Today's tickers: C, BAC, HBC, BG & PFG
C – Citigroup Inc. – Without a doubt Citi is the leading option's venue for panicked equity investors today. Options trades are running at a frenzied pace with volume soaring upwards of 200K for Citigroup today amid continued erosion of Citi's share price. In this unprecedented financial crisis, it appears that the old adage the bigger they are, the harder they fall, still applies as pieces of the former behemoth continue to fall away. Having shelled out $2.7billion, Morgan Stanley will now own 51% of the formerly Citi controlled Smith Barney broker unit, now Morgan Stanley Smith Barney, with the option to acquire the remaining 49% in five years time. Citigroup garnered a much needed $6.5billion of equity capital in return for relinquishing a huge portion of their wealth management business. Its shares continue to recoil as speculation mounts as to what a remolded version of the company will look like. Shares are down 15% to $5.00 while around 200,000 options contracts have crossed the tape by 11am. Around half of this has taken place in the January contract, where options expire in just two more sessions later this week. At-the-money put options at the 5.0 strike have seen most volume with 28,000 lots in action, the price of which has surged from 9 to 42 cents today as investors ponder where Citi's price will be in just two days – never mind after a re-tune. At the February 4.0 strike investors traded 20,000 puts at the 4.0 strike at a similar 42 cent premium, where the delta or the chance of these puts landing in the money, currently stand at 25%.
BAC – Bank of America. – Investors are raising the valid question about BAC's recent acquisition of Merrill and what benefit it will bring the company in light of Citi's forced sale of its stake in Salomon Smith Barney. Overall option volume at Bank of America today is a lofty 125,000 contracts of which some 20,000 were traded in one series alone. That volume of puts was initiated by buyers who dominated activity at the January 10 strike where investors paid 44 cents for rights to sell shares at the strike price by Friday's expiration. Investors would make money if BAC was trading below a share price of $9.56. Investors also sold 10 and 11 strike call options where implied volatility of around 165% boosted premiums to 71 and 23 cents respectively. In the February contract, those same strike calls were bought while the heavier activity involved the sale of 12.5 strike calls were around 11,750 options traded at 65 cents. Option implied volatility reached a one-month high at 118% as shares teetered on 52-week support threatening to trade in the single-digits.
HBC – HSBC ADRs – HSBC, Europe's largest bank (by market value), is the freshest face on the down-trend circuit, joining in with many of their banking brethren on Broke-Back-Bank Mountain, and deploying yet another S.O.S. signal to investors. Currently down 9.4% at $41.56 it looks like investors are now wary of HSBC, a far-cry from just one year ago when they out-performed all other British banks. Uneasiness by investors across the globe was heightened by a Morgan Stanley analyst who predicts that HSBC will need to raise at least $30billion, and further contend that HSBC will likely slash dividends in half as profits of yesteryear give way to deep losses. The share price decline at HSBC has become self-feeding as analysts keep pointing out the news, but this has not prevented an investor positioning for a rebound in the stock. On Tuesday an investor placed a 10,000 lot call spread in the March involving the 50 and 60 strikes, while today the same feat has been attempted. The trade today costs 1.15 – lower than yesterday on account of the cheapening calls as shares plunge. This investor clearly is doubting the growing chorus of warnings and could make out well if HSBC is able to dash these fears. The trade would payout 8.85 per contract should HSBC recapture 60 by March expiration, yet would start to make money above a share price of $51.15.
BG – Bunge Limited - Grain processor, Bunge told a dire tale about the agribusiness today when it missed expected profit numbers. While the financials fell short the data revealed a likely worsening of the situation at the end of the year. Farmers are less inclined to pull crops out of the ground given the slump in grain prices. The company warned of deteriorating counterparty risk and announced an unexpected currency loss from a slide in the Brazilian real. The picture was nothing short of absolutely ugly and no wonder Bunge's share price is 14% lower at $41.50. Our market scanners picked up on relatively large volume compared to the 10-day average. It appears that investors expect the situation to become bleaker before the week is over as option traders piled into the 40 strike puts expiring this Friday at an 85 cent premium. Those options would be profitable at a share price of less than $39.15. What's startling here is that today's action involving more than 3,000 put options compares to established positions of less than half that number.
PFG – Principal Financial Group – Fears that losses from fixed-income investments would deplete capital and concerns that credit defaults would undermine capital adequacy hurt shares in life insurers today. Principal Financial was 12% lower at $16.82 and with less than 40,000 options positions established, today's 5,500 contracts jumped out at us. With implied volatility raging at 134%, an investor stepped up to sell a strangle on the stock by combining 1,000 of each of the February 20 calls and same expiration 12.5 strike puts. The calls fetched 1.40 while the put sale collected 1.0 per contract. The combined premium of 2.40 defines the limits beyond which the investor starts to lose money. The strangle sale works well if shares remain between $10.10 and $22.40 by expiration next month. The total premium is retained as long as shares remain within the two strikes. Separately investors bought the 15 strike puts for a 1.85 premium.