Lehman call options outpace puts in volatile trade

CHICAGO (Reuters) - The debate over the survival of investment banking giant Lehman Brothers Holdings Inc reached a fever pitch in equity options trading on Thursday as volume and volatility soared.

"Lehman seems to be where the gamblers are today," said Victor Schiller, president of options research firm Investors Observer.

Trading has been heavy in Lehman options all week. But late on Thursday alone, roughly 467,000 calls and 355,000 puts had changed hands in Lehman, four times the normal daily level, data from option analytics firm Trade Alert show.

Shares of Lehman Brothers sank 41.79 percent to $4.22 after the struggling bank failed to announce any deals to raise capital to cover losses on mortgage-related investments.

"The surge in volume and implied volatility reflects the uncertainty about the future outlook for Lehman," said Frederic Ruffy, option strategist at Web site WhatsTrading.com.

While many shareholders have been selling shares, and sending the stock price sharply lower, others have been buying put options on fears the worst is still to come, he said.

But not all investors were bearish. Lehman September $5 and October $10 calls were the most active, with more than 110,000 contracts combined and nearly one-third traded on the offer, indicating buying, Ruffy said.

A call option enables an investor to buy a company's shares at a specific price within a specified time period. A put gives the right to sell a stock at a preset price and time.

U.S. options exchanges on Thursday also added several new series of Lehman options below a $15 strike price that required an alternative alphabetical symbol.

The people who are buying the September calls are betting that the company will rebound quickly. Buyers of September puts speculated the stock will continue to move downward by next Friday, when September options expire, said William Lefkowitz, options strategist at brokerage firm vFinance Investments.

The demand for options pushed up Lehman's option implied volatility, or the expected magnitude of share price movement conveyed by option prices.

"During the last three days, we have seen incredible volatility swings in Lehman as the pace of news keeps the market going crazy," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group.

Implied volatility in the September options, the most active, soared to more than 500 percent, up from roughly 150 percent on Friday, according to Trade Alert data.

(Reporting by Doris Frankel, Editing by Peter Bohan and Jonathan Oatis)