Morgan Stanley put options suggest more losses

CHICAGO: Many traders on Friday loaded up on put options in Morgan Stanley, looking for at least a 30 percent decline in the bank's shares between now and the November options expiration.

In afternoon trade, around a third of Morgan Stanley overall volume of about 89,000 contracts was situated in the November $12.50 strike price, which allows investors to sell its shares at $12.50 a piece by Nov 21 options expiration. Option sentiment based on order flow was 61 percent bearish, according to option analytics firm Trade Alert.

Morgan Stanley shares fell 8.52 percent to $16.54 in afternoon trading. Most US bank shares tumbled on fears that losses from bad loans will soar due to a deep global recession, and as National City Corp agreed to be bought at a below-market price.

National City, a Cleveland-based bank battered by soured mortgage and construction loans in the US Midwest and Florida, became the latest troubled lender to accept a takeover offer, a $5.2 billion bid from Pittsburgh's PNC Financial Services Group Inc.

Heading into this session, existing Morgan Stanley option contracts outstanding at the November $12.50 strike were just 5,553 contracts, which compares to volume at the strike of 31,333 in afternoon trade, Reuters data show. The contracts fetched $1.70, almost double in value from Thursday.

"That implies a decline to $10.80 a share within a month before that trade would provide insurance for the option buyers," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Connecticut. As that premium got more expensive, investors moved to the lower $10 strike, where more than 12,000 lots traded and commanded a premium of $1 a contract.

A put option conveys the right to sell the company's shares at a given price and time, while a call option allows investors to buy the security at a preset price and time. "Traders appear to be stepping up their bets on further, imminent pressure on the share price," Wilkinson said.

"Investors are putting financial shares back under the microscope, realizing that the world has changed since the government injected capital into banks last week." The rush to buy Morgan options pushed up the implied volatility, a key driver of an options price, in that strike price to more than 200 percent, up from about 120 percent Thursday, said Pete Najarian, a founder of Chicago-based Web information site optionmonster.com.

"I am seeing a couple of large institutional-sized blocks, including one of 6,000 contracts traded in the $12.50 strike," Najarian said. "This appears to be outright buying of put options. This is extremely significant, given the size of the volume on that individual strike amid speculation that the shares may slide lower," he said.