"What we saw on Friday afternoon was an implied volatility spike of 11 percent on the session," she said. "Implied volatility for the month of June is up about 30 percent in GE, and as of the close on Friday it was actually weighing, ticking in higher than it did ahead of its earnings, which is rather unusual."
But Darst cautioned that the volatility wasn't in anticipation of a downgrade. (See her full comments in the accompanying video).
"There were rumors that surfaced as recently as Thursday that GE might resort to having to raise external capital. Those are reports that representatives of GE had steadfastly, vehemently denied, we should say, but there was very active front-month put-buying activity on Friday at the 27.50 and 29 dollar strikes, which would suggest some defensive sentiment for the month to come, and that just happened to coincide very conveniently with this analyst's downgrade this morning."
Traders buy puts, that is options to sell a stock at a certain price in the future, as insurance against a drop in the value of a stock.
"The activity implied that investors were getting very defensive about General Electric
, that there were some misgivings about that stock. Implied volatility is a very handy thing to keep an eye on, because it is sort of a harbinger of things that may be brewing in a stock," she said.
"In that regard," she continued, "it's also important to keep an eye on those regional banks which continue to be a real millstone for the financial sector. Wachovia , implied volatility options rose more than any other ticker on our platform on Friday, up as much as 50 percent late in the session on Friday, before ending the session up 38 percent. We also saw out-of-the-money put activity in the front month in Wachovia at the June 15 and 17 strikes."
Other financials bear watching too, Darst suggested.
"Actually, Goldman Sachs and Morgan Stanley , on Friday, we saw a bit of a pullback in implied volatility, which is somewhat unusual right ahead of earnings, although we should note that volatility in all these broker-dealers has been at a pitch throughout the week, so what we saw is a near-19 percent pullback in implied volatility in Goldman Sachs, still the front month pricing in about an 11-dollar move on the back of the numbers as of the close of the session on Friday. In Morgan, we saw a 14 percent pullback in implied volatility, but still about 16 percent more price risk to its shares over the next 30 days. The price of the June $42 straddle in Morgan Stanley, which is how we calculate what kind of move option traders are looking for in back of the earnings is about $4, which was suggesting about a 19 percent price move on back of those numbers."
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