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Bearish Put Butterfly Spread Materializes on Emerging Markets Fund

Today’s tickers: EEM, GE, PXD, STI, VLO, UPS, RF, NWL, HNT & FFIV

EEM – iShares MSCI Emerging Markets Index ETF – A contrarian options trader established a large-volume bearish put butterfly spread in the June contract this afternoon even though shares of the emerging markets exchange-traded fund, which looks for investment results that correlate to the price and yield performance of the MSCI Emerging Markets index (an index designed by MSCI as an equity benchmark for international stock performance), are trading 0.65% higher to $41.47 as of 2:30 pm (ET). The massive pessimistic play yields maximum benefits to its owner if shares of the underlying stock plummet more than 15.50% from the current price to $35.00 by June expiration. The investor enacted the butterfly by purchasing 20,000 puts at the June $31 strike for a premium of $0.24 apiece [wing 1] in conjunction with the purchase of another 20,000 puts at the higher June $39 strike for $1.41 each [wing 2]. Finally, the body of the butterfly spread involved the sale of 40,000 puts at the central June $35 strike for a premium of $0.58 apiece. The net cost of the ‘fly amounts to just $0.49 per contract. Therefore, the bearish player is positioned to reel in maximum potential profits of $3.51 per contract – total net profits of $7.02 million – should shares of the underlying fund slip to $35.00 by expiration day. Shares of the EEM must surrender at least 7% of their current value by June expiration in order for the investor to breakeven at $38.51. The transaction is a very efficient way for this investor to establish a pessimistic stance on the emerging markets fund because maximum potential gains trump maximum possible losses on the position. The parameters of the butterfly spread represent a reward-to-risk ratio of more than 7-to-1.

GE – General Electric Co. – The diverse conglomerate’s shares are standing 0.30% higher on the day at $16.55 with one hour remaining in the trading session. General Electric’s shares have rebounded 6.30% in the past month since dipping to $15.57 on February 12, 2010, but one big options strategist is positioning for continued bullish momentum in the price of the underlying stock through expiration in May. The optimistic investor initiated a large-volume bullish risk reversal play by shedding 20,000 puts at the June $15 strike for an average premium of $0.37 apiece, spread against the purchase of 20,000 calls at the higher June $18 strike for $0.32 each. The reversal yields a net credit of $0.05 per contract, which the investor keeps if GE’s shares trade above $15.00 through May expiration. Additional profits accumulate to the upside should shares rally another 8.75% from the current price of $16.55 to surpass the breakeven point at $18.00 by expiration day in May.

PXD – Pioneer Natural Resources Co. – The independent oil and gas exploration and production company attracted outright bullish options trading late in the session amid a 2.55% rally in the price of its underlying shares to a new 52-week high of $50.70. Investors positioned for a sharp increase in Pioneer’s share price by April expiration by engaging in plain-vanilla call buying. Bullish traders purchased 4,000 calls at the April $55 strike for an average premium of $0.80 per contract. Call-buyers stand ready to accumulate profits should PXD’s shares jump 10% over the current price to breach the effective breakeven point on the calls at $55.80 by expiration day next month.

STI – SunTrust Banks, Inc. – Shares of the financial services holding company are trading up 3.10% at a new 52-week high of $26.62. The SunTrust name was put in the frame on Tuesday when stories emerged that Britain’s Barclays Bank was on the prowl for an affordable U.S. bank with substantial deposit base. April contracts options trading, however, was dominated by a bearish investor bracing for a pull-back by expiration. It appears the trader purchased 7,500 puts at the April $24 strike for an average premium of $0.42 apiece, spread against the sale of 15,000 puts at the lower April $22 strike for $0.18 each. The so-called ratio put spread yields a net credit of $0.06 per contract. Additional profits accumulate if SunTrust’s shares suffer a 10% decline and breach the $24.00-level by April expiration. Maximum potential profits of $2.06 – including the $0.06 credit pocketed today – are available to the trader if shares plummet 17.35% from the current price to $22.00 by expiration day next month.

VLO – Valero Energy Corp. – The operator of refineries that produce gasoline, jet fuel, petrochemicals and other refined products experienced a 3.50% rally in its shares today to $20.22. Bullish options traders celebrated Valero’s share price improvement by booking profits on previously established positions, and by initiating fresh bullish stances on the stock. It looks like one trader prepared for today’s rally by selling 1,500 puts at the April $17 strike for an average premium of $0.35 apiece back on February 2, 2010. Today the investor was able to buy back the short puts for just $0.11 each, thus banking net profits of $0.24 per contract. The trader extended a new bullish stance on Valero by selling short 1,500 puts at the higher April $19 strike for a premium of $0.45 each. Shares of the underlying stock must be trading above $19.00 by expiration day next month in order for the investor to walk away with the full amount of premium received today. Fresh bullish positioning in call options took place in the September contract where one optimistic individual purchased a debit call spread. The investor picked up approximately 3,000 calls at the September $23 strike for an average premium of $0.71 each, and sold about the same number of calls at the higher September $25 strike for a premium of $0.35 apiece. The net cost of the transaction amounts to $0.36 per contract. Maximum potential profits of $1.64 per contract are available to the trader if Valero’s shares surge more than 23.50% from the current price to $25.00 by expiration day in September.

