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Long-term Put Play on Intel Provides Protection through 2011

Today’s tickers: INTC, FXI, UFS, TM, BRK.B, X, QCOM, MCO, APC, COST, HNZ & DLTR

INTC – Intel Corp. – Shares of chip-making giant, Intel Corp., dipped lower in early trading, but rebounded this afternoon to stand 0.75% higher on the day at $20.15. Long-term protective positioning in the January 2011 contract on the stock suggests cautious optimism by Intel-option traders. One investor purchased a put spread by picking up 5,000 in-the-money puts at the January 2011 $22.5 strike for a premium of $4.05 each, marked against the sale of 5,000 puts at the lower January 2011 $12.5 strike for $0.35 apiece. The net cost of the transaction amounts to $3.70 per contract. The trader responsible for the spread is likely long shares of the underlying stock. The spread, in this scenario, serves as an insurance policy on the value of the underlying position should Intel’s shares slip beneath the effective breakeven price of $18.80 in the next year to expiration. The investor is protected even if shares of the semiconductor chip producer collapse down to $12.50 by January of 2011.

FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the exchange-traded fund, which invests in twenty-five of the largest and most liquid Chinese companies, are down 0.75% to $38.27 with just under one hour remaining in the trading session. FXI’s share price has declined nearly 15% in the past few weeks, from a 2010 high of $44.53 on January 6, 2010, down to an intraday low today of $37.89. One option trader’s actions in the March contract today suggest he has had enough of the downturn, and is looking for a sharp rebound by expiration in two months. The investor initiated a three-legged combination play using both calls and puts on the fund. It appears the main portion of the trade is a ratio-bullish risk reversal involving the sale of 5,000 deep in-the-money put options at the March $41 strike for a premium of $3.66 each, spread against the purchase of 10,000 calls at the same strike for $0.70 apiece. The purchase of 10,000 puts at the March $35 strike for $0.85 each rounded out the third leg of the transaction. The investor pockets a net credit of $0.56 per contract on the trade, which he keeps if shares rally up to $41.00 by expiration. Additional profits accrue to the upside if shares bounce 7.15% higher to surpass the $41.00-level. The 10,000 put options at the March $35 strike serve as a buffer against losses in case shares of the FXI do not improve in the next couple of months. The investor risks having shares of the underlying put to him at an effective price of $40.44 each should the March $41 strike puts remain in-the-money through expiration, and the March $35 strike puts land out-of-the-money.

UFS – Domtar Corp. – Paper products manufacturer, Domtar Corp., appeared on our ‘hot by options volume’ market scanner today after one investor initiated a ratio-bearish risk reversal in the February contract. Shares moved 1.30% lower during the session to stand at $49.86 as of 3:30 pm (EDT). The reversal player sold 6,000 out-of-the-money call options at the February $55 strike for a premium of $0.80 apiece in order to offset the cost of purchasing 3,000 puts at the February $45 strike for a premium of $1.15 each. The investor banks a net credit of $0.45 per contract on the spread, which he keeps if UFS shares trade below $55.00 through expiration day. Additional downside profits amass if shares decline through the $45.00-level. The 9,000 contracts utilized in the bearish transaction comprise roughly 57% of the total existing open interest on Domtar Corp. of 15,793 contracts.

TM – Toyota Motors Corp. ADR – “How many Toyota cars did you say would be recalled?” That may well have been the tone of the question springing to the front of option traders’ minds earlier today as shares were dropping like a stone towards $79.50 (down 8.4%) and sharply off last week’s high at $92.00. The recall of 8.2 million units in the U.S. and Canada and the closure of production plants effective next week after the recall of global top-sellers Camry and Corolla, raise the question of whether Toyota’s ascent to the top of the global totem pole hasn’t come at the sacrifice of quality. Typically sleepy implied volatility on its options roared into action today from 27% to 35% as investors wondered where the move might stop. Of course it doesn’t take a genius to work out where today’s options volume is to be found. During the course of the morning put buyers paid increasing premiums for February expiration puts at the $75 strike where prices rose from as little as 70 cents this morning to 1.45 recently. The pattern was similar at the $80 strike put where more than 3,000 contracts suffocated prevailing open interest of less than one-third of that, as premiums nearly doubled from $1.70 to as high as $3.30 throughout the day.

BRK.B – Berkshire Hathaway Inc. – Warren Buffet’s insurance and investment company’s shares jumped more than 7.5% to open the trading session at $73.28 after it was selected to join the Standard & Poor’s 500 Index. Shares tapered off slightly by the middle of the day to stand up a lesser 4.5% to $71.07. Bullish options trading took place in the September contract where 5,000 put options were sold at the September $64 strike for a premium of $2.55 apiece. Investors selling the put options keep the full $2.55 per contract received today as long as the underlying share price remains greater than $64.00 through expiration in eight months time. Several years ago Buffet employed the same type of strategy by effectively writing very long-dated put options to willing corporations agreeing to buy shares of S&P 500 components at expiration, possibly long after his own death. Little did he know at that time that Berkshire Hathaway would one day figure in the index.

