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Retail-Bear Initiates Put ‘Fly On XRT

 Today’s tickers: XRT, SM, AMD, MEE, EXPE, CTV & MYL

XRT - SPDR S&P Retail ETF – Pessimism on the retail ETF took the form of a put butterfly spread today, suggesting one strategist is prepared for the price of the underlying fund to decline by December expiration. Shares of the XRT, an exchange-traded fund designed to track the performance of the S&P Retail Select Industry Index, are up 0.95% this afternoon to stand at $43.75 as of 3:10 p.m. in New York trading. The XRT’s shares are higher today following reports that economists increased estimates for consumer purchases in the third quarter after retail sales rose more than expected in September. But, nearly all of the activity in XRT options took place in puts and implies a bearish slant on the fund today. The butterfly spread involved the purchase of 5,600 puts at the December $43 strike at a premium of $1.45 each [wing 1], the sale of 11,200 puts at the December $39 strike for a premium of $0.47 per contract [body], and the purchase of 5,600 puts at the lower December $35 strike at a premium of $0.19 apiece [wing 2]. Net premium paid to initiate the bearish spread amounts to $0.70 per contract, thus positioning the investor to make money if shares of the XRT fall 3.3% from the current price of $43.75 to breach the effective breakeven point at $42.30 by expiration day in December. Maximum potential profits of $3.30 per contract are available to the trader if the price of the underlying fund declines 10.85% to settle at $39.00 at expiration. The investor paid $0.70 per contract, but stands prepared to gain more than 4.7 times that amount, or $3.30 per contract, if the transaction comes good by December expiration.

SM - SM Energy Co. – Shares of the U.S. producer of oil and natural gas rose 4.05% today to $42.34 as of 3:25 p.m. The current rally may be an extension of gains realized last week on news the firm’s well in Cheyenne, Wyo., was spewing oil. The accident is seen as positive in some respects because it shows the ground there has oil under pressure in that area. Investors placed bullish bets on SM Energy today in order to position for shares to rally higher through the early months of 2011. One options optimist initiated a ratio call spread, buying 3,000 in-the-money calls at the February 2011 $40 strike at a premium of $4.70 each, and selling 6,000 calls at the higher February 2011 $50 strike for a premium of $0.90 apiece. The net cost of the call spread amounts to $2.90 per contract. Thus, the investor is poised to make money should SM’s shares rise another 1.1% over the current price to exceed the effective breakeven price of $42.90 by expiration day in February. The trader stands ready to accumulate maximum potential profits of $7.10 per contract if the energy company’s shares jump 18.1% to settle at $50.00 at expiration. The ratio of twice as many short calls exposes the investor to losses in the event that shares rise far more than he expects in the next several months. Losses start to amass for this trader if SM Energy’s shares surge 34.9% and trade above the upper breakeven price of $57.10 by expiration day.

AMD - Advanced Micro Devices, Inc. – Bullish investors are dominating options trading activity on the chip maker today with shares 4.2% higher on the day at $7.18 as of 12:45 p.m. in New York. According to Digitimes AMD introduced a new chip called the AMD Radeon HD 6800 series, which was specifically created for gamers and sells at $179.00. Options trading traffic is heaviest in near-term call options. Investors purchased approximately 2,800 in-the-money calls at the November $7.0 strike for an average premium of $0.38 each. Call buyers at this strike make money if AMD’s shares rally another 2.8% to trade above the average breakeven point at $7.38 by expiration day next month. Optimistic players purchased another 5,600 calls at the higher November $8.0 strike for an average premium of $0.08 apiece. Investors holding these contracts are prepared to profit in the event that the chip maker’s shares surge 12.5% over the current price of $7.18 to trade above the average breakeven point at $8.08 by November expiration. AMD’s shares last traded above $8.08 back on July 28, 2010.

