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CAT-Bears Brace for Rocky Start to 2010

Today’s tickers: CAT, MS, UUP, STI, WFC, MCO, M, ROK, BBY, JAVA & HMY

CAT – Caterpillar, Inc. – Bearish option traders are bracing for potential CAT-share price erosion through expiration in February 2010. Shares edged nearly 0.75% lower in late afternoon trading to stand at $57.94. One pessimist purchased a put spread to prepare for potential declines. The transaction involved the purchase of roughly 7,000 puts at the February 55 strike for a premium of 2.35 apiece, marked against the sale of 7,000 puts at the lower February 35 strike for 49 cents premium each. The net cost of the trade amounts to 1.86 per contract. The investor responsible for the spread probably holds a long position in the underlying. Under this assumption, the trader has established downside protection, which kicks in if Caterpillar’s shares fall beneath the breakeven price of $53.14 by expiration day in February.

MS – Morgan Stanley – Analysts at Barclays Capital slashed fourth-quarter earnings estimates for Morgan Stanley to 40 cents from 90 cents today. Perhaps the bearish options activity observed on MS during the trading session was partly inspired by the significant profit-forecast revision at Barclays. Either way, investors populating Morgan Stanley’s January 2010 contract appear pretty pessimistic on the second-largest U.S. securities firm. Traders threw in the towel on MS by shedding nearly 20,000 calls at the January 31 strike for an average premium of 75 cents apiece. Some investors may be closing out previously established long call positions. Analysis of the existing open interest at that strike suggests traders are likely cutting their losses by selling the calls today. Investors abandoning bullish bets do not paint a rosy picture of where MS’s share price may settle during the first weeks of 2010.

UUP – PowerShares DB US Dollar index Bull Fund – The U.S. dollar is brimming with confidence on the first of a two-day FOMC meet in Washington and while investors are not expecting any signs of a policy change, there is certainly a firmer tone underlying the dollar in the past 72 hours or so. Option traders placed extremely bullish bets using call options on the bullish dollar index fund, whose shares currently stand 0.9% higher on the day at $22.82. Investors bought a huge chunk of 100,000 long-dated options reserving buying rights over the dollar at a fixed $24.00 before the contract expires in January 2011. That leaves traders hoping for a 5% rally from its current value before the trade reaches the strike price, and based on the $1.00 premium paid today, would require a 9.5% gain before reaching breakeven at $25.00. Although the Fed keeps telling us that rates need to remain low for a so-called “extended period” the rise in the yield curve recently indicates a lack of investor conviction that the case is closed. At this point rising bond yields are apparently underpinning the appeal of the greenback.

STI – SunTrust Banks, Inc. – The financial holding company suffered a 6.5% decline in shares during the session to $20.86. Investors anticipating further share price erosion initiated bearish plays on the stock. One trader established a put spread in the April 2010 contract by purchasing 7,000 puts at the April 21 strike for 2.50 apiece, spread against the sale of the same number of puts at the lower April 16 strike for 80 cents each. The net cost of the pessimistic play amounts to 1.70 per contract. The investor responsible for the transaction – assuming no position in the underlying stock – profits to the downside beneath the breakeven price of $19.30. Maximum potential profits of 3.30 per contract are available to the bearish trader if shares plummet another 23% from the current price to $16.00 by expiration in April 2010. Option implied volatility on the stock is up 7.69% to 50.12%.

WFC – Wells Fargo & Co. – A pair of bullish risk reversals traded in the April contract on Wells Fargo today after the firm revealed plans to sell $10.65 billion of common stock to help repay borrowed government bailout funds. WFC follows the lead of other banking giants, such as Bank of America, JPMorgan and Citigroup, who have either paid back the U.S. government or intend to do so. Shares of WFC increased 2% as of 12:20 pm (EDT) to $26.00 on the TARP-repay news. Optimistic investors utilized the bullish risk reversal strategy to position for a rebound in WFC shares by expiration in April 2010. One trader sold 6,000 puts at the April 26 strike for 2.36 apiece in order to buy 6,000 calls at the same strike for 2.50 each. The investor paid a net 14 cents per contract for the transaction. Profits accrue for the trader if shares rally at least 14 pennies over the current price to surpass $26.14 by expiration. The other reversal involved the sale of 3,000 puts at the April 24 strike for 1.60 apiece, marked against the purchase of the same number of calls at the higher April 27 strike for 2.04 each. This WFC-bull paid a net 44 cents per contract for the transaction and profits if the stock trades above $27.44 by April’s expiration day. Option implied volatility on WFC fell roughly 9% to 40.06%.

