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Friday, February 23, 2024

Capital One Bears Out in Full Force in Options Land

Today’s tickers: COF, CAT, XRT, XLY, XLB, XLF, KRE, BRK.B, MCD & ISRG

COF – Capital One Financial Corp. – Better-than-expected fourth-quarter earnings of $0.83 per share, which blew straight past average analyst estimates of $0.45 a share, failed to shield the stock from the massive beating received during the trading session. Shares plummeted 11% to an intraday low of $38.18 after analysts at FBR Capital Markets slashed their forecast for COF’s earnings. FBR analysts cited “shrinking margins and new U.S. credit-card regulations” as reasons for the reducing earnings estimates according to one Bloomberg article released this morning. Bearish option traders are out in full force, populating both the call and put sides of the stock with pessimistic transactions. Investors purchased put options as low as the February $35 strike where 1,200 contracts were picked up for an average premium of $0.57 apiece. Traders long the puts are perhaps bracing for an additional 9.80% shift down in the price of the underlying to the breakeven point on the puts at $34.43 by expiration next month. Approximately 2,000 nearly in-the-money puts were purchased at the higher February $38 strike price at an average premium of $1.46 apiece. Call selling added to the bearish picture as some 2,100 contracts were shed at the out-of-the-money February $40 strike for a premium of $1.43 per contract. Finally, one trader initiated a pessimistic stance in the January 2012 contract. Perhaps this investor believes today’s turmoil is just the beginning of Capital One’s troubles, or, alternatively, the trader may simply be looking to keep the dollar credit on the following transaction. The trader purchased 1,500 puts at the January 2012 $30 strike for a premium of $4.36 each, spread against the sale of 3,000 puts at the lower January 2012 $25 strike for which he received $2.68 apiece. The investor pockets a net credit of $1.00 per contract on the spread, which he keeps if shares settle above $30.00 by expiration.

CAT – Caterpillar, Inc. – Surprisingly bullish trades befell machinery maker Caterpillar today. CAT’s shares commenced the trading day with higher shares, but slipped lower during the session, and currently reside 1.35% lower on the day at $56.09. Investors expecting shares to recover by expiration in March shed 5,000 in-the-money put options at the March $57.5 strike for an average premium of $3.76 apiece. Open interest at that strike of 5,169 lots suggests this transaction could be a closing sale by an investor banking profits on the current downturn in shares. Put selling activity was heavier at the lower March $50 strike where at least 17,400 contracts sold for a premium of $1.05 each. Volume at the March $50 strike ballooned to 33,100 contracts today, which exceeds existing open interest at that strike of 26,744 lots. Investors selling the puts expect shares to trade above $50.00 through expiration, in which case the full $1.05 premium is theirs to keep.

XRT – SPDR S&P Retail ETF – A massive chunk of put options purchased in the March contract on the retail exchange-traded fund, which generally mirrors the performance of the S&P Retail Select Industry index, paints a near-term bearish picture. Shares of the XRT are up 0.35% to $35.38, but the significant volume of put options picked up today indicates the price of the underlying could take a big hit in the next couple of months. It appears approximately 116,000 puts were bought for an average premium of $0.125 per contract at the March $28 strike. Such positioning could point to a drastic 21% decline in the value of the underlying stock given the breakeven point on the puts at $27.875. The spike in demand for option contracts on the fund lifted option implied volatility 7% to 23.68% as of 11:30 am (EDT).

XLY – SPDR Consumer Discretionary Select Sector ETF – Shares of the XLY, which is an exchange-traded fund that invests in companies from the automobile, apparel, hotels, leisure, media and retailing industries – to name a few, are trading 0.30% higher at $29.67. The slight increase in the price of the underlying today may be short-lived according to one bearish option trader. It looks like a huge lot of 135,900 put options were purchased at the March $24 strike for an average premium of $0.13 per contract. The enormous bearish play suggests the trader is bracing for a significant pull back in shares by expiration in March. The breakeven point on the puts at $23.87 is 19.5% lower than the current value of XLY shares. Additional pessimism appeared at the higher March $26 strike where 5,000 put options were coveted for an average premium of $0.25 per contract. The leading indications of such purchases suggest near-term gloom and doom is afoot.

