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Just a warning, I took these images BEFORE the close so the charts will not be representative of today’s ending data.

(No posts over weekend, going to focus on school) — WOOO! Eye opening day for me today. I suppose it’s because I’m still young, inexperienced, and vulnerable to be fascinated by new experiences! I was finally able to get some quality time with Bloomberg this afternoon and found some quite interesting information on MER. It can be seen that LOTS of front-month options (i.e., the closest month to expiration for an option contract) are being traded! Not only are they being traded, but Open Interest is high too! I found out why there has been the options spike. But first, let’s take a look at Bloomberg’s Equity ANR Function (the Analyst Recommendations page)

As we can see, under Analyst, we find Meredith A Whitney. This person put an underperform on MER on March 27, 2008. The day before, Charles W Peabody put a sell recommendation on MER. The focus based on my findings, however, are the actions of Meredith Whitney. This is a snippen of her note regarding MER on March 27th.

Merrill may post a loss of $3 per share and write down $6
billion of assets, Whitney wrote in a report dated yesterday.
Zurich-based UBS will lose $2.75 per share after writing down
about $11 billion, she said. Sanford C. Bernstein & Co. also
abandoned its prediction of a profit for Merrill today.
“We expect the brokers and banks to take another round of
writedowns on their mortgage-related positions,” said Whitney,
who correctly predicted two months in advance that Citigroup Inc.
would reduce its dividend to preserve capital.

“We believe Merrill Lynch will go through the disruptive
step of true structural reorganization or right sizing that will
dominate the bulk of 2008,” she wrote. Whitney has an
“underperform” recommendation on shares of Merrill Lynch, the
third-biggest U.S. securities firm.

The full article can be found here.

Anywho, it’s looking bad for MER with analysts views being negative.

Let’s take a look at Bloomberg’s OMST (Most Active Options function) to see which options are being heavily traded today. Notice the Open Interest Put/Call ratio. It’s currently at 1.65. Interesting.

Whoa. Do you see that? APR08 30 Puts and APR08 40 Puts are trading quite heavily. Let’s look into this to find whether traders are Selling the options or Buying the options. First, let’s look at the option that would most likely expire in-the-money (i.e., APR08 40 Puts). First and foremost, let’s look at the historical chart for this option to identify when, exactly, did interest begin with this particular option:

It seems as if the APR08 40 Puts started getting hot after the analyst downgrades. I suspect the previous dramatic increases in contracts traded was due large to the extremely large fluctuations of the underlying. Bloomberg’s VWAP (Volume Weighted Average Price) function is seen below. The VWAP, as the name implies, determines the average price of all the options traded in the period (indicated by the green line on the chart). This graph helps determine whether trades took place on the Ask (Buy) side or the Bid (Sell) side. If there are more Asks than Bids, then that almost always means there were more purchases of the option than sales of the options. In other words, for this particular option (MER APR08 40 Put), it is screaming a signal that MER will be heading down below $40 before April expiration comes around. What is interesting for me, is that OpInt (Open Interest) is currently above 70,000. That’s huge (for me at least.. iuno, I suppose I’m still in experienced). Anyways, here’s the VWAP (Volume Weighted Average Price):

Here are the trades that are included into the VWAP calculation:

It is pretty obvious that nearly EVERY trade is betting MER will, at the very least, dip below $40. Now let’s look at the most actively traded option today, the MER APR08 30 Put option.

Unforetunately, this set of data is not as clear as the APR08 40 Puts. Currently, open interest for this option is above 60,000. However, what makes this uneasy is the balanced buying and selling of this option. For me, this indicates resistance at $30. There are people on both sides willing to put down real money to bet MER will either stay above 30 or below 30.

It will be very interesting to see how MER will do on its earnings this first quarter. I honestly do not know if MER will release after April expirations. Smart Money says, “MER is going below 40 but it might go below 30.” Or at least that’s what it’s saying to me on this wonderful Friday afternoon (wonderful in terms of FXI’s locked gains).

MER APR08 40 Put options have experienced a huge spike today. I suspect insider information.. or at least very high speculation.

MER April Options Table (Notice the unusually high volume in the highlighted row)

Here’s the Apri08 40 Put Graph for March 27, 2008

I checked the Time and Sales; the trades between 10am and 11am traded mostly at asking prices. In other words, heavy April 40 Put buying. I’ll have to check the historical charts when I get a chance to go on Bloomberg. Unfortunately, I don’t see any support/resistance levels using technical analysis to enforce this speculative buying.

MER’s going to dip below $40 again before April expiration comes around.

FXI Update: Today, FXI broke $135.00 but could not hold above that level and closed at 132.50. I did not close my position on FXI when it was trading above 135.00 because, at the time, options activity indicated heavy April 125 Put selling… plus, I suppose I am hesitant to sell since I have not seen the big buyer from a couple days back (refer to previous FXI post) close out his/her position… plus, I think I’m getting greedy. Greed is not a good thing. After checking options activity after the close, there is April 139 Put buying. This is making me uneasy.

FXI_20080327 - APR08 Options Table