OPTIONS NOVEMBER 20, 2008, 8:56 P.M. ET Traders Make Quick-Hit Options Bets in Financials
By TENNILLE TRACYArticle
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Traders did something they rarely do -- they bought options that expire in a matter of hours.
Under normal circumstances, traders steer clear of options that are close to expiring. That is because they have a greater chance of losing money when they bet on a company's stock moving in a certain direction within a short amount of time.
On Thursday, traders showed up in droves to buy and sell November options in several of the largest financial companies, even though the contracts become obsolete when the market closes Friday. "I think the volatility buying, with options expiring tomorrow, has been extreme," said Steve Sosnick, an equity risk manager with Interactive Brokers' Timber Hill.
There were few companies in which this was more evident than Citigroup Inc. Trading in Citigroup jumped to three times the normal level, as investors picked up 349,000 calls that allow them to buy the company's stock and 341,000 puts that allow them to sell it, according to Trade Alert.
A lot of the activity took place in November options, where the bulls locked on to November $5 calls and the bears picked up November $5 puts. After taking into account the price of the options, the calls make money if Citigroup jumps 15% above Thursday's close and the puts make money if it drops 9%.
Citigroup closed the session at $4.71, down 26.4%.
Investors showed similar interest in the November contracts of J.P. Morgan Chase & Co. There was considerable volume around November $25 calls, which suggests some investors think the stock will rebound Friday. Priced at 65 cents, those contracts make money if J.P. Morgan shares climb above $25.65.
There was noteworthy action around November $25 puts, as well. Those are priced at $2.50 and make money if J.P. Morgan slips below $22.50.
J.P. Morgan Chase closed at $23.38, down 17.9%.
With so many investors willing to speculate on the direction these stocks will take in the next session, the options market is signaling that volatility could remain high. After several days of triple-digit moves, investors believe anything can happen in a short span of time and they're willing to bet that it will.
"I think that everyone has started to stretch their definition of what is possible in this market," Mr. Sosnick said.
The definition of what's possible also included a double-digit move in Goldman Sachs Group, as traders flocked to the near-term options in that Wall Street firm. In this case, traders picked up November $60 calls and November $50 puts.
Goldman shares closed at $52, down 5.8% |
