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Bearish Plays Surround Caterpillar Options

Today’s tickers: CAT, JWN, TIBX, XLI, FXI, M, C, FRE & PCLN

CAT– Shares of the machinery manufacturer were on the rise this morning, but have reversed direction this afternoon, surrendering nearly 2% to stand at $46.91. One investor was seen positioning for a drastic decline in the stock by expiration in September. Initiating a ratio put spread he purchased approximately 7,000 puts at the September 42 strike price for an average premium of 1.17 apiece spread against the sale of some 14,000 puts at the lower September 37 strike for 40 cents each. The net cost of the transaction amounts to 37 cents and yields maximum potential profits of 4.63 if the stock declines to $37.00 by expiration. Shares of CAT must fall at least 11% from the current price before the bearish investor begins to amass profits to the downside at the breakeven point of $41.63. – Caterpillar, Inc.

JWN – Shares of the high-end fashion retailer have slipped nearly 3.5% to $29.26 today just a few days ahead of the firm’s earnings announcement scheduled for this coming Thursday. Option trades on the stock today suggest pessimism by investors who were seen trading in call options for more fashionable puts. Bearish reversals at the August 30 strike price involved some 6,400 calls shed for an average premium of 95 cents in exchange for the purchase of 6,400 puts at the same strike for about 1.47 per contract. The net cost of the transaction amounts to approximately 52 cents and yields downside protection beneath the breakeven point at $29.48. Profits have already begun to amass for investors long the put options because the current market price of JWN shares is 22 cents beneath the breakeven point described above. Additional bearish sentiment was observed at the August 29 strike price where investors purchased 1,100 puts for an average premium of 1.00 apiece. – Nordstrom, Inc.

TIBX – Option implied volatility on the provider of infrastructure software exploded upwards by an amazing 131% to the current reading of 87.04% amid news that Germany’s SAP AG may be looking to buy the U.S. firm. Investor uncertainty and shares of TIBX surged, with the stock rallying 11.5% to $9.45 during today’s trading session. Option traders looking to join the bullish wave purchased approximately 4,500 calls at the September 10 strike price for an average premium of 74 cents apiece. Profits will begin to amass for these individuals in the event that TIBX shares continue to climb through the breakeven point at $10.74 by expiration. Nearly 1,000 calls were picked up at the higher September 12.5 strike for about 21 cents per contract. A rally of about 35% from the current price is required for the higher strike call buyers to realize profits starting at a price of $12.71. – TIBCO Software, Inc.

XLI – The industrials exchange-traded fund edged onto our ‘most active by options volume’ market scanner amid bullish options activity despite the more than 1% decline in shares to $24.78 today. It appears that approximately 10,000 calls were purchased at the December 27 strike price for an average premium of 87 cents. Investors holding these calls are likely hoping for a more than 12% rally in the fund so that they may begin to accrue profits starting at the breakeven price of $27.87. The higher December 30 strike price looks to have had 5,000 calls shed for an average premium of 22 cents per contract. The sale did not appear to be linked to the long call transaction at the lower strike, but could potentially be the work of an investor effectively limiting profits to the upside by enacting a call spread. – Industrial Select Sector SPDR

FXI – Shares of the exchange-traded fund have remained relatively flat on the day, although the stock is currently off slightly by less than 0.5% to stand at $41.74. FXI jumped higher on our ‘most active by options volume’ market scanner this afternoon after one investor initiated a large-volume reversal in the September contract. It appears that the trader sold 17,000 puts short at the deep in-the-money September 50 strike price for 8.30 apiece and spread the sale against the purchase of 17,000 calls at the same strike for 15 cents each. The net credit received on the transaction amounts to 8.15 or $13,855,000. In order to retain the full credit, shares of the FXI would need to explode about 20% higher to surpass the $50.00 level by expiration. The short put position leaves the investor vulnerable to having shares of the underlying put to him at an effective price of $41.85 in the event that shares remain beneath $50.00. – iShares FTSE/Xinhua China 25 Index Fund

M – Shares of the retailer have dipped more than 3.5% to $15.40 ahead of earnings scheduled for release on Wednesday. Option traders active in the November contract this morning seem to expect Macy’s share price to remain roughly within the $14 – $19 range by expiration. Investors were seen selling about 3,500 puts short at the November 14 strike price for an average premium of 1.35 each, while the higher November 19 strike had 4,400 calls shed for 75 cents apiece. The transactions were not spread against one another, but the short selling of both calls and puts effectively mimics a short strangle. Investors employing such a strategy are expecting shares to remain ‘strangled’ within the strike prices described in order to retain the premium enjoyed on today’s sale. Additional short selling of some 1,200 put options was observed at the November 15 strike price for 1.75 per contract. Shares of Macy’s must remain higher than $15.00 by expiration in order for traders to retain the full 1.75 premium received for the transaction. – Macy’s, Inc.

C– After leaping on Friday to a three month high, shares at Citi are up again today, although below Friday’s best point. Currently its shares are trading at $4.03. Early-bird optimists bought August 5 strike calls, which would require a 25% jump in the space of the coming two weeks. There is also still a great deal of interest at the same expiration 4 strike puts where 27,000 contracts have traded between 19 and 28 cents so far. Option implied volatility has once again eased as the share price rebounds and has lost 7.6% to 73% today. – Citigroup, Inc.

FRE – The mortgage-finance company under government control surged 81% to $1.34 during today’s trading session after reporting its first profit in two years and revealing it will not currently require more U.S. Treasury aid. Our attention was drawn to the September contract where investors appear to be picking up long straddles. The September 2.0 strike price had approximately 10,500 calls purchased for 15 cents apiece in combination with the purchase of 10,500 puts for an average premium of 96 cents each. Investors purchased the straddles at a net cost of 1.11, and are apparently expecting greater volatility in the price of FRE shares through expiration. Profits will begin to amass for traders in the event that shares rise another 132% through the breakeven point to the upside at $3.11 or decline 34% to fall beneath the breakeven point to the downside at $0.89. – Freddie Mac

PCLN – Implied volatility on the online travel company contracted more than 24% to the current reading of 39% after the firm reported that third-quarter profits may be as high as $2.85 per share. The stock jumped 13.5% to $148.86 today on the improved earnings guidance. Option traders exchanged more than 25,300 option contracts on PCLN today, which is nearly 23% of the existing open interest on the stock of 110,542 lots. Notable bullish call buying was seen at the August 150 strike price where more than 1,000 calls were scooped up for an average premium of 3.56 apiece. Investors long these calls will begin to realize profits if shares can rally another 3% to breach the breakeven point at $153.56 by expiration. – Priceline.com, Inc.


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  1. Phil
    I am a new member and want to know your strategy for playing a possible pull back. I am still trying to find my way around the site. I will appreciate any pointers on using DIA puts or anything else. I understand this may have been posted by you earlier but as I get my arms around the site, it would save some time as this market looks ready for a drop. I am looking to get into some action by the AM. Thanks.
    Sudhar


  2. Sudhar,
     
    Usually most posts goes into Phil daily article. Click on "Phil Tab" and look for a post done in the morning (around 8 am), There is where all chat for the current day is held, and where you can ask for a fast reply. 
     
    Regards & welcome.


  3. Thanks Spider