UPDATE:Options Suggest Investors Are Wary Of El Paso, Others
June 26 2009 - 4:19PM
Dow Jones News
As U.S. companies gear up to report the next batch of quarterly
results, investors appear willing to pay more for bearish options
than bullish ones in a handful of companies.
The trend suggests investors are more nervous about these stocks
making sharp moves to the downside than sharp moves to the
upside.
Among the stocks in which bearish options cost more than bullish
ones are Starwood Hotels & Resorts Worldwide Inc. (HOT), El
Paso Corp. (EP), Moody's Corp. (MCO) and Quicksilver Resources Inc.
(KWK), according to analyses conducted by Goldman Sachs Group.
On the flip side, there are also companies in which bullish
options cost more than normal, when compared to the cost of bearish
contracts. Among these names are Medarex Inc. (MEDX), Qwest
Communications International Inc. (Q), Goldcorp Inc. (GG) and
Barrick Gold Corp (ABX).
Strategists attempt to determine the likelihood of future moves
by analyzing the "implied volatility" of the companies' options.
Specifically, they compare the implied volatility on put options
with the implied volatility on call options - a closely watched
measurement known as "skew."
Puts convey the right to sell a company's stock and are
considered bearish contracts. Calls, on the other hand, convey the
right to buy a company's stock and are considered bullish
contracts.
In cases where puts carry a higher implied volatility than
calls, investors have shown a willingness to pay higher prices for
those bearish contracts and are signaling nervousness over the
stock.
"Typically, people look at these screens as a gauge of fear
because if puts are more expensive, then people fear a gap move
down more than they fear a gap move up," said Goldman Sachs
derivatives strategist John Marshall.
The relationships between call and put options are constantly
changing, and so rapid increases or decreases in skew could signal
expectations for future moves.
Among the companies in which the skew has turned more bearish in
recent sessions are Wendy's/Arby's Group Inc. (WEN), JetBlue
Airways Corp. (JBLU) and General Electric Co (GE).
Meanwhile, skew has turned more bullish for Sara lee Corp.
(SLE), DIRECTV Group Inc. (DTV) and Advanced Micro Devices Inc
(AMD).
To obtain these readings, Goldman Sachs tracked changes in skew
from June 16 to June 23.
Investors who believe the options market is mispricing risk in
these companies - either to the upside or downside - can execute
certain trades to take advantage of the situation.
For example, investors who believe a company's puts are too
expensive in relation to its calls can sell puts and buy calls. By
contrast, investors who think a company's calls are too expensive
in relation to its puts can sell calls and buy puts.
-By Tennille Tracy, Dow Jones Newswires; 212-416-2183;
tennille.tracy@dowjones.com