MCO – Moody’s Corp. – The credit ratings provider attracted long-term bearish option traders today as shares slipped 2.5% to $25.90. One pessimistic player targeted the January 2011 contract to establish a bearish risk reversal on the stock. It appears the investor sold 9,500 calls at the January 35 strike for a premium of 1.85 apiece in order to partially offset the cost of buying the same number of put options at the lower January 17.5 strike for 2.03 each. The net cost of the reversal play amounts to 18 cents per contract. The transaction suggests the trader expects MCO’s shares to plummet over the next 13 months. Shares must decline 33% from the current price before the investor breaks even at $17.32.

M – Macy’s, Inc. – Frenzied call-buying activity on the department store operator today suggests shares could rebound sharply by expiration in January 2010. Shares declined more than 2% during the session to stand at $17.12 by midday (EDT), but did not deter option bulls from playing the field. It looks like at least 25,000 calls were purchased at the January 20 strike for an average premium of 20 cents per contract. Perhaps call-buyers anticipate a profitable holiday season for Macy’s given the 14 consecutive weeks of rising sales for the U.S. retail sector. Investors long the calls profit if shares rally 18% from the current price to surpass the breakeven point at $20.20 by expiration next month. The spike in demand for call options on the stock lifted option implied volatility 5.45% over yesterday’s closing value of 45.84% to an intraday high of 48.34%.

ROK – Rockwell Automation, Inc. – An article in the Wall Street Journal this morning likely inspired near-term call buying action on Rockwell Automation today. The article cites JPMorgan analyst, Steve Tusa, who proffered ROK “could be a prime target for GE”. Takeover chatter and an increased demand for option contracts on the stock pushed Rockwell’s option implied volatility reading up 13.51% to 38.06% during the trading day. Shares, however, edged 2% lower to $47.24. Call-buyers honed in on the December 50 strike where nearly 4,000 contracts were coveted for an average premium of 16 cents apiece. Investors long the calls accumulate profits if ROK’s shares jump more than 6% over the current price to breach the breakeven point at $50.16 ahead of expiration day on Friday.

BBY – Best Buy Co., Inc. – Shares of the specialty retailer of consumer electronics are trading 7.5% lower to $42.00 this morning. BBY’s share price took a dive today despite the fact that the firm posted increased sales and profits for the third quarter. Best Buy reported profits of 53 cents per share, which exceeded analyst expectations of 43 cents per share. Pessimism on BBY stems from lower-than-expected estimates for BBY’s fourth-quarter gross margin because consumers are buying up less profitable products such as lower-priced flat-panel televisions. Option implied volatility contracted 13.94% to 33.83% following earnings. Investors exchanged nearly 44,000 contracts on Best Buy as of 10:20 am (EDT).

JAVA – Sun Microsystems, Inc. – The reading of option implied volatility on JAVA fell 24.04% to 13.57% this morning, following yesterday’s volatility implosion of 70.61% to 17.12%. Investors are breathing easier following Oracle’s pronouncement that ongoing negotiations with the European Commission are improving. JAVA’s shares are slightly higher by 0.65% to $9.34 as of 10:30 am (EDT). Option traders exchanged approximately 4,000 contracts on the stock in the first hour of the trading session.

HMY – Harmony Gold Mining Co. Ltd. – The gold mining company popped up on our ‘hot by options volume’ market scanner this morning after investors exchanged call options in the February 2010 contract. Shares slipped more than 1% lower in morning trading to $10.48. More than 9,500 calls changed hands at the February 11 strike for about 85 cents apiece. Traffic is moving in both directions at the strike, although it appears the majority of the contracts were purchased. Perhaps traders are positioning for a rebound in the price of gold by expiration in February. However, the open interest level of 21,138 contracts at that strike, suggest traders could be closing out previously established short positions.


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