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Retail Reversal Combination Grabs Attention on XRT

Today’s tickers: XRT, MGM, DE, GLD, UUP, NWL, HNZ, EWZ, UNH, OSTK & STEC

XRT – SPDR S&P Retail ETF – A three-legged transaction in the December contract on the retail exchange-traded fund reveals bearish sentiment by one investor. Shares of the XRT are trading nearly 1% higher today to $34.60. It looks like the trader sold call options in order to offset the cost of buying a put spread. The put spread involved the purchase of 5,000 puts at the December 33 strike for a premium of 1.07 apiece, marked against the sale off 5,000 puts at the lower December 30 strike for approximately 37 cents each. The sale of 5,000 calls at the higher December 36 strike knocked another 87 cents per contract off the total price of the bearish play. The investor more than offset the cost of buying the spread and thus receives a net credit of 17 cents per contract. The full credit is retained by the trader as long as shares of the XRT remain below $36.00 through expiration. Additional profits may accumulate if shares dip below $33.00, while maximum potential gains of 3.00 per contract require that shares trade down to $30.00.

MGM – MGM Mirage, Inc. – Shares of the casino resort operator slipped 2.5% lower to $9.40 today but one options optimist initiated a bullish play on the stock in the March 2010 contract. It appears the trader put on a ratio call spread by buying one in-the-money call option for every three out-of-the-money calls sold. The investor purchased 10,000 calls at the deep in-the-money March 7.0 strike for 3.20 apiece and simultaneously sold 30,000 calls at the higher March 12 strike for 1.05 each. The net cost of the transaction is reduced to just one nickel per contract. The investor probably does not expect shares to rally through $12.00 by expiration because he is short 20,000 calls at that strike price in the March contract. Shares of MGM last traded above $12.00 on October 14, 2009.

DE – Deere & Co. – A large bearish butterfly spread appeared in the March 2010 contract on the agricultural equipment maker. The transaction indicates one investor is positioning for significant declines in the price of DE shares by expiration. Shares are down 1% to $46.76 with just under 90 minutes remaining in the trading day. The investor purchased the upper wing of the spread at the March 40 strike where 15,000 put options were bought for an average premium of 2.09 apiece. The trader paid just 8 pennies per contract to buy 15,000 puts at the March 20 strike [lower wing]. The body of the spread involved the sale of 30,000 puts at the central March 30 strike for 46 cents each. The net cost of the bearish transaction amounts to 1.25 per contract. Maximum potential rewards of 8.75 per contract are available to the investor if shares plummet to $30.00 by expiration. We note that the stock has not traded near the $30.00-level since March 20, 2009. Shares must decline at least 17% from the current price in order for the investor to breakeven at $38.75. Shares would need to trade 36% beneath today’s price for the trader to pocket the maximum available profits of 8.75 per contract.

GLD – SPDR Gold Trust – A ratio call spread on the gold exchange-traded fund this afternoon suggests one trader expects the price of the underlying shares to increase significantly by expiration in March of 2010. Shares are currently up nearly 1% to $107.41. The investor purchased 3,500 calls at the March 125 strike for an average premium of 2.14 apiece, spread against the sale of 7,000 calls at the higher March 135 strike for 1.22 each. The trader receives a net credit of 30 cents per contract on the bullish transaction. Additional profits may accumulate if shares surge 16% to the breakeven price of $125.00. Maximum potential profits of 10.00 per contract are attainable if the price of the GLD jumps 26% to $135.00 by expiration in March. The GLD fund has never traded higher than the current all-time highs experienced during today’s session.

