U.S. Options Index Rises Most in 3 Weeks as Citigroup Puts Gain
By Jeff Kearns
June 26 (Bloomberg) -- The benchmark index for U.S. stock options gained the most in three weeks as put contracts on Citigroup Inc., Merrill Lynch & Co. and General Motors Corp. advanced.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed for the first time this week, gaining 13 percent to 23.93. The index, which measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, reached the highest level since June 11. The S&P 500 lost 2.9 percent as analysts said Citigroup and Merrill will report more writedowns and GM plunged to the lowest in at least 46 years.
``The financials are driving a lot of the volatility,'' said Randy Frederick, director of derivatives at Charles Schwab & Co. in Austin, Texas. ``We're getting close to the point where a lot of the firms are going to announce earnings and almost every company is guiding lower or issuing cautious statements.''
September $15 puts on Citigroup, the biggest U.S. bank by assets, rose as the stock fell to $17.67, the lowest since 1998. Merrill's July $27.50 puts climbed while its shares slipped to a five-year low of $33.05. GM's July $10 puts surged after Goldman Sachs Group Inc. recommended selling the largest U.S. automaker, citing a deteriorating sales outlook. The biggest U.S. automaker tumbled 11 percent to $11.43 on the New York Stock Exchange.
The most-active contracts tied to the VIX were July 27.50 calls, more than doubled to $1.15, followed by July 25 calls, which rose 81 percent to $1.90. Buyers of VIX calls profit when the S&P 500 declines. The VIX has averaged 23.33 this year.
`We're Waiting'
``The financials have to take the lead'' in rallying, Randy Bateman, who oversees about $15 billion as chief investment officer of Huntington Bancshares Inc. in Columbus, Ohio, said during a Bloomberg Radio interview. ``We're waiting until we see a sustainable trend before we jump back in.''
Citigroup's September $15 puts gained 73 percent to 90 cents. Merrill July $27.50 puts advanced 71 percent to 70 cents. The world's largest brokerage hasn't traded below $27.50 since 1998.
Citigroup may reduce the value of its assets by $8.9 billion, causing a third straight loss for the New York-based company, Goldman analyst William Tanona wrote in a report. Sanford C. Bernstein & Co.'s Brad Hintz cut his second-quarter estimate for Merrill to a loss of 93 cents a share from a profit of 82 cents.
Volatility Swings
Calls convey the right to buy a security for a certain amount, the strike price, by a given date. Puts give the right to sell. Some investors buy or sell options to guard against changes in the prices of securities they already own. Others use the contracts to bet price swings, or volatility, will increase or decrease. Next month's options expire July 18.
GM July $10 puts more than doubled to 57 cents after Goldman recommended selling the largest U.S. automaker, citing a deteriorating sales outlook.
``The trading shows concern about additional weakness in the stock,'' options strategists at Susquehanna Financial Group in Bala Cynwyd, Pennsylvania, wrote in a note to clients. ``The $10 strike puts in July, August and September are all seeing heavy buying.''
Investors bet that homebuilders will keep dropping after Lennar Corp. reported its fifth straight quarterly loss as the company cut prices to attract buyers. The second-largest U.S. homebuilder fell to the lowest since January, sliding 8.4 percent to $13.34 on the NYSE.
Trading in Ryland Group Inc. puts reached 16,156 contracts, six times the 20-day average, and bearish bets exceeded calls by 15-to-1. Almost 80 percent of puts traded on Ryland, the homebuilder that targets first-time buyers in 15 U.S. states, were October $22.50 puts. They rose 36 percent to $3.40. Ryland declined 8 percent to $22.80 on the NYSE.
Centex Corp. put volume jumped to 2.4 times average, also boosted by trading of October puts. The most-active contracts on the fourth-largest U.S. homebuilder were October $15 puts, which rose 40 percent to $3. Volume for that series was 10,349 contracts, more than the 6,976 daily average for all Centex puts. Centex lost 7.6 percent to $14.22.
To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.
Last Updated: June 26, 2008 17:46 EDT
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