Options Trading Spikes on Lehman Brothers Holdings Inc.
It’s been a rough road for Lehman Brothers Holdings
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PowerRating). The vultures appear to be circling, ready to pick apart its bones. Earlier this week, the Financial Times reported that Kohlberg Kravis Roberts, Hellman & Friedman, and Bain Capital will be in the bidding if the brokerage decides to sell its asset-management unit (which includes Neuberger Berman). The Times also noted that LEH has not made a final decision on whether or not to pursue a sale.
Meanwhile, the stock was hit with negative comments from 2 different brokerage firms this morning. Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone commented in a report that he forecast $6.1 billion in net write-downs for “problem assets” across leveraged loans, and commercial and residential mortgages for Morgan Stanley
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PowerRating), Goldman Sachs
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PowerRating), and Lehman Brothers. Trone believes the full-service securities firms “continued to operate in a tough environment” during the fiscal third-quarter period. Furthermore, “Global equity markets deteriorated sharply during the period, seasonal weakness emerged in customer flows in July and August, and auction-rate securities-related settlements with government bodies triggered fines and write-downs.”
Elsewhere, Keefe, Bruyette & Woods analysts slashed their profit estimates for Goldman Sachs, Lehman Brothers, and Morgan Stanley. The analysts cited in a note that they expect write-downs on residential mortgages and other assets, and weaker revenue in investment banking and trading. “Given the uncertain recovery we have also lowered 2009 estimates and adjusted price targets,” the brokerage said. “Caution is warranted if investing in these names as volatility remains intense.”
Technically Speaking
The stock has fluctuated between positive and negative territory this morning on the reports and is currently sitting on a gain of more than 1%. However, the security has been locked in a steep downtrend since May 5 under its 10-day and 20-day moving averages, falling more than 67%. The shares are currently consolidating along the 12 level as they attempt to put in a bottom.
This short-term downtrend is part of a longer-term retreat in the shares. The stock’s descent started in February 2007, dropping more than 82% under its 10-month and 20-month moving averages.
Brisk Option Trading
Options trading has been brisk on the security. The International Securities Exchange (ISE) reported that on Wednesday the stock had 4,514 calls purchased compared to 1,083 puts purchased. This equates to roughly 4 calls purchased for every 1 put.
On the other hand, puts were more active yesterday on the CBOE. The exchange reported that 13,297 calls were purchased compared to 17,358 puts were purchased. In other words, 1.3 puts were bought for every 1 call.
Overall, call trading is running ahead of put trading. The Schaeffer’s put/call open interest ratio rests at an annual low of 0.95, indicating that investors have not been more optimistically aligned at any other time during the past year. This low reading indicates that investors have relatively high hopes for the shares.
Despite the negative earnings comments from Wall Street, we haven’t seen a number of downgrades or price-target revisions. Zacks reports that the stock has earned 5 “buy” ratings, 6 “holds,” and just 1 “sell” rating. This configuration leaves ample room for additional downgrades, which could weigh heavily on the shares.
What’s more, the average 12-month price target for LEH stands at $31.43, according to Thomson Financial. This represents a 110% rally in the shares during the next year. Any downward revision to the stock’s price target could also have a negative impact on the security.
Pocket of Pessimism
Not everyone is optimistic when it comes to the security. According to the latest data, more than 70 million LEH shares have been sold short, accounting for 10.5% of the company’s total float. Any positive news from the company, particularly with its earnings report, could cause many of these bears to close out their winning positions in an effort to protect their profits, pushing the stock higher.
Overall, traders should keep a close watch on the 12 level. A bounce off this level and a break above resistance at the stock’s 10-day and 20-day moving averages could signal that the shares are finally on the mend.
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