XLB – Materials Select Sector SPDR ETF – A measure of the materials economic sector, the XLB exchange-traded fund, hosted bearish options activity in the March contract today despite the 0.35% increase in shares during the session to $32.39. Like the XRT and the XLY described previously, the Materials Select Sector SPDR had a large pessimistic play unfold in the early portion of the trading day. A huge position comprised of 77,230 put options was purchased at the March $26 strike for a premium of $0.23 per contract. The trader coveting the bearish put options is perhaps expecting that shares of the XLB are set to decline more than 20% from the current price to breach the breakeven point at $25.77 in the next two-or-so months to expiration. A significant collapse such as this brings shares back down to levels not seen since the start of May 2009. Option implied volatility is up 3.7% on the fund to 26.68% as of 11:50 am (EDT).

XLF – Financial Select Sector SPDR ETF – A put spread enacted in the near-term February contract on the financials ETF indicates one investor expects financial stocks will continue to suffer through expiration next week. Shares of the XLF are trading down 1.15% to $14.49. Perhaps the trader expects Obama’s call to limit the size and trading activities of banks is likely to continue to weigh down equities in the financial sector. All potential motivations aside, the spread is certainly a bearish signal. The investor purchased 20,000 put options at the February $14 strike for an average premium of $0.28 apiece, spread against the sale of 20,000 puts at the lower February $13 strike for about $0.09 each. The net cost of the transaction amounts to $0.19 per contract, and positions the investor to accrue maximum potential profits – assuming no position is held in the underlying stock – of $0.81 each if shares of the ETF decline to $13.00 by expiration. We note that shares of the XLF have traded above $13.00 since the start of August 2009.

KRE – SPDR KBW Regional Banking ETF – Shares of the fund designed to track the performance of the KBW Regional Banking index edged more than 1% lower today to $24.65. A couple of bearish trading strategies caught our attention, particularly in the face of rampant bearish signals across a number of ETFs today. The larger of the two transactions involved the purchase of roughly 58,790 put options at the March $20 strike for a premium of $0.23 apiece. This enormous purchase represents a whopping 35% of total existing open interest on the fund of 169,461 contracts. The bearish implications of the trade point to a potential 20% pullback in the price of the underlying to the breakeven point on the puts at $19.77 by March expiration day. Shares of the KRE have traded above the effective breakeven price since November of 2009. A smaller, though still inherently bearish, play appeared at higher strike prices in the March contract. One investor purchased 2,500 in-the-money puts at the March $25 strike by shelling out an average premium of $1.55 per contract. The purchase was spread against the sale of 2,500 puts at the lower March $21 strike for a premium of $0.25 each. The put spread results in a net cost to the trader of $1.30 per contract. If the investor is long shares of the underlying, the spread serves as downside protection in case shares of the fund slip beneath the breakeven price of $23.70 by expiration day. Option implied volatility currently stands 9.7% higher to 30.99% just after noon-time on the East Coast.

BRK.B – Berkshire Hathaway Inc. – Class B – Option traders wasted little time this morning taking bullish positions on Berkshire Hathaway, Inc. – Class B even though shares are trading more than 3.5% lower to $70.09. Most notable in early trading is the chunk of 5,000 call options purchased at the June $74 strike for a premium of $4.10 per contract. The investor responsible for the transaction is positioned to benefit from higher shares by expiration in June. Shares must rally at least 11% over the current price in order for the investor to accrue profits above the effective breakeven price of $78.10. The call-buyer seems to expect the price of the underlying stock will attain a new 52-week high within the next five months to expiration.

MCD – McDonald’s Corp. – Shares of the world’s biggest restaurant company increased 1.75% this morning to a new 52-week high of $64.27 on better-than-expected earnings for the fourth quarter. McDonald’s posted profits of $1.03 per share, which is higher than the average estimate of $1.02 a share predicted by analysts. Bullish traders displayed optimism by selling near-term put options and by buying out-of-the-money calls. The February $62.5 strike had roughly 5,000 puts shed for an average premium of $0.62 per contract. Call-buyers targeted the higher February $65 strike to pick up 1,100 contracts for an average premium of $0.71 each. Option implied volatility is down approximately 17.3% to 14.83% following earnings.

ISRG – Intuitive Surgical, Inc. – Shares of the maker of robotic medical equipment blew right past their current 52-week high of $317.20 this morning and are trading 10.85% higher to a new high of $337.53. The stock took off after ISRG reported fourth-quarter profits of $1.95 per share, which exceeded average analyst expectations by a whopping $0.24 per share. Option implied volatility imploded, falling 36.36% to 29.24% in the first 30 minutes of the trading session. Investors exchanged roughly 11,450 contracts on the stock by 10:00 am (EDT), and displayed a slight preference for call options over puts.


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