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Microsoft Option Traders Geared Up For Disappointment

Today’s tickers: MSFT, CMCSK, HIG, PNC, F, WFC, XLU & FXI

MSFT – Shares of the software company are currently higher by about 3% to $25.53, but options activity on the stock suggests investors are bracing for bearish movement in the price of the underlying through expiration in September. Traders may be feeling a bit nervous ahead of MSFT’s fourth-quarter earnings report, as the firm is expected to reveal that earnings declined to 36 cents from 46 cents in the same period last year. Investors acted on fears of potential declines in the stock by selling approximately 10,000 calls short at the September 26 strike price for a premium of 85 cents apiece in order to finance the purchase of some 10,000 puts at the September 25 strike for 1.11 per contract. The net cost of getting long protective put options amounts to 26 cents. Traders will begin to amass profits, or protect long positions in the underlying, if shares slip beneath the breakeven point to the downside at $24.74. – Microsoft Corp.

CMCSK – The provider of entertainment announced that it will be the first cable provider to offer full HBO On Demand service in high definition (HD) to its customers. Shares of CMCSK have rallied approximately 1% to $13.70 during today’s trading session. Comcast appeared on our ‘hot by options volume’ market scanner after option traders took bullish stances on the firm in the near-term August contract. Hoping for continued upward movement in the stock, investors purchase about 8,900 calls at the August 15 strike price for an average premium of 22 cents apiece. In order for these individuals to amass profits by expiration, shares would need to surge at least 11% to surpass the breakeven point at $15.22. Option implied volatility edged slightly higher to 41% this afternoon from the opening reading of 38%. – Comcast Corp.

HIG – Frenzied call-buying by bullish option traders was apparent on the insurance and financial services firm today, amid a share price rally of more than 14% to $14.03. Call options were traded five times to each put option in action on the stock, as evidenced by the call-to-put ratio of more than 5-to-1. The near-term August 14 strike had about 5,200 in-the-money calls picked up for an average premium of 73 cents apiece. We note that now the same in-the-money calls tote an asking price of 1.25 each. The higher August 15 strike price attracted bullish traders who bought 8,600 calls for about 42 cents per contract. Further, the most optimistic individuals purchased 1,600 calls at the August 16 strike for 32 cents each. Shares of HIG would need to surge 16% higher for investors long the August 16 strike calls to begin to profit above the breakeven price of $16.32. Finally, other traders picked up 1,800 put options at the August 13 strike for 92 cents each, perhaps in an attempt to lock in gains enjoyed during the rally. – The Hartford Financial Services Group, Inc.

PNC – The banking and financial services firm has been left out of today’s market rally, its shares currently down nearly 4% to $36.04. PNC’s second-quarter earnings failed to meet analyst expectations. The company revealed that profits tumbled 61% as an increasing number of borrowers fell behind on loans. The EPS of 14 cents for the quarter pales in comparison to the 1.45 earned by PNC just one year prior. Options bears roared, clawing at put options in the November contract. It appears one investor initiated a ratio put spread in an attempt to profit to the downside. The just out-of-the-money November 36 strike price had 20,000 puts purchased for an average premium of 4.08 apiece spread against the sale of 40,000 puts at the lower November 31 strike for 1.97 a-pop. The net cost of the transaction amounts to just 14 cents and yields maximum potential profits of 4.86 if the stock declines to $31.00 by expiration. Shares need only fall by another 18 cents for this PNC-pessimist to begin to garner profits at the breakeven price of $35.86. We note additional fresh put-option action at the November 29 strike where 10,000 lots traded to the middle of the market for 1.45, as well as at the November 27.5 strike where 15,000 puts exchanged hands. – PNC Financial Services Group, Inc.

F – Shares of the U.S. automaker surged more than 10% to $7.04, surpassing the 52-week high for the stock of $6.53, after reporting earnings which exceeded analyst expectations. Cost cutting efforts and increased domestic market share contributed to losses of 21 cents per share versus average losses of 50 cents per share projected by analysts. Investors looking to lock in gains purchased more than 25,000 put options at the September 7.0 strike price for an average premium of 80 cents per contract. If the stock reverses direction ahead of expiration, put-holders who may be long shares of the underlying, are protected beneath the breakeven price of $6.20. Bullish trading was observed in the January 2011 contract where it appears that investors have effectively established call spreads. The January 10 strike price likely had 6,300 calls purchased for a premium of 1.35 apiece, while the higher January 15 strike looks to have had 6,300 calls shed for 50 cents each. The net cost of such positioning amounts to 85 cents and yields maximum potential profits of 4.15 per contract if the stock can rally up to $15.00 by expiration. The bullish earnings news allowed investors to breathe a sigh of relief, and pushed option implied volatility on the stock lower to 50% from yesterday’s closing reading of nearly 60%. – Ford Motor Company

WFC – The biggest U.S. home lender revealed that bad loans increased in the second quarter as borrowers struggled to maintain payments in the recessionary climate. Shares slipped lower by about 0.5% to arrive at the current price of $24.53. One bearish investor looked to profit from Wells Fargo’s pain by establishing a put spread in the September contract. The spread involves the purchase of 7,000 puts at the September 23 strike for 1.25 apiece against the sale of 7,000 puts at the lower September 20 strike for 45 cents each. The net cost of the transaction amounts to 80 cents, yielding maximum potential profits of 2.20 if shares decline to $20.00 by expiration. The trader responsible for the spread will begin to amass profits given a 9% decline in the stock through the breakeven point at $22.20. – Wells Fargo & Co.

XLU – Shares of the utilities exchange-traded fund are currently higher by more than 1.5% to $28.85. A bullish trader hoping for a continued rally established a calendar spread on the XLU. It appears that the investor sold 15,000 calls short at the December 29 strike price for a 1.15 apiece in order to purchase 15,000 calls at the nearer-term September 29 strike for an average premium of 37 cents per contract. The trader enjoys a net credit of about 78 cents on the spread. Shares of the ETF must rise a paltry 15 cents from the current price in order for the investor to continue to accumulate profits on the transaction. The short position held in the December contract must be closed out at some point if the calls are in-the-money by the conclusion of 2009. Otherwise, the investor would likely have shares of the underlying called away from him at expiration at a price of $29.00. – SPDR Utilities Select Sector ETF

FXI – The China ETF edged higher on our ‘most active by options volume’ market scanner today amid a mixture of overtly bullish call-buying and protective positioning. Shares of the FXI have rallied higher by more than 4% to $42.18. One investor, who does not expect the fund to rise through $45.00 any time in the near-future, initiated a risk reversal in the September contract. The trader shed 10,000 calls at the September 45 strike price for a premium of 95 cents in order to partially finance the purchase of 10,000 puts at the September 39 strike for 1.35 each. The net cost of the downside protection amounts to 40 cents and yields profits if shares slip beneath the breakeven point at $38.60. Bullish traders scooped up call options, positioning for continued upward movement in the ETF. The September 45 strike price had 3,000 calls picked up for about 95 cents each while the higher September 46 strike also had 3,000 calls coveted for 85 cents apiece. Finally, bullishness spread as high as the November 48 strike price where uber-optimists purchased 4,000 calls for an average premium of 1.30 per contract. Profits will amass for investors long the November 48 strike calls given a 17% rally in shares through the breakeven price of $49.30 by expiration. – iShares FTSE/Xinhua China Index Fund


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