Prediction of General Electric’s AAA at risk spurs put-buying frenzy

Today’s tickers: GE, USB, WMT, NTRS, BK & CVTX GE – General Electric – UBS today sent a note to clients telling them that shares in General Electric were a ‘short-term sell.’ The likely excess of credit losses beyond existing company guidance along with reserves that are too low means that the company is at risk of maintaining its AAA credit rating. What that means for the stability and preservation of its dividend, the other half of the equation that CEO Immelt is struggling to juggle, we don’t know. However, an option trader was quick to jump at puts suggesting a bruising for shares in the world’s largest maker of power-turbines. This morning some 25,000 put options were scooped up at a 30 cent premium as investors pored over today’s worsening outlook. The trade was as large as the overall number of established option positions at the March 5.0 strike and would make money should shares be trading lower than $4.70 at expiration. However, along the route, the position would be increasingly profitable should its shares continue to slide and should implied volatility rise. Both events would positively impact put premiums in this case. Today, GE slipped 3.9% to $12.43. USB – U.S. Bancorp. - The product of its fourth quarter earnings announcement this morning was to leave shares in the bank doing the opposite of its peer group. Declining net income was hampered by the market valuation of some of its assets, while provision for credit losses and an increase in charge-offs didn’t help. Shares are 20% lower at $12.29 while option traders wasted no time in saddling themselves up for the next victim of the financial meltdown. Our option market scanners honed in on heavy trading so far today where 100,000 contracts are in action. The big picture view is that investors are scooping up puts at strikes as low as 5.0 where few investors have so far dared to venture. Call spread activity appears geared towards credit spreads in which investors are selling lower strikes and buying same expiration higher strikes for an overall account credit. March expiration puts are the big story where we are watching volume tick higher by the minute, with more than 11,000 puts in demand where investors have paid a 40-50 cent premium to reserve rights to sell USB at the fixed $5.00 strike ahead of expiration. Implied option volatility at the February 12.5 strike is…