UPS – United Parcel Service, Inc. – Shipping services firm, United Parcel Service, received a medium-term vote of confidence by one bullish individual anticipating continued upward movement in the price of the underlying shares by expiration in July. UPS’s shares rallied 0.50% during the current session to $60.58. The options player initiated a bullish risk reversal by shedding 4,000 puts at the July $50 strike for an average premium of $0.44 per contract in order to finance the purchase of 4,000 calls at the higher July $70 strike for $0.19 apiece. The investor pockets a net credit of $0.25 per contract on the reversal, which he keeps as long as shares trade above $50.00 through expiration day. Additional profits, however, require shares to move sharply to the upside. The trader starts to accumulate additional gains only if shares jump 15.50% from the current price to surpass the upper breakeven point at $70.00 by expiration in July. We note that shares of the shipping company have not exceeded $70.00 since June 5, 2008.

RF – Regions Financial Corp. – Plain-vanilla call-buying on Regions Financial Corp. suggests some investors are positioning for a more than 25% rally in the price of its shares by August expiration. Shares of the underlying stock are up 5% already today to stand at $7.25 as of 12:40 pm (ET). Optimistic options traders purchased approximately 4,000 calls at the August $9.0 strike for an average premium of $0.29 per contract. Call-buyers stand ready to accrue profits to the upside should Regions’ shares explode 28% from the current price to surpass the effective breakeven point on the call options at $9.29 by expiration day in August. The spoke in demand for options on Regions Financial today lifted overall options implied volatility on the stock 15.7% to 46.52%.

NWL – Newell Rubbermaid, Inc. – Shares of the maker of well-known name-brand household products are up 1% to $15.15 as of 10:20 am (ET), but traded as high as $15.45 in the first 25 minutes of the trading session. Early-bird options traders feasted on Newell call options to position for continued bullish movement in the price of the underlying stock. Near-term optimists picked up approximately 1,000 calls at the March $17.5 strike for an average premium of $0.08 apiece. Other investors targeted contracts that have more time to expiration. Roughly 3,100 call options were purchased at the April $17.5 strike for an average premium of $0.21 each, while 1,400 calls were coveted at the June $17.5 strike for $0.37 per contract. April $17.5 strike call-buyers profit if Rubbermaid’s shares rally at least 16.90% from the current price of $15.15 to surpass the effective breakeven point at $17.71 by April expiration day. The surge in demand for call options on NWL sparked a sharp increase in the overall reading of options implied volatility on the stock. Implied volatility jumped 52.60% to 40.43% as of 10:30 am (ET).

HNT – Health Net, Inc. – The provider of managed health care services upheld its forecast for the current fiscal year yesterday, stating earnings expectations of $2.32 to $2.42 per share, which is greater than average analyst forecasts of $2.30 a share. Health Net also received an upgrade to ‘market perform’ with a target share price of $24.00 at BMO Capital Markets yesterday. Shares of the underlying stock are 1.25% higher during the current session at $24.65, inspiring bullish options activity in early trading. Investors bought 1,000 calls at the March $25 strike for an average premium of $0.53 per contract. Health Net’s share price must increase another 3.55% in order for these call-buyers to accrue profits above the breakeven price of $25.53 by expiration day next week. Uber-optimistic individuals picked up 1,300 calls at the higher April $27.5 strike for an average premium of $0.38 each. These bulls profit if shares surge 13% to breach the effective breakeven point on the calls at $27.88 by expiration day in April. Options implied volatility is up 14.4% to 40.52 with 70 minutes behind us in the trading day.

FFIV – F5 Networks, Inc. – Shares of the provider of products and services to the technology, telecommunications, financial services and other industries, are up 2.10% to a new 52-week high of $62.97 this morning. Investors anticipating further bullish movement in F5’s share price purchased 2,100 calls at the March $65 strike for an average premium of $0.57 apiece. Investors long the calls are positioned to accrue profits if shares of the underlying stock increase 4.25% from the current price to surpass the breakeven point on the calls at $65.57 by expiration day. Options players also picked up 1,000 calls at the higher April $70 strike for an average premium of $0.57 each. FFIV’s shares must jump 12.20% in order for April $70 strike call buyers to amass profits above the breakeven price of $70.57 by April expiration.


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