Unlike a week ago when we bearishly addressed Goldman Sachs (GS), a barrage of seemingly never-ending reports from America’s Anchor Bankers (XLF) made this a “Terribull Tuesday” for many overly-optimistic portfolios. One company in particular that’s remained more toxic to directional bulls than most names in the group is Lehman Bros (LEH).
In Tuesday’s session shares of the Broker / Dealer tumbled 13% to finish near $13 per share and striking its worse level in more than a month. Option traders certainly took notice and participated in sync with the stock sinking of sorts.
Contract volume nearing 333,000 was more than 3.3 times above-average. At the same time, roughly 2.7 puts traded for every call. In conjunction with implied volatilities pressing higher on the session to their highest levels in August, the assumption of investors seeking protective put purchases makes enough sense as a simplified version of Tuesday’s trading truth for Lehman.
Despite Tuesday’s increase in premiums, when looking at a blended view of option pricing, options through January 2009 appear roughly in-line with statistical value. We can see that relationship in Figure 1, below.
Figure 1: Lehman (LEH) 7 -149 ATM IV / SV Relationship
Does fair value represent an edge for traders to consider a bit of option-oriented “Buy, Buy, Buy?” Personally, the guesstimate is shares over the short-term can afford long curve / gamma positions enough hedging opportunities to overcome potential theta problems.
Figure 2: Lehman (LEH) Statistical Volatility Two-Year
Longer-term the question of “Is the trend your friend?” might be raised. While some gamma scalping could work, this options strategist isn’t as convinced about the longer-term prospects of ultra-high stock volatility. Looking above to Figure 2, we see that since an initial volatility spike last summer, shares of Lehman (and most financials for that matter) have turned into a momentum vehicle for both bears and bulls, depending on the day in question.
Barring a Bear Stearns style collapse we might expect the volatility trend of the past year to be closer to ending than continuing to motor on based on a seemingly never-ending stream of bad news. My thoughts are if traders want to play a longer-term position, choose a side directionally but position with a softer delta vertical that won’t break the bank.
Figure 3: Lehman (LEH) Daily Bottoming or EW4?
As for other moves of importance, “Have shares of LEH gone too far already?” After Hours, Goldman widened its 3rd Quarter loss estimate on Lehman to $2.75 from $0.68 per share. Trader reaction is trying to show some respect for the broker call as LEH trades off another .25 to $12.80. That’s just forty cents from Lehman’s mid July capitulation-worthy lows of $12.40.
Technically and looking above to Lehman’s daily chart, Elliott Wave via ProfitSource doesn’t seem to think much of price action many investors are likely eyeballing as a potential double-bottom. In fact, an existing EW4 suggests aggressively lower prices. Further, based on George Soros’ recent stock accumulation strategy that’s up to 9%, I’m sure lower prices would make those deep pockets even happier. As for the rest of us looking to play sheriff with more limited means, maybe 19,500 January 2010 20/30 Call spreads for $2.20 is more our speed? One thing’s for certain, at least one bull and one bear donning the hedge hog threads certainly do.
Chris Tyler
Staff Writer & Options Strategist
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
