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New York
Wednesday, December 6, 2023

Gloomy Put Options Posturing on Financials ETF

Today’s tickers: XLF, ETFC, CF, HGSI, EEM, BEBE, SMH, VRTX, HGSI, F & LDK

XLF – Financial Select Sector SPDR – A large bearish spread in the June 2010 contract suggests one investor feels the need for downside protection through expiration. Shares are slightly up this afternoon by about 0.25% to $14.09. The trader purchased 20,000 put options at the June 14 strike for an average premium of 1.91 apiece. He financed the long position by selling 20,000 puts at the June 11 strike for 74 cents each, and by selling another 20,000 puts at the lower June 10 strike for 51 cents premium. The net cost of the transaction amounts to 66 cents per contract. The investor responsible for the three-legged spread is possibly holding a long stock position in the XLF. The put options might then serve to protect the value of the position in the event that shares decline beneath the effective breakeven point at $13.34 by expiration. The fact that the trader is short two times as many puts indicates this investor expects a pullback but not a collapse beneath the lower strike price of $10.00.

ETFC – E*Trade Financial Corp. – The Wall Street Journal reported that ETFC withdrew its application for funding through the Troubled Asset Relief Program (TARP) because the company’s “recent capital-raising and debt-reduction efforts negates the need for the money.” E*Trade raised $150 million by selling stock in the third quarter out of some $765 million of sold stock this year. The seemingly bullish news that the company no longer plans to participate in the capital-purchase program did not do much for the current share price, which slipped 6% lower to $1.37. Our scanners picked up on interesting options activity this afternoon that may or may not have been inspired by today’s news. It appears 95,000 put options sold at the January 1.0 strike for about 5.5 pennies apiece. One may infer the transaction represents bullish sentiment on ETFC if the sale of the put options is fresh activity. If this is the case, the trader pockets the 5.5 cents premium, and expects shares to remain above $1.00 through expiration. However, the sale could also be the work of an investor closing out a long put position given the already high reading of open interest at the small number of available strike prices.

CF – CF Industries Holdings, Inc. – The manufacturer of nitrogen and phosphate fertilizer products bolstered its bid for Terra Industries (TRA) by tacking on a cash portion to the offering. CF shares edged slightly higher this afternoon to $83.31. CF shares rallied 143% to a 52-week high of $95.12 on October 19, 2009, since touching down to a 52-week low of $39.14 on November 20, 2008. However, one option trader is expecting continued gains in the price of CF shares through expiration in January. This individual initiated a call spread by purchasing 10,000 calls at the January 95 strike for an average premium of 2.30 apiece, marked against the sale of 10,000 calls at the higher January 100 strike for 1.05 each. The net cost of the bullish strategy amounts to 1.25 per contract. Shares of CF must surpass the current 52-week high in order for the trader to breakeven at $96.25. The investor will bank maximum potential profits of 3.75 per contract for a total of $3,750,000 if the stock rallies 20% from the current price to $100.00 by expiration day in January. Option implied volatility on CF is running 20% higher at the conclusion of the trading session to stand at 53.55%

HGSI – Human Genome Sciences, Inc. – There was a predictable investor response after results of late-stage clinical trials on Benlysta paved the way for the first new lupus treatment for a half decade. Shares in the company surged to a high of $26.21 but are now pulling back to show a 33.8% gain at $24.98. Options implied volatility slumped from 224% to 69% on relief at the positive outcome has left the appeal of the company intact. It’s rare to witness premiums rise by less than a stock given the leveraged nature of options, but today that’s pretty apparent in many strikes. Curiously the put premiums in the November strikes from 23 down to 5 have seen premiums collapse by 87% and upwards. On the call side premiums between the 20 and 23 strikes are higher and only by less than 10% at the latter, while at any point between 24 and upwards, once again implied volatility has caused options to crater. Investors choosing last week’s 20/25 call spread would appear to be the victors today.

