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Put spreader portends near-term erosion in Energy fund’s shares

Today’s tickers: XLE, CROX, COCO, PCX, EBAY, NTAP, MW, ARG & AXL

XLE – Energy Select Sector SPDR ETF – A massive put spread purchased on the XLE, an exchange-traded fund designed to correspond to the performance of the Energy Select Sector of the S&P 500 Index, points perhaps to one investor’s expectation that the price of the fund’s shares are set to decline ahead of September expiration day. Shares of the fund are currently up 0.40% at $54.06 as of 3:45 pm ET. It looks like the pessimistic player picked up approximately 40,000 puts at the September $53 strike for an average premium of $0.21 each, and sold about the same number of puts at the lower September $52 strike at an average premium of $0.44 a-pop. Net premium paid to purchase the spread amounts to $0.23 per contract. The investor responsible for the transaction stands ready to make money if shares of the XLE fall 2.4% from the current price of $54.06 to breach the effective breakeven point at $52.77 by expiration next Friday. Maximum potential profits of $0.77 per contract – for a total of $3,080 million – are available to the trader if the XLE’s shares drop 3.8% to slip beneath $52.00 by expiration day.

CROX – Crocs, Inc. – The footwear firm’s shares plunged 15.5% in afternoon trading to touch down at an intraday low of $11.68. Sharp share price erosion spurred put buying by options traders expecting the stock to continue lower ahead of October expiration. Investors purchased approximately 5,100 now in-the-money puts at the October $12 strike for an average premium of $0.85 each. Put players make money if shares fall another 4.5% from today’s low of $11.68 to breach the average breakeven point at $11.15 by expiration day next month. Options implied volatility on the shoe maker shot up 26.7% to 66.39% as of 3:40 pm ET.

COCO – Corinthian Colleges, Inc. – Shares in for-profit university, Corinthian Colleges, Inc., shot up 14.5% to an intraday high of $5.61 this morning on speculation the company may be acquired. Options traders were quick to initiate bullish stances on the stock in case the rumors end up having some truth to them. COCO’s shares cooled slightly in afternoon trading and are currently up 9.8% on the day to stand at $5.38 as of 2:50 pm ET. Speculators hoping to see shares continue higher picked up 1,300 now in-the-money calls at the September $5.0 strike for an average premium of $0.41 each. Buying interest spread to the higher September $6.0 strike where some 4,300 calls were coveted for an average premium of $0.12 a-pop. Investors long the September $6.0 strike contracts make money if COCO shares rally another 9.1% over today’s high of $5.61 to exceed the average breakeven price of $6.12 by expiration day next week. Investors also purchased approximately 4,700 call options at the October $6.0 strike for average premium of $0.29 apiece. Traders holding these contracts are prepared to profit if the for-profit university’s shares gain at least 12.1% to surpass the average breakeven point to the upside at $6.29 ahead of October expiration. Takeover chatter, unconfirmed rumors and increased demand for COCO call options helped lift the stock’s overall reading of options implied volatility as much as 19.6% to a high of 92.44% today.

PCX – Patriot Coal Corp. – Coal producer, Patriot Coal Corp., attracted bullish options investors during the session with the value of its shares rallying as much as 4.65% in morning trading to touch an intraday high of $11.69. Positioning in PCX calls across several expiries today suggests some traders are hoping to see the price of the underlying stock continue to rebound. Patriot’s shares, using today’s high of $11.69, are still down 51.8% since April 26, 2010, when the stock reached its 52-week high of $24.25. Bulls hoping to see the coal company’s shares extend gains picked up at least 3,250 calls at the September $12 strike for an average premium of $0.28 each. Call buyers are poised to profit should PCX shares rally another 5.05% to trade above the average breakeven price of $12.28 by expiration day next week. More than 7,240 calls changed hands at the September $12 strike by 1:30 pm ET versus previously existing open interest of 3,113 lots. Optimism spread to the October $12 strike where another 1,000 calls were purchased for premium of $0.72 a-pop. Investors looking for a more significant upward shift in share price scooped up 1,000 calls at the higher October $14 strike for an average premium of $0.25 apiece. Traders holding these contracts make money if the coal producer’s shares jump 21.9% over today’s high of $11.69 to surpass the average breakeven point at $14.25 by October expiration. Shares last traded above $14.25 back on June 23, 2010. The increase in demand for call options on the stock earlier boosted Patriot’s overall reading of options implied volatility 8.78% to an intraday high of 65.48%.

EBAY – eBay, Inc. – It looks like one trader may have sold call options on the online marketplace operator as part of a buy-write strategy in the expectation that EBAY’s shares will rebound by October expiration. eBay’s shares commenced the session higher, but quickly reversed course in the first 30 minutes of the trading day, slipping as much as 2.00% to an intraday low of $24.08. The investor appears to have combined the purchase of EBAY shares for approximately $24.12 each with the sale of 3,000 calls at the October $25 strike for premium of $0.57 apiece. Premium received on the sale of the calls effectively reduces the price paid to get long shares of the underlying to roughly $23.55 each. Thus, the transaction positions the investor to reel in maximum gains of 6.15% should shares rally above $25.00 by expiration day next month.

