Lowe's, Target Calls Drop as Retailers Cut Forecasts; VIX Falls

Sept. 25 (Bloomberg) -- The most-active Lowe's Cos. and Target Corp. options declined after the retailers reduced their profit and sales forecasts amid the U.S. housing slump.

Lowe's January $30 calls tumbled 45 percent, while Target October $65 calls declined 56 percent. Lowe's said a drought caused some customers to cut back on the purchase of outdoor products. Target forecast same-store sales growth that was less than half its prior projection. Higher fuel costs and slowing home sales made consumers more budget-conscious.

``The hard evidence coming out of Lowe's and Target points to a dearth of optimism amongst investors about earnings,'' said Andrew Wilkinson, a senior market analyst at Interactive Brokers Group in Greenwich, Connecticut. ``People are having second thoughts on a bounce for retail stocks.''

The benchmark for U.S. option prices, the Chicago Board Options Exchange Volatility Index, dropped 4 percent to 18.60, the lowest since July 25. The so-called VIX, known as a fear gauge because it tends to increase when stocks decline, has retreated 40 percent since reaching a four-year high of 30.83 in August. The Standard & Poor's 500 Index fell 0.52, or less than 0.1 percent, to 1,517.21 today.

The three most-active Lowe's options were calls that declined in price, including the January $30 contracts. The same was true for Target.

``Investors are having to rethink and unload existing long- call positions,'' Wilkinson said.

Home Improvement

Lowe's is the second-largest U.S. home-improvement chain, while Target is the nation's No. 2 discount retailer behind Wal- Mart Stores Inc.

Lowe's shares fell the most since May 2003, losing 6.9 percent to $28.51. Target fell 4.6 percent, the most since Aug. 14, to $61.52.

Calls convey the right to buy shares for a set price, called the strike price, by a given date. Puts give the right to sell.

American Superconductor Corp. call trading surged more than 10-fold to 6,106 contracts, while shares of the developer of technology for the energy industry fell 0.6 percent to $17.84. Almost one-third of total call volume was in January $25 calls. American Superconductor shares would have to surge 40 percent in less than four months to reach the strike price on the calls.

That indicates investors are betting the stock will rise, Jay Shartsis, director of options trading at R.F. Lafferty & Co. in New York, wrote in a research note.

``There's aggressive call buying here while the stock's down,'' he said in an interview. ``That means it might be worth a look.''

Tesoro Corp.'s implied volatility, a gauge of option prices, rose 8.5 percent after Standard & Poor's said yesterday it will add the owner of seven U.S. refineries to the S&P 500. Call and put trading both increased to more than four times the daily average. Tesoro shares rose 2.7 percent to a two-month high of $51.01.

Implied volatility for Intercontinental Exchange Inc. increased 2.4 percent. The owner of Europe's largest energy market is also joining the S&P 500.