EEM – iShares MSCI Emerging Markets Index ETF – A large-volume credit spread was initiated in the January 2010 contract today by an investor expecting limited upward movement in the price of the exchange-traded fund through expiration. Shares are currently trading 2% higher to $38.37. The trader appears to have sold 51,700 calls at the January 43 strike for a premium of 75 cents apiece, and simultaneously purchased the same number of calls at the higher January 47 strike for 17 pennies each. The net credit received on the trade amounts to 58 cents per contract. The investor retains the full credit, which amounts to a grand total of $2,998,600.00, as long as shares of the EEM remain below $43.00 through expiration day. The credit-spread seems like a good money-making strategy especially because shares of the fund have remained below $43.00 since August 1, 2008.

BEBE – Bebe Stores Inc. – It was six months ago that clothing and shoe retailer, Bebe traded up to its 52-week high at $9.50 but has largely wilted ever since. Today shares in the half-billion dollar company are up 2% at $6.40 and options activity is striking. An investor traded some 30,000 call options at the March 10 strike for 20 cents. The activity appears to be to the buy-side, but still this looks like an outrageous bet that shares will take off. Not only must shares surge 48% to match the 52-week high but they’d need to rally 59% to break even at expiration. The volume is impressive but considering the difficult retailing environment it doesn’t seem logical to explain this situation away as a possible takeover candidate nor that the next earnings report will be a humdinger. A large block of stock trading at the same time as the options activity went through could be a short sale.

SMH – Semiconductor HOLDRS Trust – Shares of the semiconductors exchange-traded fund rose 0.5% today to $24.30. Bullish option traders employed a couple of different strategies in the near-term November contract. Put-selling took place at the November 23 strike where approximately 38,000 puts sold for an average premium of 32 cents apiece. The existing open interest at that strike exceeds the day’s current volume. Thus, the put-selling could be the work of investors closing out long positions or may represent bullish short-selling by traders expecting shares to remain above $23.00 through expiration day. The next strategy observed was a bullish call spread. The spread involved the purchase of 8,500 calls at the November 26 strike for 11 cents apiece, marked against the sale of the same number of calls at the higher November 27 strike for just one penny per contract. The net cost of the transaction amounts to 10 cents each. Shares of the SMH must rally sharply by at least 7% within the next few weeks in order for the call-spreader to breakeven at $26.10. Maximum potential profits of 90 cents per contract require that shares of the underlying stock jump to $27.00.

VRTX – Vertex Pharmaceuticals, Inc. – Biotechnology firm, Vertex Pharmaceuticals, realized a 12.5% increase in shares to $37.73 as of 12:30 pm (EDT) on news its experimental hepatitis C therapy may be taken twice per day rather than the current standard of three times per day. Fresh call positions were taken by investors some 5,100 times at the out-of-the-money December 40 strike. It appears 1,800 calls were sold for approximately 1.32 each. Perhaps call-sellers are long the stock and simply adding to portfolio income by selling covered calls. Nearly 3,000 of the call options at that strike traded to the middle of the market for 1.30 apiece. These contracts may have been purchased by investors looking for continued upward momentum through expiration next month.

HGSI – Human Genome Sciences, Inc. – Option implied volatility on the biopharmaceutical company plummeted 67% to 73% on news its experimental lupus drug, Benlysta, was successful in a second large clinical trial. Shares are trading nearly 35% higher to $25.13 as of 9:55 am (EDT). Option traders exchanged more than 65,000 contracts on HGSI within the first 25 minutes of the trading session.

F – Ford Motor Co. – Shares of the automobile manufacturer are up 9.5% to $7.67 following better-than-expected third-quarter earnings released ahead of the opening bell this morning. Ford posted its first quarterly profit in more than a year, smashing average street estimates of a loss of 12 cents, by posting earnings of 26 cents per share. Option implied volatility contracted 16% to 55% following earnings.

LDK – LDK Solar Co., Ltd. – Investor uncertainty on the manufacturer of solar wafers is soaring on news Q-Cells – one of the world’s biggest makers of solar cells – terminated a wafer supply agreement with the company. Option implied volatility jumped 21% to 101% by 10:10 am (EDT) while shares of LDK slumped more than 18% to $5.55. Traders exchanging approximately 8,700 put options at the December 4.0 strike are perhaps bracing for further declines by expiration next month. If these puts land in-the-money by expiration, shares of LDK will have fallen to within 25 cents of the current 52-week low at $3.75, attained back on March 12, 2009.


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