Rebecca Engmann Darst co-authored this article.

(BSC) – Put volume in Bear Stearns increased more than 300% today against an abysmal 8.7% drop in share price to $63.87. Early morning concerns over the state of its liquidity drove the cost of credit default swaps sharply higher, elicited the chairman of the brokerage’s executive committee, Alan Greenberg, to take to the airwaves and debunk the scrap-talk on CNBC directly. But the initiative has done little to quell option traders’ nerves, with implied volatility on the front-month, at-the-money 60 call now reading about 170%. Historic volatility on all Bear Stearns options ticks in at just above 54%, by way of comparison. Of interest here is not just the giddy level of put trading, with buyers and sellers eagerly swapping downside bets on Bear Stearns’ fortunes, but the lowering limbo-stick of trading interest. Puts at strikes as low as 30 attracted volume of some 2,775 lots in the March contract despite only about a 1% of Bear Stearns shares halving in value over the next 10 days.

(LEH) – News that 5% of its global workforce will shortly be made redundant failed to reassure option traders as to Lehman Brothers’ ability to navigate the ongoing liquidity crisis through a regimen of overhead belt-tightening. As Lehman’s share price plummeted to a new 52-week low with today’s 5% slide in share price to $44.07, implied volatility in Lehman Brothers options shot up 20% to 81%, making it one of the day’s top implied volatility gainers. Traders appear to be seeking insurance against further declines in the week leading up to its quarterly earnings numbers, rather than swapping mere volatility wagers, as evidenced by the keen level of buying interest in March puts at out-of-the-money strikes as low as 40. The price of this put position is up more than 82% on the session, reflecting a better than 1-in-4 chance of a break below $40 over the next 10 days. In all, 5 times as many Lehman puts are trading as calls today.

(XLF) – Shares in the Financial Select Sector SPDR tacked on a 2.3% loss to read $23.76 heading into the noon hour. Early buying interest in March 26 calls at 27-cents apiece was quickly eclipsed by more volatility-bullish trades. The selling we observed at the March 24 put strike at $1.04 may have occurred in tandem with call-selling at the 25 strike. The strategy would make sense given the current disparity between implied and historic volatility in the XLF. Option prices are currently predicting more than 50% price risk out of the financial space than the sector has shown historically.

(ACAS) – Among the severely diminished minority of financial sector-related stocks trading higher today we find shares in American Capital Strategies, an alternative asset manager that provides financing for midmarket corporate buyouts. While today’s .95% increase in share price to $33.89 shows at least some immediate immunity to the woes facing other companies exposed to the fund-management space, option traders are positioning for volatile price action over the next 10 days. The first clue is the elevation in implied volatility, which at 54.8% shows premiums pricing in 12% more price risk to American Capital Strategies shares over the next month than they have shown historically. With options trading at more than 4 times the normal level, it appears that traders are going long the March 35 straddle for $2.85, in anticipation of 8% up-or-down price action over the next 10 days. The trader in this case may have funded the long front-month volatility position by selling the same position short in the April contract for $4.70. Interestingly, while American Capital Strategies’ current share price represents an 8.7% premium on its 52-week low, option traders hold more than twice as many put positions as calls.

VIX – So what’s the upshot for volatility? The composite implied volatility reading for the S&P 500 made a scurrilous upside move with today’s 5% gain in the CBOE Volatility Index. The index currently reads nearly 29. Interestingly, the intraday spike inspired some streetwise investors to play on the swiftness of the volatility index to pull back from the 30-level by selling calls at that strike for 75-80 cents apiece, while loading up on puts at the 25 strike for 60-65 cents, the price coming off some 21% over the weekend.

(CFC) – From fraught…to fraud? This weekend’s news of an FBI securities fraud investigation into embattled mortgage lender Countrywide sent implied volatility on a 42% upward trajectory this morning. Now, on top of a share that has shown 69.8% historic volatility over the past year, option traders are pricing in about 150% more price risk over the next month. Faced with a volatile outlook, option traders intuitively sought protection via long positions in puts, bidding the price of protection higher as buyers dived heavily into March puts at strikes as low as 4 and 5, and April puts at the 5 strike. The current price of the $4 premium reflects a slightly less than 1-in-3 chance of continued deterioration past those levels over the next 10 days.

(CVTX) – CV Therapeutics - A 6% in its share price to $5.56 in early trading sent option volume sharply higher. Today’s action appears roundly situated in in October 7.50 calls, which are attracting buyers at $1.25 per contract, suggesting upside price action heading into the fall. The current share price is just pennies above the 52-week low. Also noteworthy here is the massive disparity between CV Therapeutics’ 62% historic volatility reading at the near-159% implied reading.

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Andrew Wilkinson

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