Some option players see less risk to Lehman shares

CHICAGO (Reuters) - Options activity in Lehman Brothers Holdings Inc LEH.N was brisk on Monday as some players cashed in on bearish bets in hopes that the worst may be over for the investment bank while others turned to put options to guard against further declines in the stock.

Lehman on Monday projected a $2.77 billion second-quarter loss, saying it would bolster its capital base by raising $6 billion in securities offerings.

Lehman shares fell as low as $28.01 on the news, before closing down 8.7 percent at $29.48 on the New York Stock Exchange. In the U.S. options market, roughly 214,000 puts vs 149,000 calls traded, two times the normal volume, according to option analytics firm Trade Alert.

"While some investors turned to Lehman put options for protection from further weakness in the share price, others sold put option contracts on hopes today's news signals a turning point for Lehman," said independent options trader Frederic Ruffy.

Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Inc in Chicago, echoed that view.

"Many investors believe now the worst of the news is out for Lehman in the near-term as their plans to help their risk exposure is now known," Kinahan said.

But he also noted many investors who are still long the stock are selling their near-term puts and buying July, October and January puts as they seek longer-term insurance against any negative surprises that would impact the stock.

"Investors are selling in-the-money puts and purchasing at-the-money or out-of-the-money puts to continue holding a position in case the stock declines further," said Scott Fullman, director of derivative investment strategies at broker-dealer WJB Capital Group in New York.

Investors often use equity puts as a way to speculate on potential share price weakness or to insure their stock positions against adverse stock moves.

The put selling also pushed down Lehman's overall implied volatility, which measures as a percentage the expected magnitude of share price movement based on option prices.

"Implied volatility fell 22 percent on the day, which also confirms that puts saw a significant (amount) of selling despite the ongoing volatility in Lehman shares on Monday," Ruffy said.

A lot of the heavy two-way traffic in Lehman put options occurred under the June and July $30 strike level.

In many of the lower June put strikes, the premiums fell as some traders appeared to be taking profits off the table from their previously held positions.

For example, it looks like institutions have sold the June $25 and June $20 puts, which are both down in price, despite the fact that the stock declined, said Jon Najarian, a founder of Web information site optionmonster.com in Chicago.

The news from Lehman may have given many option traders comfort as they sold puts in the belief that its shares may be approaching a bottom, Najarian said.

(Reporting by Doris Frankel, editing by Richard Chang)