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Betting on Increased Volatility

Author
John Stewart

9/28/2006 1:55:36 PM

Call options on the CBOE Volatility Index (VIX: sentiment, chart, options) are quite popular today, as nearly 30,000 contracts just at the November 15 strike have been traded thus far. There is little-to-no put option activity on the VIX. This is a large bet on an increase in volatility, which usually means a sharp drop in the broader market. As the market declines and people rush out to buy put option protection for their portfolios, the VIX increases. The current VIX reading is 11.84. I've noticed in the past, these types of plays tend to be "smart money."


 

Minyanville: H&R Block: The Ugly, The Bad, and The "Looking for Something, Anything Good"

Author
Minyanville: John Succo

9/1/2006 9:54:35 AM

Schaeffer's Investment Research is pleased to bring you articles from Minyanville contributors. For more about Minyanville, go to www.minyanville.com. Views and opinions expressed here are solely those of the author and do not necessarily represent those of Schaeffer's Investment Research.

Since the quarter was an incredible screw-up, even for a company that has a history of incredible screw-ups, I will break with tradition and start with...

The Ugly: The Numbers

  • The numbers missed consensus by a lot, despite consensus being a totally uninspiring -$0.28; H&R Block (HRB) reported a -$0.41. To put this in some context, it did -$0.09 1Q last year—so the excuse that first quarters are always seasonally weak goes out the window.

    • Mitigating Factor: It was not really a surprise—guidance did not reflect the 19 cent mortgage reserve announced last week—the reason the stock did not sell off post announcement, despite the numbers looking much worse than expectations.

  • The company reduced already anemic guidance from $1.80-$2.05 to $1.60-$1.80. The reduction was primarily related to additional provision for repurchase reserves.

    • It still strikes my firm as too high as it assumes default experience does not worsen from here. We think that deteriorating real estate prices and rash of ARM prepayments may lead to significantly more charges than management expects (or admits to).

    Just a week ago the company reported that it was setting aside $102 million to cover losses in its sub prime mortgage lending unit. CEO Ernst expressed confidence that the expanded reserve is large enough to cover loan losses.

    My firm would like to point out that this is a company that offers a wide range for earnings guidance and has still missed 4 of the past 6 quarters. I am not sure how much confidence I have in CEO Ernst's confidence.

    Mitigating Factor: Consensus numbers were already within range of new guidance.

  • Starkest Numbers:

    • Gain on Sale Mortgage assets 2005Q: $236 mln
    Gain on Sale Mortgage assets 2006Q: $63 mln

    The Bad:

  • For other mortgage companies, some cryptic comments (that we already knew) from CEO Ernst:

    • "Wall Street firms and other loan buyers in the secondary market have become much more stringent in their enforcement of their requirements to buyback loans."

    The default rate is up to 5 percent from 2 percent last year. Our view is that other mortgage lenders are facing, or will face, the same problem.

  • Block's tax service business, which historically incurs first-quarter losses, reported a pre-tax loss in the latest period of $153.1 million, compared with a $144.5 million loss last year. The company attributed the loss to opening 300-400 more offices nationwide

    • Question: why open the offices?

  • Management indicated that lower net income leaves room for only 17 million share repurchases; investors were certainly hoping for more.

  • Sale of the mortgage business is looking increasingly unlikely. CEO Ernst, during the call, discussed a lack of "strategic alternatives" for mortgages.

  • Net debt increased y/y by $480 million (company used to have positive net debt, meaning more cash than debt).

    • The Good:

  • Outside of mortgages, other business lines "performed in line with expectations," said CEO Max Ernst.

    • It is not hard to perform in line with expectations when there are no expectations because your other businesses are preparing taxes and loaning money at usurious rates against tax returns and it isn't even close to tax return season.

  • Revenues in Business Services rose 62 percent. Giving the devil his due, this line and the acquisition from AMEX seem to be working.

