Wachovia option traders brace for more share swings

By Doris Frankel

CHICAGO, Sept 26 (Reuters) - Options traders on Friday are bracing for more share price turbulence in Wachovia Corp WB.N as its put volume swelled, suggesting many players are betting the bank's shares could fall further in the near term.

Wachovia stock tumbled on Friday following the collapse of the largest U.S. thrift, Washington Mutual Inc WM.N, overnight, heightening concerns about the widening fallout of the credit crisis.

In morning trade, the stock dropped 23.14 percent to $10.53 on the New York Stock Exchange.

"After the biggest bank closure in U.S. history, investors are looking for the next financial company that could be the next victim of this financial crisis," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York. "Therefore, you are seeing put buying in companies like Wachovia."

A put option conveys the right to sell the company's shares at a preset price and time while a call option allows an investor to buy the stock at a given price and time.

In all, roughly 132,000 put options traded in Wachovia compared to 53,000 call options in morning trade, according to option analytics firm Trade Alert.

The demand for options pushed up Wachovia's option implied volatility, a key driver of an options price, to elevated levels. It stood at 250 percent, up 67 percent from the previous day, according to Interactive Brokers Group data.

"Put trading is active with both buyers and sellers. Implied volatility has shot up toward 250 percent, indicating that the options market is pricing in more risk for the shares and possibly big price swings," said Frederic Ruffy, options strategist at Web site WhatsTrading.com.

Ruffy noted Wachovia's option volume and implied volatility are higher partly due to the uncertainty on whether Congress will pass the $700 billion financial sector bailout plan.

"Wachovia could be one of the big beneficiaries of the plan because it would allow them to remove some of their bad assets. This would help lift the cloud over their shares." Ruffy said.

One of the most active options was the October $5 WB puts, which traded more than 32,700 contracts and exceeded its open interest, a sign fresh positions were initiated. Those puts cost 90 cents, up 70 cents on the day.

But not all of the option action is bearish.

In fact, the top four trades, 6,500 October $12.50 puts, 5,000 October $10 puts, 5,000 January $15 puts, and 5,000 January $15 puts hit on the bid this morning, suggesting that some players might be selling these puts and possibly closing existing positions, Ruffy said.

(Reporting by Doris Frankel, Editing by Chizu Nomiyama)