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Bears Bombard Wells Fargo with Pessimistic Option Plays

Today’s tickers: WFC, GS, EWZ, EK, CHRW, BIDU, CBY, ACOR, INTC, EK & EAT

WFC – Wells Fargo & Co. – Bearish traders lumbered around Wells Fargo today purging calls and feasting on out-of-the-money put options. Pessimistic positions were initiated during the trading session despite the 1.5% move up in shares of the underlying to $29.02. Investors piled into put options at the February $23 strike where roughly 23,000 contracts were purchased for an average premium of $0.13 apiece. Perhaps put buyers are merely securing cheap downside protection in case WFC’s shares fall off the proverbial cliff by expiration next month. Traders may be expecting a pull back in shares of the financial firm. If the puts were purchased as an outright bearish bet on the stock, investors long the contracts could turn profits by selling the puts before expiration next month if premium levels on the lots appreciate above $0.13. Medium-term pessimism was apparent in the April contract where traders shed 4,700 calls at the April $32 strike for an average premium of $0.66 each. Additional bearishness took place at the April $28 strike as investors picked up roughly 5,600 puts for $1.55 apiece. Pessimistic trading patterns suggest a bumpy start to the new year for Wells Fargo.

GS – Goldman Sachs Group, Inc. – Bullish activity in the February contract on investment banking firm, Goldman Sachs, suggests shares are poised to pop up in the next few weeks. Shares appreciated slightly during today’s session, rising 0.10% to $169.22 ahead of the closing bell. One optimistic options strategist purchased a debit spread to position for bullish movement in the price of the underlying. The trader bought 10,000 calls at the February $180 strike for a premium of $2.25 apiece, spread against the sale of 10,000 calls at the higher February $185 strike for $1.30 each. The investor shelled out a net $0.95 per contract on the trade. Goldman’s shares must gain approximately 7% from the current price in order for the call-spreader to breakeven at $180.95. Maximum potential profits of $4.05 per contract amass for the trader if GS shares jump 9.3% to $185 by expiration day in February.

EWZ – iShares MSCI Brazil Index ETF – Shares of the EWZ, which corresponds to the performance of publicly traded securities in the Brazilian market, edged 1.75% lower during the trading day to stand at $74.53. Bearish option traders made aggressive moves on the stock using both calls and puts in the February contract. One strategy employed this afternoon was a ratio put spread. It looks like one investor purchased 10,000 puts at the February $70 strike for an average premium of $1.23 each, and sold 20,000 calls at the lower February $67 strike for about $0.69 apiece. The put-spreader pockets a net credit of $0.15 per contract on the transaction. Additional profits, or downside protection on a long position in the underlying shares, kick in if shares of the ETF decline beneath the breakeven price of $70.00 by expiration next month. Plain-vanilla put buying added to the near-term negative view on the EWZ. It appears some 5,100 puts were purchased at the February $71 strike for a premium of $1.47 per contract. Investors holding these contracts are positioned to accrue profits to the downside if shares of the fund decline another 6.70% to breach the breakeven price of $69.53 by expiration. Finally, a massive credit spread using February contract call options solidifies the bearish aura looming over the EWZ today. One trader sold 24,000 calls at the February $76 strike to take in a premium of $2.45 apiece, marked against the purchase of 24,000 calls at the higher February $81 strike for about $0.74 each. The net credit received on the spread amounts to $1.71 per contract. Shares must trade beneath $76.00 for the duration of the life of the option contracts in order for the investor to retain the full credit received today. Maximum potential losses of $3.29 per contract could hurt the credit-spreader should shares burst higher in the next few weeks. Losses amass if the stock improves above the upper breakeven point at $77.71, and max out at a share price of $81.00.

EK – Eastman Kodak Co. – For the second day in a row, options in Eastman Kodak rank high on our unusual activity scanners. The news that the company today filed a patent infringement against both Research in Motion and Apple is quite a Kodak moment. According to media sources, Kodak has endeavored for years to seek fair compensation from each company relating to what it feels is the breach of a patent held by Eastman regarding technology for previewing photos. Anyway, the story is out and if successful Kodak’s complaint to the U.S. International Trade Commission could halt shipments of iPhones and Apples. All of this leads us to ponder the timing of a about 36,000 call options expiring in February at the $5.00 strike. Today shares have risen through the strike on the news and those call options have doubled overnight. Today, investors hoping to cash in on the event driven news have traded five-times the number of call options relative to puts helping lift implied volatility on the stock up 11% since the start of this week. Today’s options haven is the $5.00 strike expiring at the weekend, where some 13,000 calls have changed hands with premiums rising to 45 cents at one point earlier. Implied volatility at this strike is as high as 122%.

