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IYR-Investor Constructs Three-Legged Bullish Combination Play Despite Declining Market

Today’s tickers: IYR, PFE, FXI, WFT, UUP, JPM, GLD, ERTS, STJ & PVH

IYR – iShares Dow Jones U.S. Real Estate Index ETF – Bullish options activity on the IYR flies in the face of bearish momentum across equities in the broader market today. The investor responsible for the optimistic positioning in the February contract appears little concerned with the current 2% decline in the value per IYR share today to $45.31. It looks like the trader sold a put credit spread in order to offset the cost of buying out-of-the-money call options. The three-legged combination involved the sale of 10,000 puts at the February $45 strike for a premium of $1.56 each, spread against the purchase of 10,000 puts at the lower February $42 strike for $0.65 apiece. The net credit of $0.91 per contract received on the credit spread is more than enough to cover the cost of the 10,000 calls purchased at the February $48 strike for $0.55 each. After establishing all three legs of the spread, the trader pockets $0.36 per contract. The investor keeps the full $0.36 only if IYR’s shares trade above $45.00 through expiration next month. Additional profits amass only if shares of the fund rally 6% from the current price to surpass $48.00. We note that the investor responsible for the trade may suffer maximum potential losses of $2.64 per contract if the price of the underlying slips to $42.00 by expiration day.

PFE – Pfizer, Inc. – A bullish risk reversal on the global pharmaceutical company today suggests shares may rally to $20.00 by expiration in June. Pfizer’s shares withstood downward market pressure for the majority of the trading session, and even climbed slightly higher in earlier trading, but edged 0.75% lower to $18.70 by 2:15 pm (EDT). The reversal play involved the sale of 10,000 in-the-money put options at the June $20 strike for a premium of $2.07 apiece, spread against the purchase of 10,000 out-of-the-money call options at the same strike for $0.70 in premium. The investor receives a net credit of $1.37 per contract, which he keeps if PFE’s shares rally up to $20.00 by expiration. The short sale of put options implies the trader is willing to have shares put to him at an effective price of $18.63 each. However, the investor would optimally like to see shares rally at least 7% over the current price to surpass the breakeven price of $20.00, at which point additional profits amass to the upside.

FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the exchange-traded fund, which holds investments in 25 of the largest and most liquid Chinese companies, declined nearly 3% to $42.80 today on news China is set to tighten monetary policy. Option traders utilized a couple of bearish strategies on the FXI to position for continued turmoil and downward share price trends. One investor initiated a put spread by purchasing 2,000 puts at the May $40 strike for a premium of $1.97 apiece, marked against the sale of 2,000 puts at the lower May $35 strike for roughly $0.76 each. The net cost of the bearish play amounts to $1.21 per contract. Assuming no underlying position is held by the trader; profits to the downside accumulate beneath the breakeven share price of $38.79, and max out at $3.79 per contract if the fund declines 18% to $35.00 by expiration in May. Another options strategist displayed pessimistic sentiment on the FXI by initiating a risk reversal in the January 2011 contract. The investor sold 2,000 calls at the January 2011 $50 strike for $2.69 each in order to buy 2,000 puts at the January 2011 $35 strike for the same amount of premium. The option premiums cancel each other out and essentially provide the trader with free downside protection in case shares fall off a cliff by next year. The short call position does carry significant risk of potentially unlimited losses to the upside if shares rebound above $50.00 in the next year to expiration.

WFT – Weatherford International Ltd. – Shares of the provider of equipment and services to the oil and natural gas industries slipped 3.5% to $19.07, and prompted many option traders to abandon bullish positions. Investors threw in the towel on long call positions, selling 13,850 calls at the January $21 strike, for a paltry premium of $0.05 per contract. Call-sellers are taking in the available pittance on the contracts today before the out-of-the-money lots expire worthless on Friday.

UUP – PowerShares DB US Dollar Bullish Fund – Dollar-bulls established call spreads on the UUP today, which is the Deutsche Bank Long US Dollar Futures Index, designed to replicate the performance of the greenback against a basket of currencies of its major trading partners. Shares of the fund slipped 0.25% lower during the session to $22.67. Call-spreaders purchased 20,000 calls at the June $23 strike for an average premium of $0.60 apiece, and sold 20,000 calls at the higher June $26 strike for $0.08 each. Investors paid an average net cost of $0.52 per contract for the debit spreads. Option traders are now positioned to accrue profits if the price per UUP share rallies 3.75% to breach the breakeven price of $23.52 by expiration in June. Maximum potential profits of $2.48 per contract are available to the investors if the index comes roaring back up to $26.00 per share. The UUP last settled above the strike price last Thursday and has only closed above $23 per share on 10 occasions since the start of December.

