KeyCorp option traders see more share price swings
14:35 12Jun2008
By Doris Frankel

    CHICAGO, June 12 (Reuters) - Option traders expect more share price turbulence in KeyCorp <KEY.N> after the large U.S. Midwest regional bank said it plans to raise $1.5 billion in equity capital and cut its dividend in half.

    KeyCorp was a top volatility gainer in the options market after its stock fell sharply on the news.

    Its shares fell 21.26 percent, or $3.33 to $12.37 in late afternoon trade on the New York Stock Exchange.

    The demand for the bank's options sent its overall option implied volatility, the expected magnitude of share price movement conveyed by option prices, sharply higher.

    KeyCorp's overall projected volatility stood at 87 percent, up from 72 percent as of Wednesday's close, said Brian King, options analyst at online brokerage TradeKing in Boca Raton, Florida.

    "The rise in implied volatility in KeyCorp options implies that traders expect more turbulence in its shares," said Scott Fullman, director of derivative investment strategies at broker-dealer WJB Capital Group in New York.

    "There is concern that more credit risk will be revealed among financial services firms," he said.

    Any bank or financial institution that was involved in any credit market product may be exposed to more risk than it originally thought with the change in this market environment, said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Inc.

    Option turnover in KeyCorp was heavy on Thursday. Roughly 24,000 puts compared with 17,000 calls changed hands, 8 times the usual volume, according to option analytics firm Trade Alert.

    KeyCorp's put volume was even more aggressive on Wednesday, as about 14,000 puts and only 3,222 calls traded, when the shares of many regional banks fell to new multiyear lows.

    Directional sentiment based on Wednesday's order flow was 68 percent bearish, data from Trade Alert showed.

    The heavy put volume raised questions with at least one trader. "Somebody knew about this refinancing yesterday. The volume of trade in KeyCorp puts was 'suspicious,'" said Jon Najarian, a founder of Web information site optionmonster.com.

    The U.S. Securities and Exchange Commission declined to comment on Wednesday's unusual activity.

    Early on Thursday, investors also rushed to seek protective put options, giving the right to sell KeyCorp's shares at a fixed price. But that was counterbalanced by more circumspect call buying after Moody's Investors Service moved to affirm its rating and stable outlook on the bank, said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

    Calls convey the right to buy the company's shares at a fixed price.

    Part of the call action involved spread activity in the June $15/$17.50 strike prices, a move suggesting a pale recovery for shares back to around $15.67, a previous 52-week low, she said.

    Traffic was seen in the July 12.50 puts, giving investors the right to sell its shares at $12.50 a piece, all the way to up to the $20 strike price this morning, Kinahan said.

    "What we are seeing today in the July puts are likely speculative bets on more share losses, whereas in the previous session traders sought puts to lock in protection."