UUP – PowerShares DB U.S. Dollar Index Fund – There was huge volume today in this exchange traded fund that tracks the American dollar’s index value ahead of this afternoon’s FOMC statement, which is likely to leave monetary policy unchanged and point to an ongoing situation in which interest rates remain accommodative for as long as the eye can see. Such an outlook for the dollar at a time of modest recovery has created a weak fundamental backdrop for the greenback. So today’s 155,000 call options bought for tiny premiums ranging between 10-15 cents per contract smacks of a large institution placing a sizeable gamble that change might be in the air either in what the Fed says this afternoon or for a more general change of heart towards the dollar before expiration on November 20. The dollar index on which this ETF is based is lower today and close to its weakest point in the current environment. With the price of the fund trading at $22.54, the investor needs to see a dollar rally lift the index and boost the price of the ETF beyond $23.15 by expiration in order to not lose money. A sharp turnaround in the fortune of the dollar today would automatically boost the index and therefore the value of this sizeable set of trades.

NWL – Newell Rubbermaid Inc. – Shares of the global marketer of consumer and commercial products edged 1% higher today to $14.28, but options activity on the stock suggests shares may continue to trend upward. Rubbermaid-bulls bought nearly 5,000 calls at the November 15 strike for an average premium of 34 cents apiece. Another 2,000 calls were coveted at the December 15 strike where investors shelled out 60 cents per contract. NWL’s shares were trading at around $15.50 on October 22, 2009, before the market buckled and sent the stock back down to $13.96. Apparently call-buying investors expect shares to rebound to at least the breakeven price of $15.60 by expiration in December. The sudden demand for options drove implied volatility 20% higher to the current reading of 48% — the highest level since July 30, 2009.

HNZ – H.J. Heinz Company – A stampede of bullish investors flooded the November contract on the condiment company today as shares of the ketchup maker rallied 1.5% to $40.58. Traders scooped up approximately 6,000 call options at the November 41 strike for 44 cents premium apiece. The mad-dash for out-of-the-money calls suggests investors expect Heinz’s shares to continue on the up-and-up through expiration. Traders long the calls may amass profits if shares trade above the breakeven price of $41.44. The sharp increase in demand for HNZ calls boosted option implied volatility from an intraday low of 20% to a high of 22.62%.

EWZ – iShares MSCI Brazil Index ETF – A bearish butterfly spread was initiated in the December contract on the exchange-traded fund today despite the more than 2% rally in shares to $72.71. The lower wing of the spread was positioned at the December 60 strike where 10,000 puts were purchased for 1.02 apiece. The upper wing was placed at the December 70 strike where another 10,000 puts were bought for an average premium of 3.44 each. Finally, the central December 65 strike housed the body of the butterfly, which involved the sale of 20,000 puts for about 1.93 per contract. The net cost of the trade amounts to just 60 cents and provides maximum potential profits of 4.40 per contract if shares of the EWZ settle at $65.00 by expiration next month. The butterfly spread strategy allows the bearish investor to reduce potential risks and maximize potential profits. The investor has positioned the trade in such a way that he faces a reward-to-risk ratio of more than 7-to-1.

UNH – UnitedHealth Group, Inc. – More than 6,000 call options changed hands at the November 29 strike within the first 30 minutes of the trading session versus existing open interest at that strike of just 1,251 contracts. Perhaps option traders expect shares to rally above and beyond current gains of 5% to $28.28. We will be sure to keep an eye on options on UNH as well as activity on other health providers today.

OSTK – Overstock.com, Inc. – Shares of the online closeout retailer are trading 8.6% higher this morning to $15.78 following Tuesday’s earnings report. Overstock posted a narrower-than-expected loss of 3 cents per share for the third-quarter on 4% higher revenue of $195.1 million. Option implied volatility plunged 25% to 54%, a reading which is just 4% over OSTK’s two-year implied volatility low of approximately 50%. Approximately 1,000 option contracts traded on the stock as of 10:20 am (EDT).

STEC – STEC, Inc. – The maker of flash memory storage products suffered 35% declines in shares today to stand at the current price of $15.09. The stock plummeted on news EMC Corp., a key customer, will carry inventory from 2009 into 2010. Additional guidance from the firm revealed fourth-quarter revenue will likely come in below average analyst expectations of $106 million. Overall pessimism weighed heavily on shares and inspired a flurry of options activity in the November contract this morning.


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