XLF – Sweet charity emanating from Warren Buffett’s offer today to reinsure $800 million in municipal bond portfolios provided a sense of alleviation to Dow and S&P components. VIX volatility pulled sharply lower, and the Financial Sector SPDR ETF, the de facto temperature-taker of the trouble-making financial sector, pushed 1.6% higher to $26.95. Option action paints a somewhat different picture, one of traders all-too-knowing that the sector is cruising on a temporary mood of goodwill, and mindful of its capacity to crater – witness what happened yesterday with XLF component AIG, whose credit outlook today was cut from stable to negative by Standard & Poor’s due to its exposure to mortgage-backed securities. The 254,000 options trading actively as of the noon hour are trading twice as often to puts as to calls, with heavy buying in at the 27 put strike in February as well as March. Front-month action also showed willingness to buy puts at strikes as low as 26, with the market ascribing a slightly less than 1-in-4 chance at a break below 26 before Friday.
AIG – American International Group – Yesterday’s spectacular meltdown in AIG on credit exposure woes has met with a 3% recovery bounce to $46.55 today, despite the aforementioned S&P downgrade. Highlights from the 147,000 options trading on our platform this morning include heavy selling interest in February 45 puts – a buyer of this position last week, when concerns about AIG’s credit exposure first began to elicit heavy put-volumes in AIG, would have paid 45 cents for the contract. Today’s going price is $1.15 – a more than 150% profit on the initial position. Elsewhere it looks like traders are seeking to sell volatility in the March contract at call strikes of 40, 45, 50 and 55 and at puts from 35 and up. Implied volatility still shows traders pricing in about 20% more price risk for AIG shares over the next month than is evident in the 52% historic volatility reading.
ALB - Shares in specialty chemicals maker Albemarle are up 6% today at $40.10 on a resurgence of takeover chatter suggesting German chemicals giant BASF is on the verge of a $4 billion-plus bid for the company. Albemarle has a strongly heterogenous product palette, producing polymer additives for flame-retardant and antioxidant use, catalysts for the oil refining industry, pharmaceuticals and other complex chemicals for industrial use. Although the takeover chatter remains unsubstantiated, some analysts have given credence to BASF as a possible suitor on strength of Albemarle’s oil refining catalyst activities, which are said to account for half of its profits. This is the second session in 7 that Albemarle call volume has picked up on BASF chatter, and today’s heavy buying interest in February 40 calls has driven overall volume to more than 4 and a half times the normal level.
