Wednesday, June 18, 2008

ption Traders Put Pedal to the Metal on Retail Auto Puts
6/18/2008 3:23 PM EDT
News out of GM (GM) set the tone for a dyspeptic day for most auto-related shares. A JPMorgan analyst report suggested the automaker could be forced to borrow $10 billion this year amid concerns about its liquidity given high oil prices and the outlook for higher interest rates. The risk to its share price over the next 30 days is apparent from a look at its implied volatility reading, which at 69.5% shows a marked elevation to the 47.6% historic reading measured in underlying shares. With three times as many puts trading as calls on a 5.5% decline to $14.95 a share (a new 52-week low), option traders are buying protection into the share price decline rather than positioning against it, with what appears to be put spread activity in the front month at strikes 12.50 and 15 (these in excess of open interest, despite the imminent expiration), and heavy buying in September $10 puts.

But it's the action out of the retail auto sector that caught our attention earlier today. Shares in auto-loan financing company Americredit (ACF), which manages more than $15 billion in car loans, tanked after analysts at Friedman Billings Ramsey suggested that consumer credit stocks did not yet reflect recessionary valuation that there could still be more downside. Implied volatility on all Americredit options shows 65% additional price risk to its shares over the next 30 days, with puts outpacing calls by 7-to-1 on option volume more than quintuple the normal level.

Options in AutoNation (AN:NYSE), the country's largest direct retailer of new and used cars, showed a similar pickup in option volume to more than five times the normal level as shares fell 4% to $12.94 -- within a dollar of the 52-week low. With today's option volume standing shoulder-to-shoulder with one-fifth the total number of options positions, the preference for protection against further declines is fairly glaring today given the traffic in July 15 puts. These are trading heavily to the middle of the market, though the 31% increase in premium price suggests buying pressure occurring here. The $2.20 price tag on the right to sell Autonation shares for $15 next month requires a decline past $12.80 just to break even.

Shares in competitor Carmax (KMX:NYSE) staged a 12.7% retreat to $16.02, treading a fine line against the 52-week low. Implied volatility at 50.5% shows a fairly astonishing elevation above the 39% historic reading on Carmax stock, though this is a level that has remained fairly stable over the past month. Puts are outmoving calls by 8-to-1, with heavy volume in June 17.50 puts and what may be put spreads in force in the July contract between strikes 15 and 17.50.

Position: none

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