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Bears Out in Full Force as Market Takes a Nose-Dive

Today’s tickers: XRT, MBI, CAT, XHB, FLS, PCS & TWC

XRT – SPDR S&P Retail ETF – It’s not surprising that we are seeing bearish trading patterns emerge on the XRT, an exchange-traded fund designed to mirror the performance of the S&P Retail Select Industry Index, with shares of the fund trading 5.30% lower as of 3:20 pm (ET) to stand at $40.25. One long-term pessimistic individual initiated a three-legged bearish options combination play on the XRT using both call and put options. It looks like the investor partially financed the purchase of a debit put spread by selling twice as many out-of-the-money call options by volume. The trader purchased 5,000 puts at the September $40 strike for an average premium of $2.42 apiece, and sold the same number of puts at the lower September $34 strike for a premium of $0.84 each. Finally, the investor reduced the premium outlay required to establish the transaction by selling 10,000 calls at the September $48 strike for a premium of $0.73 per contract. The net cost of the options combination play is reduced to just $0.12 per contract. The investor responsible for the pessimistic play makes money if shares of the underlying fund slip beneath the effective breakeven point at $39.08. Maximum potential profits of $5.88 per contract are available to the trader should shares of the retail fund plummet 15.5% from the current price to breach $34.00 by September expiration. Options implied volatility on the XRT is up 15% to 34.80% with roughly 40 minutes remaining in the trading day.

MBI – MBIA Inc. – Investors who earlier in the session scooped up large numbers of put options on the insurance company are likely pleased as punch given the subsequent 10.4% decline in MBIA’s share price to $8.81 as of 3:25 pm (ET). Bearish investors purchased approximately 50,000 puts at the June $7.0 strike for an average premium of $0.75 apiece at around 11:40 am (ET) this morning when shares of the underlying stock were trading at $9.30 each. The decline in share price since this morning coupled with the 25.2% increase in the overall reading of options implied volatility on the stock to 136.22% inflated premium on the June $7.0 strike puts, which are currently up 200% on the day to reflect an asking price of $0.90 per contract. Put buyers in this case are poised to amass profits should MBIA’s shares plummet 29% from the current price to breach the breakeven point to the downside at $6.25 ahead of June expiration. Additional bearish sentiment was apparent at the June $13 strike price where 13,000 calls were shed for a premium of $0.50 each. Call-sellers keep the full $0.50 premium per contract as long as the insurer’s shares trade below $13.00 through expiration day.

CAT – Caterpillar, Inc. – Frenzied put activity on the world’s largest construction equipment manufacturer suggests some pessimistic options players are bracing for near-term share price erosion in excess of the 3% decline to $63.95 realized during the current trading session. Investors are employing debit put spreads on Caterpillar in the May contract to brace for continued bearish movement in the price of the underlying stock through expiration this month. Approximately 30,000 puts were purchased at the May $60 strike for an average premium of $0.85 per contract, spread against the sale of roughly the same number of contracts at the lower May $55 strike for an average premium of $0.25 apiece. Average net premium paid for the spread amounts to $0.60 per contract. The parameters of the transaction position traders to make money should shares of the underlying stock decline another 7.1% from the current price to breach the effective breakeven point on the spread at $59.40 by May expiration. Maximum potential profits of $4.40 per contract are available to put-spreaders should CAT’s shares plummet 14% to $55.00 in the next few weeks to expiration day.

XHB – SPDR S&P Homebuilders ETF – Yesterday afternoon we reported a three-legged bearish options combination play involving a total of 36,000 option contracts on the homebuilders exchange-traded fund. Today, it looks like perhaps the same pessimistic options investor is doubling up on the size of the position by once again selling out-of-the-money calls to finance the purchase of a debit put spread. Shares of the XHB, an exchange-traded fund designed to track the performance of the S&P Homebuilders Select Industry Index, are down nearly 2% to $18.00 as of 11:50 am (ET). The transaction observed in the previous trading session yielded a net credit of $0.01 per contract, but the decline in XHB’s share price today boosted put premiums and weighed on call premiums at the strike prices involved in the trade, and therefore require the investor responsible for today’s options combination play to pay $0.02 per contract for the transaction. The investor purchased the put spread by picking up 12,000 puts at the June $18 strike for a premium of $0.86 each, and by selling the same number of puts at the lower June $17 strike for $0.49 apiece. The third leg of the spread involved the sale of 12,000 calls at the June $20 strike for $0.35 a-pop. The trader paid a net $0.02 per contract to establish the transaction and is poised to accrue maximum potential profits of $0.98 per contract should shares of the underlying fund trade below $17.00 by June expiration day.

FLS – Flowserve Corp. – The manufacturer of engineered and industrial pump and pump systems and other industrial machinery enticed bullish options players this morning with shares of the underlying stock trading 3.4% higher at $110.85. Flowserve’s shares earlier rallied 6.55% to an intraday high of $114.21 perhaps on optimism stemming from the firm’s first-quarter earnings report released on Wednesday. Options optimists shed at least 2,000 puts at the May $110 strike to take in an average premium of $3.17 per contract. Put sellers keep the full premium received today as long as FLS shares trade above $110.00 through May expiration. Investors short the puts are apparently happy to have shares of the underlying stock put to them at an effective price of $106.83 each should the puts land in-the-money at expiration. Options implied volatility on the stock is down 7.1% to 39.60% following earnings.

PCS – MetroPCS Communications, Inc. – Shares of the pay-as-you-go mobile phone firm are trading 10.20% higher at $8.53 as of 11:30 am (ET), and earlier surged 17.20% to touch an intraday high of $9.07. MetroPCS shares jumped after the U.S. company posted first-quarter earnings of $0.06 a share and revealed first-quarter subscriber gains and first-quarter sales which exceeded analysts’ expectations. Bullish investors are positioning for continued share price appreciation by purchasing at least 4,700 August $9.0 strike calls options for an average premium of $0.88 per contract. Call-buyers make money as long shares of the underlying stock rally above the average breakeven point to the upside at $9.88 ahead of expiration day in August. The overall reading of options implied volatility on the stock collapsed 21.7% lower to 54.25% following earnings released before the opening bell.

TWC – Time Warner Cable Inc. – Investors who purchased put options on Time Warner Cable Inc. a couple of days ago are reaping the benefits today with shares of the stock trading 5.90% lower at $51.75 as of 11:40 am (ET). It looks like bearish traders picked up approximately 2,300 puts at the June $55 strike for an average premium of $1.97 apiece on Tuesday April 4, 2010, when TWC shares were trading at a volume-weighted average price of $56.08. The cable operator’s shares have since tumbled approximately 7.7% down to the current price of $51.75. The share price erosion over the past 48 hours significantly inflated premium on the now deep-in-the-money put contracts at the June $55 strike price. Thus, individuals holding the puts sold the contracts today for an average premium of $3.72 apiece to take in average net profits of $1.75 per contract. Options implied volatility on Time Warner Cable is up 12.1% to 35.89% just ahead of 12:00 pm (ET).


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