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Options Trade Extends Downside Protection On Vale

 

Today’s tickers: VALE, LCC & PNC

VALE - Vale SA – The Brazilian metals and mining company’s shares have sustained sharp losses since last summer, with the stock currently trading at a 45.0% discount to the July 26th 52-week high of $33.74. Shares in Vale are in positive territory today, up 1.3% at $18.59 as of 11:00 a.m. in New York; however, the largest prints in the iron ore producer’s options today point to the potential for fresh two-year lows in the next few months. It looks like one strategist is rolling a bearish position from the front month out to the September expiry, selling a 2,592-lot Jun. $20/$23 put spread at $2.97 per contract to buy the 2,592-lot Sept. $16/$18 spread at a net premium of $0.69 each. Open interest in the front month puts is sufficient to cover the size of the transaction, although it is difficult to determine when and at what price the spread might have originally been purchased. The put spread could be a hedge to offset losses on a long position in the shares, or an outright bearish bet that shares in Vale have further to fall this year. The new Sept. $16/$18 spread yields profits – or downside protection – should shares in Vale decline 6.9% to trade below the breakeven price of $17.31 by expiration.

LCC - US Airways Group, Inc. – A sizable position was initiated in US Airways Group put options this morning ahead of the airline operator’s annual shareholder meeting on Thursday and prior to second-quarter earnings due out next month. Shares in LCC are up 1.15% just before midday to stand at $11.50 and stand 120.0% higher since the beginning of the calendar year. It looks like approximately 5,000 put options were purchased at the July $10 strike for an average premium of $0.57 apiece, perhaps as some strategists lock in gains or speculate on a possible pullback. The cheapened cost of downside insurance may be one attraction for buyers of the contracts today given premium on the July $10 strike puts is trading at near one-month lows. Three weeks ago premium on the $10 puts was up at $1.13 apiece, nearly twice the price paid for the contracts this morning. An adverse move in the price of the underlying could see the value of the long put position rise, possibly providing an opportunity for buyers to turn around and sell the contracts at a favorable price ahead of expiration. If held to expiration, put buyers profit in the event that shares in US Airways settle below the breakeven point on the downside at $9.43.

PNC - PNC Financial Services Group, Inc. – Shares in PNC are struggling today, down 2.3% this afternoon at $56.85, though off earlier session lows. Options on the name are a bit more active than usual, with roughly equal numbers of call and put options changing hands and overall volume exceeding 8,500 contracts as of 12:45 p.m. ET. The pullback in the price of the underlying appears to have spurred some contrarian plays in PNC options. More than 2,000 puts traded at the Aug. $50 strike in the first hour of the trading day, with much of the volume sold for a premium of $1.47 apiece. Put sellers keep the full amount of premium received on the transaction as long as shares in PNC exceed $50.00 at August expiration. Meanwhile, in-the-money call buying in the June expiry suggests some strategists may be positioning for shares to recover somewhat this week. Traders that purchased around 500 of the Jun. $55 strike call at an average premium of $1.62 per contract profit at expiration if shares settle above the average breakeven price of $56.62. The intraday improvement in PNC shares now sees premium required to purchase the Jun. $55 strike call up more than 45.0% at $2.16 as of 1:00 p.m. versus the $1.47 per contract paid by some traders this morning.

 

Caitlin Duffy

Equity Options Analyst


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