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Iron-Ore Bull Excavates Massive Credit Spread on Vale S.A.

Today’s tickers: VALE, ANF, ARIA, GCI, S, KR, SYY, AZO, TLB & RAI

VALE – Vale S.A. – Option volume on iron-ore producer, Vale, exploded this afternoon after one investor exchanged 102,200 puts in the June 2010 contract. The put activity actually implies bullish sentiment on Vale despite the 3% decline in shares this afternoon to $27.36. It appears the contrarian trader sold 51,100 in-the-money puts at the June 29 strike for a premium of 4.45 each, and purchased 51,100 puts at the lower June 23 strike for 1.75 apiece. The iron-bull receives a net credit of 2.70 per contract on the trade, which he keeps if VALE’s shares rally above $29.00 by expiration in June. Shares closed at $29.40 just last week on December 2, 2009. The investor is exposed to losses to the downside if shares decline through the breakeven price of $26.30. Maximum potential losses of 3.30 per contract accumulate for the trader if the stock sinks 16% from the current price to $23.00 by June’s expiration day.

ANF – Abercrombie & Fitch Co. – A number of large-volume put transactions on fashion retail store operator, Abercrombie & Fitch, indicates investor pessimism on the stock through expiration in January 2010. Abercrombie’s shares slipped 1.5% during afternoon trading to $35.11. Perhaps bearish option traders were dismayed by the firm’s weaker-than-expected November sales report. ANF posted a 17% decline in same-store sales for the month, which was far worse than the 9.3% decline anticipated by analysts. It appears one investor initiated a four-legged combination play aimed at protecting against near-term declines in the value of ANF shares. First the investor established a ratio put spread by purchasing 15,000 puts at the January 35 strike for 2.10 apiece, marked against the sale of 30,000 puts at the lower January 32 strike for 95 cents each. The net cost of the ratio spread amounts to 20 cents per contract. Next, the trader effectively created an uneven butterfly spread by rolling a previously established put position in the January 2010 contract up to a higher strike price. It seems the trader originally purchased 15,000 puts at the January 29 strike for roughly 2.50 apiece on October 2, 2009. Today the individual took a loss on that position by selling the puts for 40 cents apiece to buy the same number of put options at the higher January 31 strike for 80 cents premium. The put trades level out to create a butterfly spread at the January 35/32/31 strikes. Typically, the wings of a butterfly spread are of equal length. However, in this instance, the investor truncated the lower wing to reduce downside risk if shares plummet through $32.00. The long put stance at the January 32 strike balances out the larger number of short puts at the central strike to essentially construct the butterfly strategy. The trader responsible for the put action is probably long the stock and looking to protect the underlying position. The uneven butterfly spread is a more cost effective and less risky strategy to use in this case.

ARIA – Ariad Pharmaceuticals, Inc. – Put selling on the pharmaceutical company today suggests bullish sentiment by investors through expiration in May 2010. Ariad’s shares surged 5.5% to $2.61 in afternoon trading. The firm’s early-stage leukemia drug reportedly showed activity in certain hard-to-treat patients during a Phase I study. Option players reacted by selling 7,000 puts at the May 2.0 strike for an average premium of 42 cents apiece. Investors retain the full 42 cents received on the sale if ARIA’s shares remain above $2.00 through expiration in May. Another 2,000 puts were sold at the higher May 2.5 strike for 75 cents premium each. Option implied volatility on the stock contracted 20.55% to 96.18%.

GCI – Gannett Co. Inc. – USA Today publisher and media operator Gannett saw its shares respond with an 8% rally to $11.98 on Tuesday after a New York Times executive reported an upturn in print advertising revenues. Investor promptly bought shares in fellow publisher Gannett lifting its shares to a five-week peak. Investors allowed the better outlook to color their views on what could be for Gannett. Fast-acting call option buyers grabbed at the chance to play a near-term snapback as they bought around 4,000 December expiration call options at the 12 strike. Some 4,000 contracts were bought for 35 cents as Gannett’s share price rallied pushing the cost of those calls to an immediate 57% premium. With overall volume of 15,000 options on the shares in action today, the reading is four-times the typical daily average. By lunchtime investors had traded a total of 12,000 calls at the 12 strike. Before today only 469 positions were held at that strike price indicating a flurry of new interest at the publisher today.

