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Options Tactician Targets Southwestern Energy Co.

Today’s tickers: SWN, XLE, FAST, NFLX, WU, ODP & SEH

SWN – Southwestern Energy Co. – Shares of the independent energy company engaged in natural gas and crude oil exploration, development and production increased as much as 1.6% at the start of the trading session to touch an intraday high of $32.60. Options trading on the stock took on a bullish slant after one strategist populated the January 2011 contract with a couple of interesting transactions. It looks like the investor sold a strangle and purchased in-the-money call options during the second half of the trading session. The options player purchased 10,000 in-the-money calls at the January 2011 $32 strike at an average premium of $2.795. At the same time, the trader initiated a short strangle, selling 15,000 calls at the January 2011 $36 strike for premium of $1.13 each, and shedding 15,000 puts at the lower January 2011 $29 strike at a premium of $1.30 apiece. Gross premium pocketed on the strangle amounts to $2.43 per contract. It seems the trader is looking for substantial albeit limited upside movement in Southwestern shares. The long call stance, in isolation, prepares him to make money if SWN’s shares rally above the breakeven price of $34.43 by January expiration. Meanwhile, the trader keeps the full premium pocketed on the sale of the strangle if shares trade within the boundaries of the $29/$36 strike prices through expiration day next year. The short strangle may be a financing vehicle aimed at reducing the cost of getting long the in-the-money calls. In this scenario, the investor is bullish on Southwestern Energy, but does not see shares exploding to the upside in the next 5 months to expiration.

XLE – Energy Select Sector SPDR ETF – The implementation of a ratio put spread on the energy ETF suggests one options strategist may be bracing for erosion in the price of the underlying shares through January 2011 expiration. Shares of the XLE, an exchange-traded fund designed to yield investment results that correspond to the price and yield performance of the Energy Select Sector of the S&P 500 Index, are lower by 0.75% to stand at $54.44 with approximately 40 minutes remaining before the closing bell. The put player appears to have purchased 11,500 lots at the January 2011 $50 strike for premium of $1.66 each, and sold 23,000 puts at the lower January 2011 $47 strike at a premium of $1.07 apiece. The investor receives a net credit of $0.48 per contract on the transaction. From a pure options standpoint, the trader is poised to accumulate maximum potential profits – including the net credit – of $3.48 per contract if shares of the XLE fall 13.66% from the current price to settle at $47.00 at expiration. The trader keeps the net credit if shares fail to trade below $50.00 by expiration day. But, if the price of the fund’s shares declines more than the investor expects he may face losses below a certain price. The net credit pocketed on the trade lowers the breakeven point at which losses start to amass to $43.52 from $44.00.

FAST – Fastenal Co. – Shares of the seller of industrial and construction supplies are down slightly by 0.15% in early afternoon trading to stand at $51.93 by 1:15 pm ET. Earlier in the session, Fastenal’s shares increased as much as 2.6% to secure an intraday high of $53.34. The stock appeared on our ‘hot by options volume’ market scanner around midday after one investor picked up a chunk of put options in the January 2011 contract. Put buying in this case may be the work of an outright bearish investor expecting shares to continue lower, or could represent hedging by an options trader who is seeking downside protection on a long position in FAST shares. The strategist purchased 4,500 puts at the January 2011 $50 strike for an average premium of $3.00 apiece. If the trader is buying the puts outright, he starts to make money if Fastenal’s shares fall 9.5% from the current price of $51.93 to breach the effective breakeven point to the downside at $47.00 by January expiration. FAST’s shares traded below $47.00 as recently as September 1, 2010. The company is slated to report third-quarter earnings ahead of the opening bell on October 12, 2010.

NFLX – Netflix, Inc. – Shares of the provider of subscription services for streaming movies and TV episodes over the Internet jumped 6.4% this afternoon to reach an all-time high of $156.67 on news the company expanded outside of the U.S. for the first time by offering Canadians its streaming services for $7.99 a month. Investors expecting shares to appreciate during the remainder of this trading week looked to the stock’s weekly option contracts to initiate bullish plays. Earlier in the session, traders scooped up some 1,300 now deep in-the-money calls at the September $150 strike for an average premium of $3.81 each. These same options now tote an asking price of $6.65 per contract. Bulls also picked up another 1,900 now in-the-money calls at the September $155 strike for an average premium of $1.78 apiece. Investors holding these contracts stand ready to amass profits should NFLX’s shares exceed the average breakeven price of $156.78 by expiration on Friday. October contract options were also heavily populated during the first half of the trading session. More than 62,190 option contracts changed hands as of 12:50 pm ET. Investors populating Netflix options exchanged more than 1.3 calls on the stock for each single put option in play thus far in the trading day. The overall reading of options implied volatility on NFLX is higher by 6.1% to arrive at 53.86% ten minutes before 1:00 pm ET.

WU – Western Union Co. – A sizeable chunk of puts were purchased on the global money transfer and payment services company today with the price of the underlying shares trading lower by 0.80% to stand at $17.17 as of 12:55 pm ET. Earlier in the session Western Union’s shares rallied as much as 0.85% to touch an intraday high of $17.46. It looks like the pessimistic player bought 23,000 puts at the October $16 strike for an average premium of $0.15 per contract. Profits are available to the investor if Western Union’s shares decline another 7.7% from the current price of $17.17 to breach the effective breakeven point to the downside at $15.85 by October expiration. The large size of the transaction may mean the responsible party is hedging a long position in the underlying shares. If this is the case, the trader is likely taking a cautiously optimistic stance on WU rather than an outright bearish one, through expiration day next month. Increased activity in Western Union put options helped lift the stock’s overall reading of options implied volatility 7.00% to 28.85% by 1:00 pm in New York trading.

ODP – Office Depot, Inc. – The global supplier of office supplies and services attracted bearish options players during the session with the price of its shares declining more than 2.5% to $4.26 as of 12:30 pm ET. Investors expecting ODP’s shares to remain bogged down for the next couple of months sold nearly 3,000 calls at the November $5.0 strike to take in premium of $0.10 per contract. Call sellers keep the premium received on the transaction as long as Office Depot’s shares fail to rally above $5.00 by expiration day. If traders are selling the calls uncovered they face potentially disastrous losses should ODP’s shares fly higher ahead of November expiration. Losses start to accumulate in this scenario if shares surge 19.7% to trade above the average breakeven price of $5.10 by expiration in November.

SEH – Spartech Corp. – The manufacturer of sheet, rollstock products and custom-designed plastic packages popped up on our ‘hot by options volume’ market scanner this morning due to bullish activity in long-dated put options. Spartech’s shares increased as much as 8.3% earlier in the session to touch an intraday high of $8.57. Today’s high of $8.57 marks a 41.4% rebound in the price of the underlying stock since September 9, 2010, when shares fell to a 52-week low of $6.06 on disappointing third-quarter losses of $3.9 million. Spartech shares still have a long way to go because the intraday high of $8.57 is 44.9% below the stock’s 52-week high of $15.55, attained back on May 3, 2010. Bullish options players hoping to see the rebound in Spartech’s shares continue shed 1,000 puts at the February 2011 $7.5 strike to take in an average premium of $0.62 each. Put sellers keep the full premium received as long as SEH shares exceed $7.50 through expiration day. Optimism spread to the May 2011 $7.5 strike where another 1,200 puts were sold for an average premium of $0.99 apiece. Investors selling put options are apparently happy to have shares of the underlying stock put to them at an effective price of $6.88 and $6.51, respectively, should the puts land in-the-money at expiration. The overall reading of options implied volatility on Spartech Corp. dropped 13.2% to 43.51% as of 11:50 am ET.


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