Wednesday Options Outlook: AMR, FTO, MAR, MSO, GE, SOLF, BUD

May 21, 2008

AMR Corp (AMR) – An early morning surge in the price of oil to
$131 per barrel was quickly followed up by news from American
Airlines’ parent AMR Corp. that it would drop 45 planes from its
fleet, sharply scale back its domestic routes, and begin charging fees for all
checked bags. As the market mood curdled toward any stock believed to be at the
mercy of mother oil, option implied volatility on all airlines wended higher. A
scan of our list of “Top Implied Volatility Gainers” reads as a
virtual who’s who of major carriers, with United Airlines’
parent UAL(UAUA)registering a 40% spike in implied volatility to 114.4%, American
Airlines’ parent AMR up 35.5% to 111.8% and Delta Airlines’ (DAL)
implied volatility up 28.7% to 74.0%. But it was the volume in AMR Corp that
caught our attention for some counterintuitive plays that seemed to fly in the
face of the near 20% drop in share price to $6.58 (a new 52-week low). With
more than 52,000 options in play by early afternoon, option traders appeared to
sell front-month calls in concert with puts in a short volatility strategy
designed to capitalize today’s leaden premiums. Elsewhere we observed
buying interest – albeit on scant 410-lot volume – in November $20
calls for 25 cents, with the same strike attracting buyers in the January
contract as well. It bears wondering what the buyer of this upside call is thinking.
As recently as last autumn, pressure was rising on American Airlines to spin
off its AAdvantage program - a frequent flier program that Bloomberg News
reported at the time could be worth as much as the airline itself (and this at
a time when AMR Corp shares were trading much higher). Could the latest
battering at the hands of almighty crude force American’s hand on the
rewards program?

Frontier Oil Corp (FTO) – Shares in oil refiner Frontier Oil staged an impressive 3% gain on the
day to $28.13 on a day of continued spiraling gains for the sector. Earlier
this month the company reported a drop in Q1 earnings on declining gasoline
profits, but has otherwise drawn bullish analyst attention on its prospects for
Q2 and Q3 due to higher input and demand for its diesel fuels from the
agriculture sector. We believe this may explain not just the 27% increase in
implied volatility on all Frontier Oil options this morning – making it
one of the day’s top gainers – but an increase in option trading
volume to 5.5 times the normal level. This included heavy buying on volume more
than 5 times the open interest in June 30 calls, extending into fresh
positioning in the 35 calls.

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