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Patient XLF optimist targets January 2011 combination

Today’s tickers: XLF, DUK, DOW, GE, CX, GME, SEPR & ADBE

XLF – Financial Select Sector SPDR – Helping pummel the S&P index and continuing to sour the tone today is a 9.5% slump in the financial select sector ETF, which is now trading at $6.22 and as if we need to mention it, that’s a fresh lifetime low. In the front March contract there is heavy call volume at the 8.0 and 9.0 strikes, both trading to bid and ask illuminating a decidedly mixed picture. Catching our eye at the January 2011 strike is a curious bullish combination in which an investor appears to have created a ratio put spread at the 4.0 and 5.0 strikes in which twice as many puts were sold at the lower strike. Some 10,000 puts were sold at a premium of 96 cents while 5,000 were bought at the 5.0 strike for 1.51. The net premium creates downside losses starting at $3.45. The other leg of the trade appears much higher up on the call side where some 5,000 calls were paid for at the 20 line with a 21 cent premium. We’re assuming that this investor is pitching camp in the 2011 contract to help weather the financial storm in hopes that sunny days will prevail after the clouds dissipate leaving him well positioned for the inevitable rebound.

DUK – Duke Energy Corporation – The energy company experienced a 3% decline to $12.06, but did not deter bullish action by one investor in the April contract. At the 12.5 strike price, over 18,000 calls were purchased for an average price of 53 cents apiece. Perhaps this trader was taking advantage of falling call premiums given today’s share price decline. In order to profit from the trade shares will need to rally by 8% to the breakeven price of $13.03. Option implied volatility has surged from 37% earlier in the day to the present reading of 49.5%.

DOW – Dow Chemical Co. – Shares of the chemical manufacturer have declined 6.5% to $6.60, reaching a new 52-week low for the stock. We observed bearish option trades in play, the largest of which occurred at the March 5.0 strike price where 20,500 puts were purchased for 34 cents each. This investor is likely buying protection from further downside movement in shares, and it is likely that he is long the stock. The bearish picture continues into April where we saw over 3,200 puts scooped up for 67 cents per contract. Implied volatility has spiked higher throughout today from 135% to 149%.

GE – General Electric – The industrial conglomerate continues to buck the market, but today that’s a good thing although its shares have tapered off after a positive start and are up by less than 1% at $6.73. GE has dominated the top of our ‘most active by options volume’ market scanner this week and today is no exception. We noticed some traders who have been able to create opportunity out of the chaos – those investors who have been able to see through the near-term turmoil and bet on future solvency of the company. In the January 2011 contract a sold strangle stood out, with 10,000 puts shed at the 5.0 strike price for 2.35 apiece, and 10,000 calls sold at the 10 strike for 1.86 each. The gross premium enjoyed on this position amounts to 4.21, and yields breakeven points at which losses begin to amass at a share price of $0.79 cents on the downside and at $14.21 on the upside. Thus, this investor will retain the total premium if shares remain ‘strangled’ by the two strike prices by expiration. The real risk lies in upside gains, although shares would need to rebound 111% in order to surpass the breakeven share price on the upside. Option implied volatility spiked to 179% yesterday, but has since come off to about 155% today.

CX – Cemex SAB de CV ADR – The Mexican cement company’s shares have fallen nearly 14% to $4.61. CX edged onto our ‘hot by options volume’ market scanner after one investor paid about 70 cents per contract to purchase 29,500 puts at the 2.5 strike price set to expire in January 2010. This bearish position does not see Cemex rebounding any time soon, rather this investor looks to be buying protection should shares more than halve from today’s price. The breakeven point on the trade is located at $1.80 and would be attained only after a further 60% decline in price. Option implied volatility has spiked to 142% up from yesterday’s valuation at about 122%.

GME – Gamestop Corporation Class A – Shares of the retailer of video game products and PC entertainment software has declined 14% to $23.45. Investors established telling positions concentrated on the put side today, and concentrated largely in the March contract. At the March 20 strike price 1,300 puts were sold for 31 cents apiece – effectively creating a floor for the share price at $19.69. Higher up at the March 22.5 strike, 1,200 puts were purchased for 85 cents each, while at the March 25 strike 2,800 puts were bought for 1.70 per contract. While these investors do not believe shares will decline through the lowest strike, they are also not expecting any miracles, and have therefore bought protection as far up as the in-the-money puts at the 25 strike. Contrary to the put buying, one bullish investor is looking for a significant rebound on the stock and bought 1,000 calls at the March 30 strike for 18 cents each. Shares would need to rise by 28% in order to pass through the breakeven point at $30.18, the point at which profits begin to amass.

SEPR – Sepracor Inc. – Looks like an intriguing upside combination from one investor today who looked to minimize trade costs while hoping that shares in the pharmaceutical manufacturer will breach at least $17.40 before options expiration in July. The shares have lost 5.8% today at $13.86 creating opportunity enough for the July cal buyer to bag 5,000 calls at the 17.5 strike price at a 1.14 premium. In isolation the investor now needs shares to reach $18.64 before seeing gains. However, the investor also appeared to simultaneously sell the same amount of call options at the same strike expiring in April at an average 30 cent premium, which reduces the required breakeven in July. Naturally there is a risk that shares will reach the strike within the next five weeks before April expires. Finally, we suspect the same investor came along and sold July puts at the 10.0 strike for a 52 cent premium, which makes the net cost of being bullish just 32 cents. The investor also bears the risk of a dip beneath this latter put strike, but clearly doesn’t expect this to occur.

ADBE – Adobe Systems, Inc. – The software company gained 5% at midday taking shares to $17.20. We observed a sold straddle at the April 17.5 strike price, where approximately 5,000 puts were sold for 1.85 each and spread against about 5,000 calls, which sold for a .95 cent premium per contract. The gross premium pocketed on the trade amounts to 2.80, and is retained in full if shares remain centered at $17.50 by expiration. The premium will have completely eroded if shares breach either breakeven point located at $14.70 on the downside and at $20.30 on the upside. Further along, in the July contract, it looks as though one investor traded in puts in favor of calls. The rationale for the trade is likely a post-earnings drop in implied volatility, which has already slipped 11% to 60% this morning. At the July 17.5 strike price, 1,800 puts were sold for a premium of 2.50, while about 1,800 calls were purchased at 2.28 each. This creates a net credit of 22 cents to the investor, who is looking for upside movement in shares come the dog-days of summer.


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