Option Trading Volume on Four Stocks Show Trader Sentiment

10/30/2009 12:01 am EST

Focus: OPTIONS

The Goodyear Tire & Rubber Co. (GT)

Shares of the largest tire producer in the US plummeted 24.5% to $12.74 after the firm forecast an operating loss in North America this quarter. The dismal forecast overshadowed bullish third quarter results wherein profits more than doubled to 30 cents per share on cost-cutting efforts.

Option trading on the stock today reflects the mix of positive and negative news on the company. Some investors purchased calls at the November 15 strike 2,700 times for an average premium of 80 cents apiece, while others sold 2,500 calls at the same strike for 35 cents each. Call buyers are perhaps expecting shares to rebound ahead of expiration. Profits will accrue for these rubber optimists if shares rally 24% to $15.80 by expiration. 

Conversely, call sellers hope to retain the 35-cent premium received on the sale in the event that shares remain south of the $15.00 level. One other bullish sign for the tire company was the sale of 1,500 puts at the November 12.5 strike for 46 cents apiece. Put sellers at this strike will retain the full premium received as long as shares trade above $12.50 through expiration day. Option implied volatility has surged 31% during the past week to reach 63% today.

Regions Financial Corp. (RF)

Large-volume bearish put plays in the November contract launched the financial services firm onto our “most active by options volume” market scanner. Shares are currently lower by 2% to $4.97. One investor banked gains on a previously established bearish position and subsequently rolled the position to a lower strike price. It appears the trader originally purchased 20,000 puts at the November 6.0 strike for approximately 60 cents per contract on September 16, 2009, when shares were trading at $6.39.

The put options have since landed in the money, allowing the trader to sell the contracts today at an average premium of 1.04 each. Net profits on the sale amount to approximately 44 cents per contract for a total of $880,000. Next, the investor established a new bearish position by purchasing 20,000 puts at the in-the-money November 5.0 strike for 34 cents a pop. Profits will begin to accumulate if Region’s shares slip beneath the break-even price of $4.66 by expiration. Option implied volatility on the stock steadily increased throughout the trading week, rising 29% since Monday’s opening value of 52%, to the current high of 67%.

Masco Corp. (MAS)

The manufacturer of home improvement and building products suffered a 4.5% decline in shares to $12.49 following third quarter earnings. MAS narrowed its full-year earnings estimate range to losses of a nickel up to positive income of five cents. Previously, the firm forecast losses of as much as 25 cents per share up to negative five cents per share. The positive revision, however, did not sufficiently distract investors from the 17% decline in sales for the quarter. Perhaps the depressed housing market and continued weakness in consumer spending on home improvement products contributed to the sales slump.

Bearish traders braced for continued declines in MAS by scooping up 5,000 puts at the December 10 strike for an average premium of 23 cents apiece. Put buyers may hold shares of the underlying stock. If this is the case, downside protection will kick in if shares decline a whopping 22% from the current price to breach the breakeven point at $9.77. We note that shares have remained higher than $10.00 since July 23, 2009.

Visa Inc. (V)

Proving that rising unemployment in an increasingly cashless society isn’t hampering business, payment processor Visa reported a beat in earnings as it returned to profitability after a loss a year ago. The accompanying announcement of a potential $1 billion stock buyback program also boosted the performance of its shares today as investors cashed in on a 5% gain to $77.50.

Option investors were quick to extrapolate further gains for its shares. Not only were November 75 and 80 strike calls active on volume of 12,500 lots apiece, but bulls played out those expectations by agreeing to have shares put to them at an arranged $75 ahead of November’s expiration in the event that the share price subsides. Investors sold almost 10,000 75 strike puts at a $1.46 average premium. This volume is fresh opening interest from investors eager to retain the premium on what they perceive to be an increasingly lower likelihood outcome. And the reward for doing so is to effectively acquire Visa shares at a discounted $73.54. In the meantime, option implied volatility is on the decline as it slips 16% to 31.5% today, which naturally causes attrition of premium on both calls and puts.

By Andrew Wilkinson of Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group

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