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Enormous Prints in Put Options on Tech. Select Sector SPDR Fund

Today’s tickers: XLK, ENR, IYR, ALTR, AVP, JCP & TQNT

XLK - Technology Select Sector SPDR Fund – One big options market participant traded a total of 524,600 put options on the technology SPDR ETF this afternoon. It looks like the party responsible for the massive transactions rolled a previously established debit put spread in the December contract forward to the longer-dated March 2011 contract. Shares of the XLK, an exchange-traded fund that mirrors the performance of the Technology Select Sector of the S&P 500 Index, are down slightly by 0.20% to stand at $24.19 as of 2:15 pm in New York. The XLK jumped to the top of our ‘most active by options volume’ scanner after the 112,300-lot December $23/$20 put spread was sold for a net $0.31 per contract. This spread appears to have been initially purchased for a net premium of $0.68 each back on October 7, 2010, when the price of the underlying fund was trading around $23.14. Today, the XLK-options player sold the massive spread in order to purchase an even larger one at the same strike prices in the March 2011 contract. The new put position involved the purchase of 150,000 lots at the March 2011 $23 strike for a premium of $0.96 each, and the sale of the same number of puts at the lower March $2011 $20 strike at a premium of $0.31 apiece. In isolation, the net cost of buying the longer-dated put spread amounts to $0.65 per contract and yields downside protection for the investor should shares of the XLK trade below the breakeven price of $22.35 by March expiration. Enormous trades such as these tend to be tied to stock. Perhaps this trader is augmenting the size of the put spread because he has increased his exposure to the technology sector. Around the same time the puts were bring traded, some 733,000 shares of the underlying were purchased for $24.12 each. We note, however, that at this time there is no way for us to determine whether these shares were tied to the spread or not.

ENR - Energizer Holdings, Inc. – The manufacturer of batteries, portable lighting devices and personal care products appeared on our ‘hot by options volume’ market scanner late in the trading session after one investor dabbled in December contract put options. Energizer’s shares are down 0.15% to arrive at $73.78 with 40 minutes remaining before the final bell. The pessimistic player initiated a ratio put spread, buying 1,500 in-the-money puts at the December $75 strike for a premium of $4.00 each, and selling 3,000 puts at the lower December $70 strike at a premium of $1.80 apiece. The net cost of the transaction amounts to $0.40 per contract. Profits are available to the trader if Energizer’s shares trade below the effective breakeven price of $74.60 through December expiration. Maximum potential profits of $4.60 per contract pad the investor’s wallet if ENR’s shares drop 5.1% from the current price of $73.78 to settle at $70.00 at expiration day. The trader is short twice as many put options at the lower strike price and therefore may lose money in the event that the battery maker’s shares plunge far more than expected in the next couple of months. Losses start to accumulate if shares in Energizer Holdings, Inc. fall 11.35% from the current price to trade below the lower breakeven point at $65.40 ahead of expiration in December. Options implied volatility on the stock is currently up 6.8% to stand at 31.98% as of 3:25 pm. Energizer is scheduled to report earnings for the fourth quarter ahead of the opening bell on November 2, 2010.

IYR - iShares Dow Jones U.S. Real Estate Index ETF – Shares of the IYR, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Dow Jones U.S. Real Estate Index – an Index that measures the performance of the real estate sector of the U.S. equity market, fell 1.6% this afternoon to $54.94. An options trader expecting the price of the underlying shares to continue to fall through December expiration initiated a large-volume put spread on the ETF today. The investor purchased 13,000 puts at the December $54 strike at a premium of $1.67 per contract, and sold the same number of puts at the lower December $50 strike for a premium of $0.63 each. Net premium paid to initiate the spread amounts to $1.04 per contract. The put player stands ready to make money if shares of the IYR fall another 3.60% to breach the effective breakeven price of $52.96 by expiration day. Maximum potential profits of $2.96 are available to the investor if shares plunge 9.00% lower to trade below $50.00 by December expiration. Shares of the fund last traded below $50.00 back on August 27, 2010.