    • Bottom-line: The announcement was really a repeat of last week's writedown (except the amount of share repurchase was disappointing), so we don't expect immediate affects. The only bull case we have heard for these guys is that they have an above T-bill FCF yield of about 5 percent. Slightly above the risk-free rate does not seem compelling to us given high mortgage risks, uncertain tax outlook, decreased ability for financial engineering, management's poor history of delivering on promises and lack of real direction in businesses.

    Position in HRB

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    Commentary by WhatsTrading.com
     
    CBOE Volatility Index (.VIX) $21.90 -5.56%
    9/3/2010 3:20:00 PM

    The top options trades so far today are in the CBOE Volatility Index (.VIX) after the Sep - Oct 25 put spread trades at 45 cents, 58000X. The same spread traded yesterday and the action looks like rolling from one month to the next. Open interest in the Oct 25 puts increased by 54,880 to 129,900 following yesterday action and if today's block of 58K adds to it, then the increasing interest is likely to make the contract the second biggest position in the VIX; behind the Sep 25 puts, which have 289K of open interest. VIX is down 1.33 to 21.86 today and has now suffered a four-day slide of about 20 percent. The large blocks of puts on the VIX might be hedges of VIX futures.

    Read more at WhatsTrading.com

    Close Article

     
    Sprint Nextel Corporation (S) $4.39 +1.15%
    9/3/2010 2:00:02 PM

    Sprint Nextel (S) shares are up a nickel to $4.39 and have now added 12.5 percent since Monday. Some players might be worried that the gains won't last, as a block of 20K Sep 4 puts recently traded at the 4-cent ask price. It might be a closing trade. Meanwhile, 8,000 Jan 4 puts also changed hands, including 4000 at the 38-cent ask and 4,000 at 37 cents. The Jan 4 puts look opening and marked "tied", so possibly a protective put or volatility play. Implied volatility in Sprint is down 4 percent to 48.5 today, compared to a 52-week high and low of 87 and 46.5.

    Read more at WhatsTrading.com

    Close Article

     
    Urban Outfitters (URBN) $32.98 +1.23%
    9/3/2010 12:00:01 PM

    Urban Outfitters (URBN) adds 42 cents to $33 and options volume is 3X the average daily, led by a Sep 33 - 34 call spread, 3300X on ISE. Looks like it was sold at 45 cents and is possibly rolling up in strikes after a three-day 8.7 percent gain in the share price. URBN saw relative strength and was one of the best gainers in the NASDAQ 100 yesterday. The company is due to present at a Goldman Sachs Retailing Conference on 9/14.

    Read more at WhatsTrading.com

    Close Article

     
    Ford Motor Company (F) $11.95 +2.04%
    9/3/2010 11:00:00 AM

    Ford Motor (F) adds 24 cents to $11.96, now up 5.7 percent month-to-date, after reporting an 11 percent decline in August sales on Sep 1. Options action is picking up today, with 25K calls and 9,930 puts traded on the automaker, or two times the typical volume for the first hour of trading. Early trades included blocks of Sep 14 calls at 7 cents on ISE, where sentiment data hints at opening customer buy orders. 10,775 contracts now traded.

    Read more at WhatsTrading.com

    Close Article

     
    Microsoft Corp (MSFT) $23.90 +0.00%
    9/2/2010 4:00:06 PM

    Microsoft (MSFT) is flat at $23.91 and recent trades include an Oct 25 - 27 call spread at 32 cents, 5000X on CBOE. Looks like a buyer initiating the trade and the spread has been repeated multiple times. Now volume in both contracts exceeds 9000. Another noteworthy trade in Microsoft today is a block of 9555 Jan 27.5 calls at the 44-cent ask price in afternoon trading. This morning, about 30 minutes after the bell, a block of 5,720 Jan 24 calls was bought to open at $1.60 on ISE, according to ISEE data. 81,000 call options now traded on the software giant, compared to 13,000 puts. The bullish trading comes ahead of a presentation at the Citi Global Tech Conference Tuesday at Noon ET.