MEE - Massey Energy Co. – Speculation that Cliffs Natural Resources may be interested in buying Massey Energy Co. for $62.00 a share sent the value of Massey’s shares up as much as 6.25% this morning to an intraday high of $42.32. Shares in the mining company are up more than 21% since the October 18, 2010, when the Wall Street Journal reported the firm may put itself up for sale. Investors are positioning for shares to climb higher still by picking up call options in the November and December contracts. Near-term bulls purchased 1,300 calls at the November $45 strike for an average premium of $1.10 apiece. Investors holding these contracts make money if MEE’s shares rally another 8.7% over today’s high of $42.32 to exceed the average breakeven point at $46.01 by expiration day next month. Another 1,000 calls were coveted at the higher November $50 strike for an average premium of $0.28 each. Premium required to purchase the November $50 strike calls is up 257% as of 12:20 p.m. in New York. Bullish sentiment spread to the December $50 strike where some 2,600 calls were scooped up at an average premium of $0.61 a-pop. Investors long the calls make money if Massey’s shares jump 19.6% to trade above the average breakeven price of $50.61 by expiration day. Traders buying up the calls may profit ahead of expiration by selling the contracts at a more expensive premium if shares continue to rise and lift premium on the calls. Options implied volatility on Massey Energy Co. is up 4.8% to stand at 51.02% as of 12:25 p.m.

EXPE - Expedia, Inc. – The online travel company popped up on our scanner this morning after investors picked up in-the-money put options in the November contract. Expedia’s shares are up 1.60% to arrive at $28.73 in the first half of the session. Demand for puts on the stock today may be higher ahead of the firm’s third-quarter earnings report, which is slated for release after the closing bell on October 28, 2010. Investors scooped up 2,200 in-the-money puts at the November $29 strike for an average premium of $1.31 each. Put buyers at this strike make money, or realize downside protection, if EXPE’s shares fall 3.6% to breach the average breakeven point at $27.69 by expiration day. Options traders purchased another 3,200 in-the-money puts at the higher November $30 strike at an average premium of $1.83 a-pop. Investors holding these contracts are poised to profit – or protect – should shares slip beneath the average breakeven price of $28.17 ahead of November expiration. Options implied volatility on Expedia is up 11.9% at 46.10% as of 11:40 a.m. in New York trading.

CTV - CommScope, Inc. – Shares of the network infrastructure company shot up 33.1% at the start of the trading session to touch an intraday high of $30.77 on news it is in talks with leveraged-buyout firm, Carlyle Group to be taken private for around $2.98 billion or $31.50 a share in cash. Some bullish player reacted by picking up calls at the highest available strike price in the November contract. Investors purchased approximately 2,600 calls at the November $28 strike for an average premium of $2.50 each. Call buyers are poised to profit should CommScope’s shares exceed the average breakeven price of $32.50 ahead of November expiration. Options traders exchanged more than 2,840 calls at that strike, which has zero contracts in previously existing open interest. Approximately 1,000 put options were picked up at the November $23 strike for $0.05 per contract. It looks like the put buyer may be booking profits today by closing out a previously established short stance in puts. More than 6,155 option contracts have changed hands on CommScope as of 11:35 a.m., which is a little more than 53% of total existing open interest on the stock of 11,474 contracts.

MYL - Mylan, Inc. – Options on the pharmaceutical firm are active ahead of third-quarter earnings, which are scheduled for release before the market opens tomorrow morning. Shares of the manufacturer of branded and generic drugs are currently up 0.90% to stand at $19.55 just after 11:05 a.m. in New York. Last week Mylan’s shares rallied on news the FDA approved the firm’s Abbreviated New Drug Application for additional dosages of a generic drug used as a treatment for Parkinson’s disease. The firm was rated new ‘buy’ with a share price target of $25.00 at CRT Capital last week. Some investors appear to be initiating short strangles ahead of earnings tomorrow. Traders sold approximately 2,500 puts at the November $18 strike for an average premium of $0.24 each, and sold about the same number of calls at the higher November $21 strike at an average premium of $0.22 apiece. Strangle-sellers pocket gross premium of $0.46 per contract, and keep the full amount as long as Mylan’s shares trade within the range of the strike prices described through November expiration. Investors employing this strategy are exposed to losses should shares rally above the upper breakeven price of $21.46, or if shares slip beneath the lower breakeven point at $17.54, ahead of expiration day. The short strangle suggests investors expect volatility to come off and shares to remain range-bound. It looks like another 1,100 calls were sold at the December $20 strike for an average premium of $0.84 apiece. Call sellers keep the full premium pocketed on the transaction as long as shares fail to rally above $20.00 at December expiration.


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