Today’s tickers: BBBY, F, SHW, GM, IYT, DAL, NWA, SLM, CBAK & CSUN

From Yahoo! Finance

GM – General Motors – Resolution to the auto workers strike was greeted with a 6% pop-up in shares at GM to stand at $36.52. Implied volatility on options traded on the stock dropped by almost one quarter to 45%. That meant that call buyers eager to capitalize on the anticipated rise in the stock got hurt as they paid up to 3.3 for rights to buy GM shares at a fixed $35.00 by October’s expiration. The drop in volatility was accompanied by call selling on the rally leaving those calls with gains of 20% rather than the 74% gain as trading started. Call sellers at 3.3 for example are protected against share price gains until the stock reaches $38.30, which would still require a 6.6% rally from today’s current price.

Meanwhile put prices in the October contract reflected the double-whammy of “good news” (a rally in the stock and a drop in volatility) by cratering by as much as two-thirds. The 35 strike shed 54% on yesterday’s session leaving premiums at just 1.2. the November series was most active on the call side at the 37.5 strike where 2,300 lots traded in comparison to 1,590 puts at the lower 35 strike. Overall some 127,000 contracts traded by 11am with 1.8 calls trading in comparison to puts.

F – “Detroit fever” in the options market finally made its way to Ford (F), where option traders have remained firmly on the sidelines in view of the unfolding strike drama at GM. Shares tacked on a 5.6% gain to $8.81, and with 99,000 options trading it appears that some investors felt assured enough of the sticking power of today’s UAW/GM deal to let go of about 61,750 “doomsday puts” in the January ’09 series that would have allowed them to dump Ford shares for $5 apiece in January of 2009. Elsewhere, we observed confident positioning in the December 10 calls, where more than 10,000 lots traded. As is the case with GM, implied volatility beat a fast retreat and at 34% is now about 2% below the historic volatility reading for Ford shares.

BBBY – A seeming contradictoriness over the market’s perception of home improvement retailers to navigate in the current dicey environment is also apparent in shares of Bed Bath & Beyond, due to report earnings today. Shares were up 6% after the bell at $35.19, with 18,000 options moving actively, showing a slight skew to the puts. While option traders appeared loath to venture “beyond” the October contract, the positioning here suggests a couple of scenarios. We can ascertain that about a quarter of today’s volume – 3,000 lots – is seated in the October 35 calls, but because these are logged to the middle of the market, we can’t confirm whether they were bought or sold. Given that we know the 1,200 lots calls trading at the 32.50 strike were bought on the offer, some traders may be selling the 35 calls to fund exposure at the 32.50 level. Or they may be involved in sold straddles or strangles involving puts at the 30 and 32.50 strikes. Whether the market has simply become inured to pale prognostications on the buying power of home-loving US shoppers, traders do not appear to be positioning for any great shakes in volatility for Bed Bath & Beyond, and even an upside surprise in earnings is unlikely to take shares past the $35 level.

SHW – A whitewash of the current housing market woes, or is the market being primed for yet another takeover rumor? We were surprised to see this morning’s M&A rumor-mill seize upon a ticker with such unmitigated exposure to the sagging home improvement market. Sherwin-Williams, producer behind the eponymous Sherwin-Williams and Dutch Boy paint brands, is commanding more than 6 times the average volume in options trading today, with shares up 3.4% to $66.91. So what’s in the Sherwin-Williams mix that hasn’t rubbed off on the likes of Lowe’s? We’re observing heavy buying in the October 70 and 75 calls, in positioning that’s as fresh as a coat of buff! Heading into today’s session, total open interest showed about 2.7 open put positions for every call, implying a prevailingly bearish sentiment on Sherwin-Williams, a company that has underperformed the S&P by about 3.4% for the year to date, but outperformed peers in the consumer discretionary index.

IYT – iShares Dow Jones US Transport index ETF – shares rose 0.6% to $86.58 Wednesday and continued to pull away from support at $80.40 and $83.49 put to the test over the summer months. No doubt the high price of crude oil has been adding additional weight on the sector, yet the sector seems to have found some friends at least. Option open interest is scant at just 11,983 lots, which is why put trading today is of interest to us. The deep-in-the-money December 100 strike puts saw heavy volume of 2,731 lots at a price of 13.50. The bulk of that volume appears to have traded to the bid side indicating that investors have confidence that transport share prices will rally going forward. If they do continue to rally the put premium at the 100 strike will erode. Not only that, but as time lapses towards expiry the time value element that makes up options prices will decay. As long as share prices at least stand still in the sector these investors may be onto a healthy trade. Yesterday we noted a buzz in the options market as trucker YRC Worldwide took on the appearance of a takeover target.

DAL – Delta Airlines options were notably active thanks to the purchase of 21,000 calls at the December 17.5 strike price. Shares in the airline were higher by 4.5% at $17.84 and so left these calls in-the-money. An investor clearly sees relief in the sector ahead following a rebound for Delta off a $15.90 low. Implied volatility pretty much matches the activity on the underlying share price performance at around 54%. Today’s option volume stacks up to around 15% of overall open interest on Delta’s options contracts.

NWA – Northwest Airlines options volume was also significant. The bulk of today’s trading, unlike as occurred with Delta, was on the put side, where it would appear that a large chunk of October 15 puts were bought. Some 15,000 lots traded today premium of 0.50. However, an investor is picking these up at a nickel below Tuesday’s closing price at a time when shares have rallied 2.9% to stand at $17.01. This investor is looking for a share price slide of as much as 6.9% before breaking even on this trade. Also in play today were puts at the March 22.5 strike where a buyer snapped up 2,100 lots at around a 6.0 premium.

SLM – Shares closed 2.4% lower at $45.08 after Sallie Mae confirmed that a JC Flowers/Bank of America consortium had reneged on the terms of its $25 billion buyout. Options traders reacted immediately, putting more than 200,000 contracts in play. Earlier today, option traders appeared keen on volatility positioning in the front month contract. Once news of the shelved agreement was made public late in the session, traders made a rush to shed calls at the 50 and 55 strikes in the November and January contracts. A telling commentary on the volatile plight of this troubled takeover candidate, option implied volatility stands at 67% – compared to 28% historic volatility.

CBAK, CSUN – The ranks of relative volume gainers included a couple of conspicuous Chinese tech companies with exposure to the consumer electronics sector. China Bak Battery (CBAK), one of the leading makers of rechargeable lithium-ion batteries, saw its volume surge to more than 80 times the average as shares added 26% on the day to stand at a $6.35. Implied volatility rose 40% to 66.3 on the session, as option traders rushed to buy calls at the 7.50 in the October and December contracts. Meanwhile, options in the ADR-traded shares of China-based solar cell maker China Sunergy (CSUN) attracted 14 times the average volume against a modest 2.7% gain in shares to $10. Traders appeared to zero in on the front month at-the-money strangle, which at $2.35 represents more than20% of today’s share price.

Andrew Wilkinson
Senior Market Analyst

Rebecca Engmann Darst
Equity Options Analyst

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