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Options Report: Bear Stearns, Lenders and The VIX

Options speculators still love to hate Bear Stearns and mortgage lender Countrywide Financial.

Bear Stearns , still reeling from the implosion of two of its subprime hedge funds, continues to attract put buyers. The stock, which has traded as high as $172 over the past year, has recently been hovering in the $125 range. Speculators are betting Bear can go even lower.

One trade of choice today has been the September 115 puts which is a bet the stock will fall another $10 by expiration in September. Over 6,000 puts have traded versus open interest of 425 contracts.

Possibily tied to the trading in the 115 puts, is active volume in 130 put strike price where a trader could buy the 130 put and sell the 115 put to offset some cost and risk on the expectation the stock could fall further.

Shares of Countrywide traded as high as the $45 a share level at the start of the year and have since pulled back to below the $30 mark. The latest down leg today comes after American Home Mortgage announced in the dead of night late Friday that it would withdraw payment of its dividend which was scheduled to be paid this past Friday. The news has sent shudders through the mortgage industry since American shied away from subprime loans and specialized in higher quality prime and near prime loans.

American Home shares have been halted.

In the meantime, speculators in the put options of Countrywide have been getting aggressive. Nearly 10,000 August 25 puts have traded versus open interest 2,812 contracts. Traders are betting that Countrywide will fall about 20% more between now and expiration on the third Friday of August. Implied volatility in the Countrywide puts has surged leading investors to pay 35-cents on options contracts with a theoretical valume of 11-cents.

Put speculators have been burned before betting against Indymac Bancorp which managed to post in-line earnings last quarter and will post earnings tomorrow. It has only been over the last two weeks that the stock managed to break down below the lows of earlier in the year at the $28 level.

As loan quality problems have spread from subprime into next level up known as Alt-A, lenders like Indymac which originate the Alt-A loans, have been targeted by both short sellers and put options speculators.

While heaviest put buying is occurring in August 25, 22.5 and 20 strikes, or closest to where the stock is trading, some are buying what are known in the options business as "lottery tickets". Over 11-hundred August 15 puts have traded, an out on the limb, long shot speculation the stock will collapse tomorrow.

Volatility Index Revisited

A week ago Friday, this space told you about the Volatility Index's ascension above the Nasdaq Market Volatility Index - a rare occurrence since stocks in the Nasdaq are traditionally seen as being more volatile that stocks that make up the S&P 500.

The negative spread in the VIX and the VIXen , as the Nasdaq version of VIX is called, has Miller Tabak's director of options analytics, Bud Haslett, talking about a possible market 'buy' signal.

"Following the first volatility inversion, the S&P 500 was almost 3% higher 2 weeks later and over 6% higher 1 month later," says Haslett. "In 2005, the inversion was preceded by a 2.97% drop in the S&P 500 one-month before the event, very similar to the 3.15% drop that the S&P has experienced over the past 21 trading days."

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