    Read more at WhatsTrading.com

    Close Article

     
    Mariner Energy Inc (ME) $22.85 -2.14%
    9/2/2010 1:20:02 PM

    Mariner Energy (ME) shares sank in volatile morning trading on reports of an explosion on one the company's oil rigs in the Gulf of Mexico. ME sank to $19.62 and were recently down $1.04 to $22.31, and 13.7 percent off session lows. Meanwhile, options volume is running 145X the average daily, with about 23,000 puts and 3,190 calls traded. The top trade is a lot of 456 Sep 20 puts at 80 cents. It traded at 11:45 and thirty minutes after the news broke. 15.4K now traded and the contract is now bid at 40 cents. CNBC reports that no oil spilled as a result of the explosion and Dahlman Rose analysts say the explosion is likely a platform. Consequently, the fallout is likely to be consirably smaller. Still, implied volatility in the Houston-based oil driller is up sharply, almost 200 percent to 76.5.

    Read more at WhatsTrading.com

    Close Article

     
    Momenta Pharmaceuticals Inc (MNTA) $14.78 -0.81%
    9/2/2010 12:20:01 PM

    Momenta Pharmaceuticals (MNTA) loses 14 cents to $14.76 and one strategist pays 25 cents for the Jan 10 - 12.5 (2X1) put ratio spread, 4000X on PHLX. Looks like a new position and might be a hedge. The Food and Drug Administration is expected to rule on Momenta's generic drug M-Enoxaparin by the end of this year. Implied volatility is flat today, but elevated at 92.

    Read more at WhatsTrading.com

    Close Article

     
    Anadarko Petroleum Corporation (APC) $50.19 +2.87%
    9/2/2010 11:00:14 AM

    Bullish flow detected in Anadarko Petroleum (APC), with 23,850 calls trading, or 2x the recent avg daily call volume in the name. Shares are up $1.81 to $50.50 after The Australian published a story saying that APC is on BHP's radar screen as a possible acquisition target. 'A senior figure in the global energy industry is convinced that the "second target" for BHP is Anadarko Petroleum Corporation, telling The Australian he believed the US oil and gas independent was firmly on BHP's radar. BHP declined to comment for this article.' (Link). In options action, the focus is on APC Sep 50, 52.5 and 55 calls. Nov 55 calls are among the most actives as well.

    Read more at WhatsTrading.com

    Close Article

     
    Burger King Holdings Inc (BKC) $18.90 +14.90%
    9/1/2010 1:20:00 PM

    It's been one Whopper of a day for Burker King (BKC) shareholders. The stock gapped higher, near $19 at the open, on reports the fast food chain is considering putting itself up for sale. However, the early gains faded amid talk 3I Group, the interested party, denied it was in talks with BKC. Shares dropped to $17.13 mid-morning and about 10 percent from session highs. However, the WSJ then released a story suggesting that 3G is in talks with Burger King. CNBC also out saying that it might be 3G, not 3I Group interested in BKC (very confusing -- bottom line is: original speculation about 3I Group was incorrect. It should have been 3G and yet still, it's not confirmed).\n
    \nShares rallied back beyond $19 and are up $2.45 to $18.90. Meanwhile, options volume is 7X the average daily, with speculative call buying driving a lot of action in Sep and Oct 20 calls. Looks like two-way flow in Sep 19 puts and calls. Some traders are likely liquidating positions as BKC saw a flurry of activity on 8/25 and 8/26 (see 8/26 color). IV up 23 percent to 53.

    Read more at WhatsTrading.com

    Close Article

     
    Ensco Plc (ESV) $43.95 +7.77%
    9/1/2010 12:00:02 PM

    Bullish flow detected in Ensco (ESV), with 5975 calls trading, or 3x the recent avg daily call volume in the name. Shares are up $3.28 to $44.06 on a good day for the oil drillers after crude rallied $2 to $73.92 a barrel. Oil Service HOLDRS (OIH) up nearly 5 percent. ESV is among the day's biggest gainers (RDC, PDE, NE, NBR, and DO also seeing relative strength). In ESV options, the focus is on Sep 43, 44, 45, and 47 calls, as well as Oct 45 and 46 calls. Overall sentiment based on the total order flow is 59 percent Bullish.

    Read more at WhatsTrading.com

    Close Article

     
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