Today's tickers: C, BAC, EL, TRA, CY & FXI
C – Citigroup Inc. – It's options expiration day, which means lots of action for investors pricing the 4.0 strike in the January contract. Shares in Citi are so far reacting positively to the placement of the axe right though the heart of its divisions and are trading at $4.05. Just for kicks, we're watching the straddle trading, which is our barometer of where traders expect to see shares settle later today. Currently the call and put premiums combined at 32 cents predict that shares will settle between $3.68 and $4.32 today. Time value is eroding by the minute! In today's trading of the February contract it appears that investors are buying 6.0 strike calls in exchange for 7.0 and 8.0 strikes. They also seem to be selling out of 3.0 and 4.0 strike puts. Don't be confused by options sales today, which might be less driven by directional traders as it is by volatility sellers. Overall implied volatility is off 15% to 178% on the contracts ahead of the weekend. We also think we note some back spreading in the March calls between 6.0 and 9.0 strikes where investors seem to be taking a net credit from the sale of the lower strike and limiting risk with purchase at higher strikes.
BAC – Bank of America. – Bank of America Corp, having just received $20 billion in TARP funds from the U.S. government, instilled confidence in the North Carolina based BAC, and drove share price higher and option implied volatility drastically lower from 211% yesterday to 158% today. Investors priced the 10 strike call expiring in February yesterday at 1.36, but this morning a pessimistic option trader sold more than 10,000 contracts at just 85 cents after the first half hour of trading, undermining confidence in the nascent share price recovery. Thus, it appears as though the sense of confidence felt by the $20 billion injection was easily shaken in these highly uncertain times for the feeble banking industry. By late morning, the 10 strike calls expiring in February are trading lower still at 60 cents on hefty volume of 28,500 lots as BAC teeters just above yesterday's weakest price at $7.52.
EL – Estee Lauder. – With brands recognized around the globe, Estee Lauder, manufacturer and marketer of quality skin care, makeup, fragrance, and hair care products, is feeling the pressure of poorer than expected holiday sales and continued erosion of discretionary consumer spending. Shares declined 12% to $25.67 today. EL is one of a multitude of luxury consumer goods providers who has had to reveal lower than estimated earnings for 2008, as well as far weaker and more uncertain forecasts for 2009. Current economic conditions, poor consumer confidence coupled with a decrease in discretionary spending, and retailer destocking are just some of the factors that blemish EL's outlook for the year and keep its share price at around half of what it was just one year ago. But option traders don't yet see massive downside for EL where the February 22.5 puts were sold against the purchase of those at the 25 strike. Should shares decline to $22.50 at expiration the investor stands to make 1.50 per contract. At the April contract we tracked sales of puts at each strike between 20 though 25.
TRA – Terra Industries Inc. – The largest maker of liquid-nitrogen fertilizer is the target of a bid from CF Industries Holdings Inc., which accounts for a 17% jump in its shares to $19.10. While option implied volatility dropped a shade to 92% it would appear that option traders are banking on a deal here and are actively spanking the February puts at the 17.5 strike. Taking in the 55 cent premium means they are vulnerable beneath $16.45 if there has been a hitch in the deal by the time next month's expiration comes around. So far, 10,000 contracts have traded where open interest is a mere 1,400 lots. Investors also bought March expiration calls at 2.90 indicating confidence that shares would be above $22.90 by expiration. Overall option volume of 32,000 lots compares to interest in the overall options amounting to 76,538 lots.
CY – Cypress Semiconductor – While shares in semiconductor manufacturer, Cypress have only dropped 1.7% to $4.67 today the 20,000 volume so far piques are interest. Overall open interest is just less than 50,000. Here's what we think we're seeing. The March puts appear to be in popular demand today with the 4.0 strike ringing up volume of 5,600 lots at 30 cents while the 5.0 strike has been bought on volume of 2,200 lots at 75 cents. On the call side the 4.0 strike calls were largely sold at 95 cents while 5.0 calls were bought. It seems that this is a pretty bearish pattern with an investor trying to limit risk using the 5.0 calls should the shares rally. Option implied volatility is unchanged at 78% today.
FXI – iShares FTSE/Xinhua China 25 – A large opening straddle appears to have been purchased today involving the February 26.0 calls and puts. A 20,000 lot trade appears to be a large bet that the market is going to break down or surge higher during the next several weeks. The trade looks to have gone through at a gross cost of 4.60, which puts the breakevens at $30.60 and $21.40, which would be a shift towards the extremes of the recent congestion zone. The trade stirred many traders who wondered where the trade popped up from. A straddle is also used to play volatility on a security and the price of the combination will be affected by changes to how markets price options going forward. A long straddle benefits from more chaos and whether this investor is looking for a break up or down plays second fiddle to the fact that he is expecting greater volatility ahead.
Senior Market Analyst
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