NTAP – NetApp, Inc. – Medium-term bullish trading in NetApp call options appears to be the work of an optimistic investor expecting the price of the underlying shares to rally sharply, perhaps even to new all-time highs, by the end of 2010. Shares of the provider of enterprise storage and data management software and hardware products and services increased as much as 3.15% at the start of the session to secure an intraday- and new 52-week high of $47.89. It looks like the options trader originally took a bullish stance on NTAP back on August 27, 2010, by purchasing approximately 4,000 calls at the December $45 strike for an average premium of $2.34 each. Shares of the underlying stock have rallied more than 15.5% since August 27 when shares closed at $41.45. The surge in NTAP shares boosted premium on the investor’s call options, and today it appears he sold the 4,000 contracts for a substantially richer premium of $5.14 a-pop. Average net profits enjoyed on the closing sale amount to $2.80 per contract. Next, it seems the same bullish player purchased a debit call spread in the December contract to prepare for NTAP shares to extend gains. The trader picked up approximately 4,000 calls at the December $50 strike for an average premium of $2.91 each, and sold roughly the same number of calls at the December $60 strike at an average premium of $0.67 apiece. Net premium paid to establish the spread amounts to $2.24 per contract. Profits start to accumulate for the investor if NetApp’s shares surge 9.1% over today’s high of $47.89 to surpass the average breakeven price of $52.24 by December expiration. Maximum potential profits of $7.76 per contract pad the bullish player’s wallet if shares jump 25.3% in the next several months to trade above $60.00 by expiration day.

MW – The Men’s Wearhouse, Inc. – Shares of the retailer of men’s suits and tuxedos jumped 5.4% at the start of the trading session after the firm posted better-than-expected second-quarter earnings of $0.80 a share versus the consensus forecast of $0.77 a share. MW’s shares are currently up 4.75% to stand at $22.00 as of 12:12 pm ET. The retailer popped up on our ‘hot by options volume’ market scanner after one investor initiated what looks to be a short straddle in the October contract. Selling the straddle indicates the trader expects Men’s Wearhouse shares to settle at $22.00 at expiration. The transaction likely involved the sale of 2,500 calls at the October $22 strike for premium of $1.00 apiece and the sale of 2,500 puts at the same strike at a premium of $1.40 each. Gross premium pocketed by the straddle-seller amounts to $2.40 per contract. The trader keeps the full premium as long as shares are trading at $22.00 at expiration. Wayward shifts in the underlying share price will cut into the investor’s profits. The short stance taken in both call and put options exposes the investor to losses in the event that shares rally above the upper breakeven price of $24.40, or if shares trade below the lower breakeven point at $19.60, ahead of expiration day in October. The overall reading of options implied volatility on Men’s Wearhouse collapsed 22.9% lower to 43.85% as of 12:20 pm ET.

ARG – Airgas, Inc. – Shares of the distributor of industrial, medical and specialty gases fell as much as 1.6% in early morning trading to touch an intraday low of $63.55 on news proxy advisory firms recommended that Airgas shareholders vote against Air Products & Chemical Inc.’s attempt to oust the majority of the ARG board. Airgas shares recovered significantly by 11:20 am ET to stand 0.50% lower on the day at $64.28. Yesterday, Air Products upped its offer to buyout Airgas to $5.5 billion, but Airgas rejected the bid, stating the $65.50 offer undervalues the company. Bearish positioning in ARG options took place in the first half of the session. Perhaps some traders are bracing for shares to falter again while the months-long hostile takeover story continues to unfold. One pessimistic player initiated a debit put spread, buying 4,000 puts at the October $62.5 strike for premium of $3.10 each, and selling the same number of puts at the lower October $55 strike at a premium of $1.10 apiece. The net cost of the transaction amounts to $2.00 per contract. Thus, the investor makes money if ARG’s shares fall 5.9% from the current price of $64.28 to breach the effective breakeven point on the spread at $60.50 by October expiration day. Maximum potential profits of $5.50 per contract are available to the trader should the gas maker’s shares plunge 14.4% to slip beneath $55.00 ahead of expiration. The investor responsible for the transaction could be utilizing the spread to protect the value of a long position in ARG shares. Options implied volatility on the stock earlier jumped 12.3% to an approximate intraday high of 41.41%.

AXL – American Axle & Manufacturing Holdings, Inc. – The auto parts supplier attracted bullish options traders this morning when shares of the underlying stock inched up 2.9% to an intraday high of $8.99. Shares have cooled, however, and are currently flat at $8.74 as of 11:35 am ET. Investors feeling confident that American Axle’s shares are unlikely to collapse in the next 5 months sold approximately 3,000 puts at the January 2011 $6.0 strike to pocket premium of $0.35 per contract. Put sellers keep the full premium received on the transaction as long as AXL shares exceed $6.00 through expiration day. The short position in put options suggests these traders are happy to have shares of the underlying stock put to them at an effective price of $5.65 each if the puts land in-the-money at expiration.


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