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Volatility Up at Dow Chemical as Investors Feast on Options

Today’s tickers: DOW, XLF, FMCN, MAR, CAT, S & MOT

DOW - The manufacturer of chemicals, plastic materials, and other specialized products jumped onto our ‘most active by options volume’ market scanner this afternoon amid a more than 7% rally in shares to $25.30. Option traders displayed bullish tendencies as investors exchanged nearly two call options to each put traded on the stock. The near-term September contract had traders buying up both calls and puts. Bullish call buying occurred at the now in-the-money September 25 strike where more than 6,100 calls were picked up for an average premium of 33 cents each. More optimistic individuals purchased some 1,100 calls at the higher September 26 strike for 27 cents premium. Investors also locked in gains by buying 4,300 puts at the September 24 strike for 25 cents each. An additional chunk of 5,600 puts were scooped up at the higher September 25 strike for 56 cents apiece. Investors purchasing the puts probably hold long positions in the underlying stock. Finally, the October 26 strike was also targeted by bullish traders who bought about 2,000 calls for 85 cents per contract. The intraday shift in option implied volatility on DOW suggests investors are anticipating greater fluctuation in the price of the underlying shares. Volatility increased 12% during the session, rising up to a high of 51.5% from an intraday low of 46%. – The Dow Chemical Co. –

XLF - A large-volume bearish reversal caught our eye on the financials exchange-traded fund as shares of the underlying spent the better part of the trading session in the red. However, the XLF has recovered this afternoon to stand more than 0.5% higher at $14.63. The massive options reversal enacted in the October contract suggests at least one trader does not expect to see the fund climb much higher over the next five weeks. The transaction involved the sale of 35,000 calls at the October 15 strike for 39 cents apiece spread against the purchase of 35,000 puts at the lower October 14 strike for 49 cents per contract. The net cost of getting long the puts amounts to just 10 pennies each. It is likely the investor responsible for the spread holds a long position in the underlying stock. If this is indeed the case, he has established downside protection that would kick in if shares of the XLF fell beneath the breakeven point at $13.90 by expiration day. If the investor does not own an equivalent number of shares of the fund, he could face potentially unlimited losses due to the large short call position established. But, assuming he does own the shares, the short calls would act like a covered call in the event that the stock rallies through $15.00 by expiration day. – Financial Select Sector SPDR –

FMCN - Shares of the Chinese advertising firm are flying 12.5% higher to $10.92, prompting bullish options action in the October contract. It appears that traders initiated ratio bullish risk reversals on the stock by shedding a small number of puts to get long of a greater number of calls. The October 10 strike looks to have had 2,500 puts shed for an average premium of 78 cents each spread against the purchase of 15,000 calls at the higher October 12.5 strike for about 21 cents per contract. The net cost of buying the calls is reduced to approximately 48 cents each (6*0.21 – 1*0.78 = 0.48). Investors holding the calls are hoping to see FMCN rally 19% higher to breach the breakeven price of $12.98 by expiration next month. Option implied volatility on Focus Media has surged 26% during the session from a low of 66% to the current reading of 83%. – Focus Media Holding, Ltd. –

MAR - Hotelier Marriott is a little lower at $24.37 to start the week. Breaking through $25.25 has proved a tough-nut to crack in the last month and as recently as last week shares slumped to $22.00. One trader appears to be banking on an economic recovery to power the share price higher in the medium-term. In the option market we saw two trades that appear to reveal the investor as a buyer of calls and seller of same-strike puts. The investor used the September 24 strike to write some 5,000 calls at 35 cents in exchange for buying 5,000 calls at 80 cents. He same pattern emerged using the same 24 strike in the January series where the position was increased to some 9,000 contracts. In this case the net cost was around 45 cents, which significantly reduces the cost at which the investor breaks even. Option implied volatility appears to be around 12% higher on Marriott’s options today at 56%. – Marriott International –

CAT - There was heavy call option activity in the heavy-equipment manufacturer this morning. With prospects of a trade war looming that might harm global trade, it’s all too easy to justify a decline at Caterpillar to $48.48, but its shares are hardly changed. But the 25,000 lots going through in 50 strike call options expiring at the weekend is harder to figure out. Much of the options activity appears to be led by buyers who chased premiums up to 60 cents from Friday’s close at 46 per contract. However, early challenges for the broader market saw the calls open at 25 cents before a recovery in its share price saw buyers double the premium commanded by rights to lock into the stock some 3% higher than they are currently. – Caterpillar Inc. –

S - Shares of the third-largest mobile-phone operator in the U.S. have surged more than 10.5% during the trading session to $4.17 following reports that Deutsche Telekom AG may consider purchasing the company. Option traders celebrated the upward move in the stock by taking bullish positions. The November 8.0 strike attracted one investor who purchased 10,000 calls for a nickel per contract. Shares of Sprint would need to explode 93% higher by expiration in order for the trader to breakeven at a price of $8.05. However, it is possible the call-buyer plans to sell the contracts ahead of expiration. He would realize profits on the trade as long as he sells the calls for more than the 5-penny purchase price paid today. Additional bullishness was displayed in the February contract through the use of a risk reversal strategy. The investor looked to the February 3.0 strike to sell 5,000 puts for 25 cents apiece, which he spread against the purchase of 5,000 calls at the February 6.0 strike for 25 cents per contract. The trader essentially put on the transaction for free although the naked put transaction means losses are possible below the strike price. Profits are available to this individual if shares rise 44% and surpass the breakeven point at $6.00 by expiration next year. – Sprint Nextel Corp. –

MOT - Different options strategies employed using the same strike prices in the April 2010 contract caught our eye on Motorola this morning amid a more than 1.5% rally in the stock to $8.82. Perhaps the bullish positioning we observed stems from the upgrade MOT received to ‘buy’ from ‘neutral’ at UBS AG today. Analysts at UBS also shifted their target price on the stock up to $11.50 from $7.50. One tactic of note was the use of large-volume bullish risk reversal. The investor responsible for the reversal chose to sell about 12,000 puts at the April 7.0 strike for an average premium of 53 cents each in order to finance the purchase of 12,000 calls at the higher April 10 strike for 85 cents apiece. The net cost of the transaction amounts to 32 cents and positions the investor to profit above the breakeven point at $10.32 by expiration. It appears that this trader is hoping UBS’s share price prediction becomes a reality by April of 2010. In contrast, another investor initiated a sold strangle using the same strikes. This indicates that while he is still bullish on the stock, he does not expect shares to break out of the price parameters defined by the strangle. The investor shed 2,000 puts at both the April 7.0 and 10 strikes for a gross premium of 1.42 per contract. He will retain the full premium received as long as shares remain ‘strangled’ by the strike prices described. The trader is vulnerable to losses only in the event that shares move beyond the breakeven point to the upside at $11.42, or beneath the lower breakeven price of $5.58, by expiration. – Motorola, Inc. –


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