CHRW – CH Robinson Worldwide Inc. – An analyst upgrade from Deutsche Bank yesterday to shares of a series of trucking and transport companies might be behind an option strategy deployed today at CH Robinson. Its shares are trading just a little higher at $57.46 on Thursday, some 13% below the $65 price target the analyst predicts investors can expect to see. It appears that an option investor used the rating change to justify the sale of $50 strike put options, which would erode over time in the event that shares at the least truck sideways. The investor sold 12,000 puts down to a premium of $1.90 while confirming the views of the analyst with the purchase of the same amount of calls at the $65 strike for a cost of $1.35. Both options expire in seven months during August. Such a bullish play would leave the investor vulnerable to a 14% share price decline, meaning he’d have shares put to him for $50 each in the event of a decline, but would probably mean appreciation in the price of the call option should investors step on the accelerator sometime soon. Thanks to an implied volatility skew favoring put options, the investor receives a credit given the pricier premium charged on the put options where implied volatility at 27.95% compares to 22.77% on the calls.

BIDU – Baidu, Inc. – Baidu-bulls rejoiced at the more than 4.90% rally in shares of the Chinese-language internet search provider today to a new 52-week high of $461.00. Option traders initiated optimistic stances on the stock, positioning for continued share price gains that are likely to occur if the world’s most popular search engine, Google, exits the Chinese market. Baidu is poised to gain a large portion of Google’s search business in China if the California-based company does in fact depart. Investors sold 1,600 puts at the January $430 strike for an average premium of $1.96 each, and shed another 1,700 puts at the higher January $440 strike for roughly $3.65 apiece. Put-sellers retain the full premiums pocketed on the sales if BIDU’s shares trade above the strike prices described through expiration tomorrow. Call buying in the January contract suggests some investors expect continued bullish movement in the price of the underlying stock through expiration. Optimists picked up 2,100 calls at the now in-the-money January $450 strike for an average premium of $4.23 each. Another 1,300 calls were coveted at the higher January $460 strike for a premium of $1.82 apiece. Higher strike call buyers begin to accrue profits if Baidu’s share price increases above the effective breakeven point at $461.82 by expiration tomorrow.

CBY – Cadbury Plc. – – The producer of delectable items such as Flake and Trident realized a 0.25% increase in shares today to $52.04. One investor, however, purchased a put spread on the chocolate-maker, suggesting shares may decline ahead of expiration in February. The bearish trader purchased 7,170 puts at the February $50 strike for a premium of $1.45 apiece, spread against the sale of the same number of puts at the lower February $45 strike for $0.50 each. The trader, who is likely long shares of the underlying, paid a net $0.95 per contract for the spread. The debit spread establishes downside protection for the investor in case Cadbury’s shares fall 5.75% from the current price to breach the breakeven point at $49.05. Option implied volatility rose 10.02% during the first half of the trading session to an intraday high of 30.39%.

ACOR – Acorda Therapeutics, Inc. – Option players gravitated toward put options on biopharmaceutical company, Acorda Therapeutics, today despite the 1% move up in shares to $26.24. Investors employed different strategies using the puts. Bullish traders sold 2,500 puts at the February $17.5 strike to take in premium of $0.75 per contract. Put-sellers keep the full premium on the trade as long as Acorda’s shares do not collapse and remain above $17.50 through expiration next month. Another investor, who is probably holding a long stock position, purchased a put spread to lock in gains and build up downside protection. The spread involved the purchase of 5,000 puts at the February $25 strike for $2.75 each, marked against the sale of 5,000 puts at the lower February $20 strike for $1.20 apiece. The net cost of the protective play amounts to $1.55 per contract and protects the investor in case ACOR shares slip more than 10.5% to the breakeven price of $23.45 by expiration.

INTC – Intel Corp. – Shares of the chip maker are trading 1.5% higher this morning to a new 52-week high of $21.29 ahead of the firm’s scheduled earnings release after the final bell. Option traders exchanged more than 111,800 contracts on the stock by 10:18 am (EDT) and revealed a strong preference for call options. Calls changed hands roughly four times for each single put option traded. Option implied volatility is slightly lower by about 3% to 32.65%.

EK – Eastman Kodak Co. – Call options on Kodak are in high demand this morning with shares up 4% to $5.13. Investors traded call options on the stock 10.5 times for every put exchanged. It looks like fresh call buying activity is taking place at the in-the-money July $5 strike where 3,600 contracts changed hands for an average premium of $1.15 apiece. We observed investor demand for call options during yesterday’s trading session, as well.

EAT – Brinker International, Inc. – The owner, operator and franchiser of restaurants such as Chili’s and Maggiano’s attracted two-way trading traffic in February contract call options in early trading. Shares of the company are trading 3% higher to $15.25. Some investors are probably banking gains by selling now in-the-money call options at the February $15 strike for about $1.00 each. Other traders may be buying up calls at the same strike to position for continued upward movement in the price of the underlying by expiration next month. Approximately 3,700 calls changed hands at that strike by 10:30 am (EDT). The surge in demand for options on the stock pushed option implied volatility up as much as 12.20% during the first 90 minutes of the trading session to an intraday high of 48.73%.


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