S – Sprint Nextel Corp. – The Barron’s weekend coverage of Sprint’s fortunes inspired a wave of buying on Monday to lift the stock to its highest price in almost three months. Running counter to this coverage an analyst at Pali Research with a “buy” rating on the cellphone carrier today cut his rating to “neutral” citing missed opportunities to secure future growth. Instead Sprint had let the grass grow under its feet as competitor Verizon rolled out a new strategy. However, one option bull it appears placed an options combination suggesting that Sprint will overcome whatever obstacles Pali sees ahead and will continue to see its share price snap back from today’s 4.8% pullback to $4.00. the investor sold 10,000 at-the-money put options for 34 cents to fund the purchase of 31,000 call options also expiring in January. The price paid for the calls was 11 cents and so is roughly offset by the premium received from the written puts. At the least, and unless this investor is already short the underlying, he is hoping that Sprint’s shares will remain above $4.00 through January. Elsewhere it appears that an investor wrote 10,000 2.5 strike puts expiring in January 2011 for a 34 cent premium.

KR – The Kroger Co. – The operator of retail food and drug stores wins the award for the steepest declining stock in the S&P 500 today with shares down as much as 14% to $19.61 in earlier trading. Shares of the largest supermarket chain in the U.S. nosedived after the firm cut its full-year profit forecast from $2.00 per share to $1.70 per share. Additional impetus for bearish momentum in the stock stems from Kroger’s weaker-than-expected third-quarter earnings of 27 cents per share, which disappointed analysts expecting an average of 36 cents profit per share. Option traders displayed signs of optimism despite near-term gloominess. Investors initiated long-term bullish positions on Kroger by purchasing 16,200 calls aimed at the 20 strike for 2.47 per contract expiring in January 2011. Call-buyers stand ready to accumulate profits if shares rally 14.5% to surpass the breakeven price of $22.47 by expiration. Near-term bullish traders bought about 3,900 calls at the December 20 strike for 35 cents premium apiece. Option implied volatility contracted 10.76% during the session to an intraday low of 27.94%. Kroger’s shares improved to $20.50 as of 12:15 pm (EDT).

SYY – Sysco Corp. – The largest North American distributor of food to the foodservice industry received an upgrade to ‘buy’ from ‘hold’ with a $34.00 price target at Citigroup today. Shares rallied more than 1% to a new 52-week high of $28.80 during the trading session. Investors bulked up on near-term put options despite the bullish upgrade at Citi. It appears 2,300 puts were picked up for an average premium of 10 cents each at the December 27.5 strike. Another 2,700 put options were coveted at the January 27.5 strike for 40 cents premium apiece. Perhaps investors are picking up cheap downside protection to secure the value of underlying stock positions. The increased demand for puts on SYY lifted option implied volatility on the stock 9.46% from an opening value of 18.49% to an intraday high of 20.24%.

AZO – AutoZone, Inc. – Shares of the retailer and distributor of automotive parts and accessories are up 1% to $155.00 after the firm posted better-than-expected earnings for the fiscal first quarter. AZO’s profits for the quarter rose 9% to $2.82 per share and beat average analyst profit estimates of $2.66 per share. Consumers opting to replace and repair old cars rather than buy new vehicles helped drive up sales at AutoZone, which experienced a 6% rise in sales at stores open for at least one year. Option implied volatility contracted 22.74% to 25.09% following the favorable earnings report. Investors exchanged more than 13,500 contracts on AZO by 10:20 am (EDT).

TLB – The Talbots, Inc. – The clothing retailer’s shares are soaring 20.5% higher to $8.69 this morning as the firm swung to a third-quarter profit of 26 cents per share versus a loss of $3.19 per share a year earlier. Talbots also announced it will purchase BPW Acquisition Corp. – a publicly held special purpose acquisition company – for the equivalent of $11.25 per share in Talbots’ common shares. The acquisition serves to eventually retire TLB’s existing debt and to purchase outstanding Talbots shares of stock currently owned by the firm’s majority owner, Aeon. In the aftermath of the acquisition, BPW will control roughly 60%-69% of Talbots’ common shares. Option implied volatility collapsed 21.46% to 82.91% on the acquisition and earnings reports. Nearly 13,000 option contracts changed hands on TLB by 10:30 am (EDT).

RAI – Reynolds American, Inc. – Option implied volatility on the manufacturer of cigarettes and other tobacco products jumped 14.98% to 24.24%. Shares of RAI are down 2.5% to $51.78 as of 10:35 am (EDT). Option traders exchanged more than 2,100 put options at the January 2010 50.0 strike, which exceeds existing open interest at that strike of 1,665 lots. Some of the put activity suggests bearish sentiment on RAI by investors buying the put contracts for roughly 90 cents apiece.


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