Distressed Volatility

Lehman is seeing some strength and interesting options activity after last week when the South Korean Development Bank said buying Lehman was a possibility but the price offered was too high. This is after Dick Bove upgraded Lehman Brothers to Buy, saying Neuberger Berman could go for $7-$10 Billion in capital which would price Lehman at nothing on the market, most likely due to the valuation of mortgage debt on their books.. He thinks it could be ripe for a hostile takeover, and had a $20 take out price. Bove also thinks Lehman is trying to get a 20% premium to book value or a price in the $40s, which he feels "doesn't have a prayer" (Bloomberg video). He says Lehman does not want to sell at these distressed levels. Also noted, Citigroup analyst reduced his price target from $50 to $35 due to his estimate of a $2.9 Billion asset related write down in the 3rd quarter.

Lehman Volatility & Put/Call Volume Charts
Sourced From Schaeffersresearch.com
LEH Put/Call Volume vs. Price
Schaeffers Volatility Index (8/22)
It looks like volatility is moving higher, along with lows in the put/call volume chart not seen since October, 2007. The put/call volume ratio is sitting at about 1.20, and it looks like it was at parity a couple days ago. There seems to be a tug of war in sentiment and the rope doesn't seem to be moving in either direction. One side will give when the news cataylst comes out of either a buy out, sale of assets or none of the above. From a brief look at the call/put open interest chart on schaeffersresearch.com, it appears that there is a large amount of Put open interest at the SEP $5, $10, and $13 strike, with about 32,000 puts open at the $10 strike far outpacing the number of calls. However the OCT $30 call contract has the most open interest with over 24,000 contracts.

Now about the short interest, as of 8/1 about 82 million shares are reported short, and from the look of the chart it's at all time highs, so either we're in for a huge move to the downside or a massive rally is about to occur if the shorts get squeezed...

Technical Chart Analysis (chart at top of page): It looks like LEH has been gathering some strength from the RSI, also volume has increased to the 100 Million share level. It broke a key $15 level, however it closed on strong volume ending at $14.41. If we do see a positive catalyst and it breaks above the $15 mark again, we could see $17.50, or $20.00 where the top of downward trend channel exists along with the 50 day moving average, if $15 fails, down we go.