JPM – JPMorgan Chase & Co. – Contrarian option traders made bullish plays on JPMorgan today despite the more than 2.5% decline in the value of its shares to $43.37. Optimistic investors sold nearly 20,000 put options at the February $42 strike to take in an average premium of $1.01 per contract. Put-sellers retain the full premium received if JPM’s shares trade above $42.00 for the remainder of the life of the put contracts sold. Additional bullishness appeared at the higher February $43 strike where 1,400 puts were shed for a premium of $1.43 apiece. Investors selling the higher-strike puts are apparently happy to have shares of the underlying stock put to them at an effective price of $41.57 each in the event that the puts land in-the-money by expiration day. Option implied volatility on the stock rose 6.80% to an intraday high of 32.80%.

GLD – SPDR Gold Trust ETF – A massive bearish butterfly spread on the gold ETF caught our eye today amidst a 0.50% decline in the value of its shares to $112.38. One medium-term pessimist, who is likely long shares of the underlying stock, established large-volume protective stance in the September contract. The investor purchased 20,000 puts at the September $90 strike for $1.50 apiece [wing 1], and bought 20,000 puts at the lower September $60 strike for an average premium of $0.19 each [wing 2]. The central September $75 strike housed the body of the butterfly comprised of 40,000 sold put options for a premium of $0.35 apiece. The net cost of the bearish play amounts to $0.99 per contract. Downside protection kicks in if shares of the GLD plummet 20.80% from the current price to the upper breakeven point at $89.01. The investor’s underlying position is protected in case the fund’s share price declines through the 52-week low on the fund of $78.87, down to a price of $75.00 each.

ERTS – Electronic Arts, Inc. – Shares of the second-largest video-game publisher in the world are down 7% to $16.99 today due to weaker-than-expected holiday sales and a disappointing revision of its earnings guidance for the third quarter. ERTS lowered its profit forecast to $0.29-$0.33 cents per share this morning, underwhelming average analyst estimates of $0.55 a share. Bearish option traders made their mark by initiating long-term pessimistic stances on the stock. Investors sold 1,000 calls at the in-the-money June $16 strike to take in a premium of $1.95 per contract. Another 1,000 calls were shed at the higher June $17 strike for an average premium of $1.48 each. Other traders threw in the towel on ERTS by selling 4,400 calls at the January 2011 $20 strike for roughly $1.40 per contract. Short call sellers in the June contract keep the premiums received if ERTS’s shares slip beneath the respective strike prices described by expiration.

STJ – St. Jude Medical, Inc. – Bullish investors purchased call options on the manufacturer of cardiovascular medical devices this morning, ignoring the downgrade STJ received to ‘accumulate’ from ‘buy’ at Craig Hallum, where St. Jude totes a target share price of $41.00. Shares commenced the trading session slightly higher, but slipped 0.25% to $38.08 by 10:25 am (EDT). Option traders bought approximately 3,200 calls at the February $40 strike for an average premium of $0.68 per contract. Call-buyers amass profits if STJ’s shares rally 7% from the current price and surpass the breakeven point at $40.68 by expiration next month. Option implied volatility on the stock jumped 16.43% to 32.09% in morning trading.

PVH – Phillips-Van Heusen Corp. – A bullish risk reversal was initiated by one investor on the clothing and accessories company this morning as shares gained 0.50% to $43.73. It looks like the optimistic trader sold 1,250 puts at the February $45 strike for a premium of $1.90 each in order to finance the purchase of 1,250 calls at the same strike for $1.00 apiece. The reversal player pockets a net credit of $0.90 per contract on the trade, which he keeps if PVH’s shares rise to $45.00 by expiration. Additional profits accumulate above the breakeven point on the calls at $45.00. Option implied volatility is down 16.05% this morning to 24.82%. Option traders exchanged nearly 6,000 contracts on the stock, which represent 62% of the total existing open interest on PVH of 9,623 lots.

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