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Thursday, March 28, 2024

Vulcan Materials calendar put spreads predicts continued slide

Today’s tickers: VMC, ORCL, XLU, XHB, XTO, C, MS, HIG & MT

VMC Vulcan Materials Company – The distributor of construction materials must feel a bit left out given its failure to join in the market rebound festivities. Its shares are flat at $36.35 today, just a scant 5% off the 52-week low of $34.32. Vulcan edged onto our ‘hot by options volume’ market scanner after one investor established calendar spread positions in the April and May contracts. We reckon that this investor has already established a short position on the shares which have declined by more than 50% since the start of 2009. By selling April puts and buying those at the same strike in May the investor is opening the door to having stock put to him should the price settle in-the-money by expiration in the nearby April contract. By establishing the long May put positions the investor retains his short position, although only via options since the short stock position was already put back to him. The trade employed 3,000 spreads at each of the 30 and 35 strike contracts, which also lowered the full premium paid for the May put options. This provides a longer amount of time for this trader to watch the stock’s movement, yet enables him to lock down profits should exercise occur. The worst case scenario would be if shares were to rebound above $35 in April because this would devalue his short position, although the April puts would expire worthless while the May puts would decrease in value. Optimally, this trader would like to see shares decline below $30 by expiration in April as the value of the long puts in May would greatly increase and the puts in April would allow him to take delivery of the underlying shares.

ORCL – Oracle Corp. – Despite a drop of 1.5% to $14.86 in shares of the software and server manufacturer, option investors spent 75 cents scooping up calls expiring in January at the 20 strike. Some 20,000 contracts changed hands adding to an existing 70,000 of open interest at the strike. While these investor are setting lofty expectations about an ultimate increase of more than one third for Oracle’s shares within nine months, it wouldn’t take that much to shift the premium on the calls. The 0.27 delta indicates gains of around a quarter for each dollar recovery in the share price. If shares gain, delta will rise.

XLU – Utilities Select Sector SPDR – Ahead of even yesterday’s big rally for stocks, we noted several large bullish plays occurring in options of utilities and industrial exchange traded funds. Investors often find it more efficient to buy ETFs and then parse the individual stocks in hectic markets. An option buyer turned up to snag 100,000 call options expiring in September today at the 26 line. The trade is marked as a spread, which tells us that this investor could be playing with shares on the underlying in conjunction with options here. Currently the shares are trading 0.4% higher at $23.13, while in order to reach the expiration-based breakeven of $27.00 per share, the fund would still need to rally by 17%.

XHB – Homebuilders Index Fund ETF – Shares of the exchange traded fund have remained relatively flat at $9.12 today after yesterday’s 12% rally. XHB jumped onto our ‘most active by options volume’ market scanner this afternoon after one bullish investor purchased 90,000 calls at the June 12 strike price for 44 cents per contract. The motivation for locking into the purchase of some 9,000,000 underlying shares is unclear, and thus we believe this trade may be tied to stock in some way.

XTO – XTO Energy Inc. – Options activity appears to reveal a bullish stance on the energy company hoping to chop away at the cost of getting lock the stock by August expiration. Shares are responding to cheaper crude oil prices today and are 2.9% lower at $30.50 while this investor spent a 5.57 premium to buy calls at the 30 strike. However, the premium was doubly eroded by the sale of 22.5 strike puts at 1.86 and 40 strike calls at 1.91 in the same month. The net cost of the calls is then reduced to 1.80, which reduces the investors breakeven from a share price of $35.57 to just $31.80. Of course there is no free lunch in the world of options and the investor is at risk of having shares put to him in the event that the trade goes belly up with shares closing below $22.50 at expiration. In addition, a greater amount of calls were sold at the upper strike than were bought at the lower strike. It is possible that stock was involved in this cost-effective combination.

C – Citigroup, Inc. – While shares remain on the rise, today’s 7% rally to $1.56 pales in comparison with the 28% jump experienced yesterday. The excitement surrounding CEO Vikram Pandit’s encouraging words seem to have died down a bit as investors realize rallies – particularly in impaired financial stocks – may become ephemeral. Thus, option traders were seen banking gains by selling calls across several contracts. Some 20,000 calls shed at the September 3.0 strike price stuck out as investors sold out between 34-50 cents per contract on options that traded at 15 cents over the course of the last week.

MS – Morgan Stanley – The global financial services firm must feel elated over today’s 12% share price gain to $23.35. Option traders were seen banking profits in the April contract where 15,000 calls were shed for an average premium of 1.82 each. Despite the encouraging gains made yesterday and today, investors remain cautious on financials. Traders scooped up downside protection at the March 22 strike price by purchasing 9,600 puts for an average of 1.69 each.

HIG – The Hartford Financial Services Group, Inc. – The insurance and financial services company has seen shares increase by 5% to $5.46. Despite the rally, bearish option investors appear to be dominating activity today. In the March contract at the 2.5 strike price, about 9,600 puts were purchased for an average of 12 cents each, indicating perhaps that traders feel the need for downside protection. At the March 5.0 strike price, some 11,000 calls appear to have been sold for an average premium of 1.05. It is likely that these investors are banking gains given rising premiums on now in-the-money call options. Call sales were also observed at the March 7.5 strike where 1,900 traded for an average of 21 cents apiece. Perhaps investors have decided to take the money and run amid recent share price inclines as the sting of the past month’s market turmoil remains fresh in their memories.

MT – ArcelorMittal ADS – The manufacturer of semi-finished and finished steel products has seen its shares rally by about 3% to $20.64. The steel company hopped onto our ‘hot by options volume’ market scanner this morning after one investor established a bearish ratio put spread in the June contract. At the June 17.5 strike price 5,000 puts were purchased for 2.75 each, while at the June 12.5 strike 10,000 puts were sold for a premium of 1.00 per contract. The investor’s net cost for the spread amounts to 75 cents. This strategy implies that the trader sees today’s rally as short-lived and seeks profits from the put spread if shares fall 21% from the current price to the breakeven point located at $16.75. Maximum profits in the amount of 4.25 will have been realized if shares continue to decline to the lower strike price at $12.50. Should shares continue to fall below the lower strike, the net short put leaves the investor vulnerable to losses starting at $8.25 – the breakeven on the downside.

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