Options Update: Call Volume Spikes on National City
Shares of troubled banking concern National City
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PowerRating) have rebounded solidly today on hopes that the U.S. government will pass a modified version of the failed $700-billion bailout of the financial system.
Selling on the shares reached a fevered pitch yesterday, as NCC plunged more than 63% despite an upgrade from “perform” to “outperform” at Oppenheimer & Co. Today, the equity has bounced back nearly 40%, even though Moody’s Investors Service placed the company’s senior debit rating of “A3” on review for a potential downgrade.
Naturally, options traders have had a field day speculating on NCC, though the attention to call options today stands in stark contrast to recent activity on Wachovia
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PowerRating), Capital One Financial
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PowerRating), and Citigroup
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PowerRating). Specifically, more than 21,000 calls have traded on NCC so far today, nearly quadrupling the stock’s average daily call volume and placing it on today’s Intraday Volume Explosion List. Catching my eye, however, is that nearly all of this activity has crossed the tape at NCC’s October 3 call this afternoon.
The Anatomy of a National City Call Position
As you can see from the chart above, nearly all of the volume is trading at the ask price, suggesting that traders are buying these contracts. There is a chance that these options could have been bought to close an existing sold call position, considering that volume at NCC’s October 3 call falls just shy of open interest at the strike. However, for the sake of argument, let’s assume that we are dealing with a purchased call position. At 9:48 a.m. Eastern time, a block of 9,361 contracts traded at the ask price of $0.45, so we’ll use this trade as today’s example.
Diving into today’s example, the hypothetical trader purchased 9,361 NCC October 3 calls for a total outlay of $421,245 — ($0.45 * 100)*9,361 = $421,245. For this trade to reach breakeven, NCC would need to rally about 81% to $3.45 per share. We arrive at this by adding the cost of the option ($0.45) to the strike of the purchased 3 call ($0.45 + $3 = $3.45). The total loss for this position is limited to the initial investment of $421,245.
Given the volatile state of the current market environment, and the potential for the U.S. government to revisit the financial-system bailout bill, making a call on NCC at this point is very risky. The company has ample confidence from Wall Street analysts, and National City’s CEO has stressed that the company “has no plan, intention, or need to raise additional capital.” That said, let’s see if the stock’s technical picture or sentiment backdrop provide any clues that could help or hinder a NCC October 3 call.
Getting Technical
Moving right to the point, NCC’s technical picture resembles a black diamond ski slope. The shares have been in a free fall for the past 52 weeks, shedding more than 94% of their value. The recent turmoil in the financial sector has only served to exacerbate the problem, and NCC tagged a fresh all-time low on Monday as a result. Furthermore, today’s bounce has little in the way of investor confidence behind it, as the shares have stalled at short-term resistance at the 2 level. Furthermore, the 3-3.50 region could present a technical hurdle as well, as the area marks the stock’s lows from mid-July and mid-September. Obviously, NCC would need to overcome these levels in order for an October 3 call to reach profitability.
The Sentiment Drivers
Unfortunately, the sentiment backdrop for NCC doesn’t improve the outlook for a call position. Options traders are heavily bullish toward the shares. Aside from today’s wellspring of call volume, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.47 indicates that these bullishly oriented options more than double their put counterparts among near-term options. Furthermore, this ratio ranks below 89% of all those taken during the past year, indicating that options traders have been more optimistic toward NCC only 11% of the time during the prior 52 weeks.
However, the bullish musing end at the boarders of the options pits. Specifically, Wall Street analysts have doled out 8 “buys,” 6 “holds,” and 2 “sells” on NCC, leaving room for potential upgrades should the company’s situation turn out to be not quite as dire as speculators believe. Furthermore, short interest accounts for more than 22% of the stock’s total float. While it could take quite a rally from NCC to shake these bears loose, there is always the potential for a deal out of Washington, D.C. that could also spook short sellers. Any upgrades from analysts or a move away from NCC short positions could boost the prospects for an October 3 call.
The Verdict?
I have to admit, I an leery of investing in NCC at the moment. It is not that I am shying away from the financial sector – Wells Fargo
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PowerRating), PNC Financial
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PowerRating), and Hudson City Bancorp
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PowerRating) all look quite solid at the moment – its that NCC looks considerably risky at the moment. The odds for a rebound in the shares look good given the heavy pessimism from investors. Furthermore, heavy put activity on Washington Mutual
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PowerRating) and Wachovia turned out to be smart money ahead of their respective demises. If you have the stomach for the degree of risk involved, NCC might make for a potentially lucrative call position. Personally, however, I am shying away from this one until Wall Street and Capitol Hill settle down a bit more.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.