25,000 calls at the April 30 strike price for 1.18 each. Shares would need to rally by 22% from the current price in order to breach the breakeven on the trade at $31.18 by expiration. Optimism appears guarded however, as investors also picked up some 34,000 puts at the April 20 strike price for an average price of 99 cents per contract. Option implied volatility has jumped from 87% to the current value of 101%.

RYL – The Ryland Group, Inc. – Shares of the homebuilder and mortgage-finance company have declined by more than 5% today to $16.11. RYL edged onto our ‘hot by options volume’ market scanner after one investor initiated a sold strangle in the July contract. The trade involved twice the put volume than call volume and appeared at the July 10 strike price 5,000 puts were sold for a premium of 83 cents, while at the July 22.5 strike price 2,500 calls were purchased for 1.32 each. The gross premium pocketed by this investor amounts to 2.98 (2*.83 + 1*1.32 = 2.98) and will be fully bankable as long as shares remain within the two strike prices described on the trade. Like the rest of the homebuilding sector, RYL experienced a great sigh of relief yesterday when its shares gained 14% throughout the day on positive news regarding housing starts and the Fed’s plans to buy mortgage securities. It is thus likely that this ‘strangler’ does not see shares breaking out of the upper strike by expiration in July, nor does he see shares falling by more than 2.98 below the lower strike price. The investor is really stating a view that if this company has survived this deep into a housing correction then it will probably survive, but that the measures in place won’t be sufficient to attract enough investors to break the share price above the upper strike by mid-summer.