X – United States Steel Corp. – Shares continue to hemorrhage at Pittsburgh, PA-based steel producer, United States Steel Corp., today and received another blow in the form of a downgrade to ‘neutral’ from ‘buy’ with a target share price of $55.00 at Goldman Sachs Group. The value of the underlying stock has fallen 18.20% thus far this week to a low of $46.61, which represents just a portion of the total 42% erosion in shares since January 11, 2010, when shares touched a high for the new year of $66.20. Some option traders reacted by initiating bearish plays on the stock, but it looks like one trader has taken a contrarian stance, as well. Pessimists meandered about the February contract buying put options as low as the February $40 strike where at least 2,000 lots were purchased for an average premium of $0.56 apiece. Other bears shed out-of-the-money call options. Roughly 1,300 calls were sold at the February $48 strike for a premium of $2.30 each, while 2,400 calls were let go at the higher February $50 strike for about $1.62 apiece. Call-sellers keep the premium received if the call options land at- or out-of-the-money at expiration. More interesting, however, is the large contrarian trade transacted in the February contract. It looks like one investor purchased 20,000 married put options at the February $45 strike for $2.00 apiece. A trade such as this implies the investor purchased an equivalent number of underlying shares in combination with put options, which serve as downside protection on the value of the underlying position through expiration in February. The undertaking of a long stock position suggests the trader is expecting U.S. Steel Corp’s shares to rebound at some point. The decision to get long the shares today could mean the trader believes the stock is nearing a low point. The put options protect the investor in case shares decline another 7.75% – from the low of $46.61 – and breach the breakeven price of $43.00 ahead of February expiration.

QCOM – Qualcomm, Inc. – Telecommunications equipment manufacturer, Qualcomm, is scheduled to release results for the first quarter following the closing bell this afternoon. Shares are down 0.50% to $46.65 and implied volatility is higher by about 6% to 31.04% ahead of the report. Option traders established protective stances using put options in the March contract, perhaps to hedge against the possibility of an earnings disappointment from the firm. Plain-vanilla put buying took place at the March $42 strike where 1,700 contracts were picked up for an average premium of $0.72 apiece. Another bearish strategy employed today was a ratio put spread. One trader appears to have purchased 5,000 puts at the now in-the-money March $47 strike for a premium of $2.25 each, marked against the sale of 10,000 puts at the lower March $43 strike for a premium of $0.90 apiece. The net cost of the transaction amounts to $0.45 per contract and yields downside protection beneath the effective breakeven price of $46.55 through March expiration. Qualcomm’s management provided quarter one earnings guidance of $0.54 to $0.58 per share during their previous earnings call.

MCO – Moody’s Corp. – Options implied volatility rose at the rating agency today following the dismissal of a lawsuit that gets Moody’s and fellow agencies off the hook for losses incurred by investors in mortgage backed securities. Moody’s shares’ rose to a six-month high at $29.18 before easing to $28.63, still leaving it with a lunchtime gain of 7.5% for the session. Volatility surrounding its options rose by about 10% to 44% as investors tried to figure out where its share price might go next. Options trading was mixed although it appears that in-the-money call volume at the February $27 strike might be the work of a seller closing an established position. The volume of calls traded at that strike surpassed 2,000 lots where the premium stood at $2.30 and 142% higher than yesterday. Call buyers expressing greater ambitions for Moody’s prospects established fresh bullish positions at the same expiration contract at the $30 strike price. Put volume was not absent, however, with notable volume at both February and March $28 strike puts along with volume of around 1,300 lots at the February $26 strike where the number of contracts exceeded an open interest reading of just above 1,000 lots.

APC – Anadarko Petroleum Corp. – Bloomberg reported earlier that Anadarko Petroleum, “declared a major oil discovery […] in the Gulf of Mexico”, which likely spurred the 1.25% rally in shares of the Texas-based firm to $64.71. APC’s shares opened the session higher at $65.94 on the news. Option traders reacted by purchasing 2,500 put options at the March $60 strike for a premium of $1.74 apiece. Put buyers are likely long the stock and securing downside protection to lock in recent gains in the underlying. Alternatively, put purchasers may hold no stock position. In such a case they are merely initiating bearish bets that the stock is set to fall sharply ahead of expiration in March.

COST – Costco Wholesale Corp. – Early morning options trading on Costco is dominated by bullish investors selling put options despite the 0.40% decline in the price of the underlying shares to $57.69. It looks like traders are expecting shares to rebound by expiration in March because roughly 8,000 in-the-money puts sold for an average premium of $3.30 apiece at the March $60 strike in the first thirty minutes of the trading session. Investors selling the put options keep the $3.30 premium per contract if Costco’s shares rally up to $60.00 or above by expiration. Put-sellers are apparently willing to have shares of the underlying put to them at an effective price of $56.70 should the contracts remain in-the-money through expiration. Finally, it looks like approximately 2,000 lots out of the total sold number of puts at the March $60 strike were spread against the purchase of an equivalent number of purchased put options at the lower March $57.5 strike for about $1.80 each. The put credit spread in this case limits the maximum amount of premium received to $1.50 per contract.

HNZ – H.J. Heinz Co. – Option implied volatility on ketchup maker, H.J. Heinz Co., is way up this morning on the vague and speculative whisperings of takeover rumors. Implied volatility is currently up 19.02% to stand at 19.03% as of 10:25 am (EDT). Shares are also up 0.85% to $43.20, but gained more than 2% in earlier trading to reach a new 52-week high of $43.58. Investors purchased out-of-the-money call options in the February contract to position for a potential jump in share price. Approximately 1,400 calls were purchased at the February $44 strike for an average premium of $0.47 apiece, while the higher February $45 strike had 1,100 calls picked up for roughly $0.29 per contract. Option traders exchanged more than 8,790 contracts on Heinz within the first hour of the trading day.

DLTR – Dollar Tree, Inc. – Bullish options trading commenced during the early portion of the trading session on discount retail chain, Dollar Tree, as shares opened up slightly higher at $49.32. The stock has slipped lower as of 10:30 am (EDT) to $49.05. One trader, who expects shares to remain above $48.00 through expiration next month, initiated a put credit spread in the February contract. The investor sold 3,500 puts at the February $48 strike to take in an average premium of $0.82 per contract, spread against the purchase of 3,500 puts at the lower February $45 strike for $0.22 each. The spread results in a net credit of $0.62 per contract to the trader, who keeps the full credit as long as shares remain above $48.00 through expiration day.


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