ALTR - Altera Corp. – Sizeable bearish options transactions on the semiconductor company today indicate some investors are expecting the price of the underlying shares to decline in the next couple of months. The pessimistic plays on ALTR appear to be the work of contrarians given the more than 2.45% rally in the firm’s shares to a new 52-week high of $31.08 this afternoon. Options traders utilized two different bearish strategies on the stock. The first and nearer-term of the two bearish trades is a plain-vanilla debit put spread wherein the investor purchased 6,000 puts at the November $31 strike for a premium of $1.22 each, and sold the same number of puts at the lower November $30 strike for a premium of $0.70 apiece. The net cost of putting on the spread amounts to $0.52 per contract. Thus, the investor responsible for the transaction is prepared to make money if Altera’s shares reverse course to breach the effective breakeven price on the spread at $30.48 by November expiration. Maximum potential profits of $0.48 per contract are available to the trader should shares slip 3.475% lower to trade below $30.00 by expiration day. If the put spreader is long the stock, he may be using the trade to lock in gains enjoyed during ALTR’s recent rally. Next, a more pessimistic player looked to the December contract to employ a ratio put spread. The trader purchased 5,000 puts at the December $29 strike for an average premium of $0.775 per contract, and sold 10,000 puts at the December $26 strike at a premium of $0.20 each. The net cost of the transaction amounts to $0.375 per contract. Profits start to accumulate for this investor if ALTR shares fall 7.9% from today’s high of $31.08 to trade below the breakeven price of $28.625 by December expiration. The investor may walk away with profits of up to $2.625 per contract in the event that, at expiration, shares plunge 16.3% to settle at $26.00. Selling twice as many lower strike put options exposes the trader to losses if ALTR’s shares tumble 24.8% lower to trade beneath $23.375 by expiration day in the final month of 2010.

AVP - Avon Products, Inc. – The overall reading of options implied volatility on the beauty products manufacturer is up sharply today along with investor appetite for near-term call options. It seems uncertainty and bullish positioning in AVP options is building ahead of the firm’s third-quarter earnings announcement, slated for release ahead of the opening bell tomorrow morning. Shares of the global marketer of skin care and various other personal products increased as much as 6.2% this morning to secure an intraday high of $34.87. As of 12:15 pm AVP’s shares are up 1.45% to stand at $33.31, while options implied volatility is 25.9% higher on the day to arrive at 50.87%. Traders are heavily favoring call options on the stock, trading more than 10.5 calls on Avon Products for each single put contract in play thus far in the session. Bullish investors purchased approximately 1,000 calls at the November $34 strike for an average premium of $1.875 per contract, and picked up another 1,200 lots at the higher November $35 strike at an average premium of $1.38 apiece. Optimism spread to the November $36 strike where approximately 2,200 calls were coveted for an average premium of $1.02 apiece. Investors holding the November $36 strike calls make money if Avon’s shares rally 11.1% over the current price of $33.31 to trade above the average breakeven point at $37.02 by November expiration. Bulls also shelled out an average of $0.82 per contract to take ownership of some 2,400 calls at the November $38 strike. More than 28,200 option contracts have changed hands on Avon Products, Inc. as of 12:25 pm in New York trading.

JCP - J.C. Penney Co., Inc. – The department store operator popped up on our scanners this morning after one options strategist initiated a bearish transaction in the December contract. Shares in J.C. Penney are currently down 3.60% to stand at $31.59 as of 11:55 am in New York. The pessimistic player established a ratio put spread, buying 2,000 now in-the-money puts at the December $32 strike at a premium of $2.06 each, and selling 4,000 puts at the lower December $29 strike for a premium of $0.93 apiece. Net premium paid for the transaction amounts to $0.20 per contract. Thus, the investor starts to profit if JCP’s shares trade below the effective breakeven price of $31.80 by December expiration. Maximum potential profits of $2.80 per contract are available to the trader should shares plunge 8.2% from the current price of $31.59 to settle at $29.00 at expiration. The ratio of twice as many short put options exposes the investor to losses in the event that shares decline more sharply than expected. Losses start to accumulate for the trader if shares plummet 17.05% to trade beneath the lower breakeven price of $26.20 by expiration day in December. J.C. Penney is scheduled to report third-quarter earnings ahead of the opening bell on November 12, 2010.

TQNT - Triquint Semiconductor, Inc. – Shares of the provider of products and services to communications companies around the globe are up 3.65% at $10.18 as of 12:30 pm, but earlier shot up as much as 4.60% to touch a new 52-week high of $10.27. Triquint call options are a hot ticket item today ahead of the firm’s third-quarter earnings report, which is scheduled to hit the stands after the market is closed for the evening. Investors expecting the rally to continue post-earnings purchased at least 4,550 in-the-money calls at the November $10 strike for an average premium of $0.51 per contract. Call buyers make money if TQNT’s shares increase another 3.25% over the current price of $10.18 to surpass the average breakeven point to the upside at $10.51 by November expiration. More than 7,170 calls changed hands at the November $10 strike thus far today, which is more than twice the number of contracts represented in call open interest at that strike.

 


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