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Regional Banking ETF Put Volume Pops During Afternoon Trading

 Today’s tickers: KRE, CPN, PRGO, FITB, DPS, SMH & M

KRE - SPDR KBW Regional Banking ETF – A large-volume debit put spread initiated on the SPDR KBW Regional Banking ETF this afternoon suggests one options investor is wary that the significant run up in the price of the underlying fund since the start of December could reverse course next year. Shares of the KRE, an exchange-traded fund that tracks the performance of the KBW Regional Banking Index, are up slightly by 0.10% to trade at $25.18 as of 3:30pm. The strategist responsible for the put spread may be building up downside protection, or alternatively, could be taking an outright bearish stance on the regional banking sector through March 2011. Shares in the fund rallied 14.25% during December so far to reach a 6-month high of $25.59 this past Wednesday. The put-spreader picked up 19,000 put options at the March 2011 $24 strike for a premium of $0.81 each, and sold the same number of puts at the lower March 2011 $20 strike at a premium of $0.16 apiece. Net premium paid to initiate the spread amounts to $0.65 per contract. Thus, the investor is prepared to make money, or realize downside protection, if shares of the KRE fall 7.3% from the current price of $25.18 to breach the effective breakeven point on the spread at $23.35 by March 2011 expiration. Maximum potential profits of $3.35 per contract are available to the put-spreader should shares of the underlying fund plummet 20.6% lower to trade below $20.00 by expiration day next year. The fund’s shares have not traded below $20.00 in more than a year.

CPN - Calpine Corp. – A large chunk of call options were picked up on Calpine Corp. late in session by a bullish strategist positioning for shares to rally substantially ahead of January 2011 expiration. Shares of the independent power generation company are up 2.6% this afternoon to stand at $13.22 in the final hour of the trading week. Calpine was recently rated new ‘buy’ with a 12-month target share price of $16.00 at Goldman Sachs. The options optimist looked to the January 2011 $14 strike to purchased 5,500 calls at a premium of $0.15 per contract. Profits start to amass for the call buyer if Calpine’s shares surge 7.00% over the current price of $13.22 to exceed the effective breakeven point to the upside at $14.15 by expiration day next month. Calpine Corp.’s overall reading of options implied volatility is higher by 6.0% to arrive at 22.98% as of 3:25pm in New York.

PRGO - Perrigo Company – The global healthcare supplier that manufactures and distributes over-the-counter and generic prescription pharmaceuticals and products appeared on our ‘hot by options volume’ market scanner today after one investor picked up a put spread in the January 2011 contract. Perrigo’s shares fell as much as 1.3% during the course of the trading day to touch down at an intraday low of $67.10. It looks like the bearish player purchased 1,500 puts at the January 2011 $65 strike for a premium of $1.35 each, and sold the same number of puts at the lower January 2011 $60 strike at a premium of $0.25 apiece. The net cost of the transaction amounts to $1.10 per contract, thus positioning the investor to make money if Perrigo’s shares slide 4.8% off today’s low of $67.10 to breach the effective breakeven price of $63.90 by expiration day next month. The options trader could walk away with maximum potential profits of $3.90 per contract should shares of the drug maker plunge 10.6% lower to trade under $60.00 by January expiration. Shares in Perrigo Company dipped below $60.00 as recently as November 30, 2011.

FITB - Fifth Third Bancorp. – Shares of the Cincinnati, OH-based bank holding company increased as much as 2.9% this morning to secure an intraday high of $14.32, but activity in call and put options set to expire in January 2011 suggests the rally may be short lived. It looks like one investor initiated a three-legged bearish spread, selling roughly 4,500 calls at the January 2011 $15 strike for a premium of $0.34 each, buying around the same number of January 2011 $14 strike put options at an average premium of $0.62 apiece, and selling some 4,500 puts at the lower January 2011 $12.5 strike for an average premium of $0.18 a-pop. Net premium paid to establish the spread amounts to $0.10 per contract. The transaction could be a protective play by an investor holding a long position in FITB shares, or may be the work of an outright bearish trader cheapening the cost of a directional play that pays off handsomely if shares nosedive by January expiration. In the latter scenario, the strategist starts to make money if Fifth Third’s shares decline 1.3% from the current share price of $14.08 to breach the effective breakeven point to the downside at $13.90. Maximum potential profits of $1.40 per contract are available to the investor should shares plunge 13.0% to trade below $12.50 ahead of January 2011 expiration. Fifth Third Bancorp.’s shares last traded under $12.50 on December 2, 2010. The short stance in January 2011 $15 strike calls may result in losses for the trader if the price of the underlying rallies above $15.00 ahead of expiration. Alternatively, if this transaction represents a hedge by an investor protecting a long position in FITB shares, the sale of the calls suggests he is willing to have the stock called from him at $15.00 each in the event that the stock rises sufficiently by expiration day next month.

DPS - Dr Pepper Snapple Group, Inc. – Bullish options traders thirsting for a rally in the price of the non-alcoholic beverage maker’s shares by expiration day in January picked up call options on the stock right out of the gate this morning. Shares in Dr Pepper Snapple Group are currently up 1.15% to stand at $37.53 just before 11:30am in New York. Investors have exchanged more than 4,795 call options at the January 2011 $40 strike thus far in the session, versus previously existing open interest of just 576 contracts at that strike. It looks like the majority of the calls traded at that strike today were purchased for an average premium of $0.34 apiece. Call buyers are prepared to make money should the Snapple manufacturer’s shares surge 7.5% over the current price of $37.53 to surpass the average breakeven point to the upside at $40.34 by expiration day. The sharp rise in demand for calls lifted the stock’s overall reading of options implied volatility 17.9% to 26.66% by 11:35am.

SMH - Semiconductor HOLDRS Trust – The Semiconductor HOLDRS Trust, an exchange-traded fund that invests in companies engaged in developing, manufacturing and marketing semiconductors, popped up on our scanners this morning after one option strategist purchased a sizeable put spread in the February 2011 contract. Shares of the SMH are currently up 0.50% on the day to arrive at $32.68 by 11:40am. The bearish player responsible for the spread picked up 5,700 puts at the February 2011 $30 strike for a premium of $0.50 each, and sold the same number of puts at the lower February 2011 $27 strike at a premium of $0.15 apiece. Net premium paid to initiate the pessimistic play amounts to $0.35 each. Thus, the investor stands ready to profit on the position should shares of the fund fall 9.3% from the current price of $32.68 to breach the effective breakeven point on the spread at $29.65 by February expiration. Maximum potential profits of $2.65 per contract pad the investor’s wallet in the event that SMH shares plummet 17.4% to trade below $27.00 by expiration day next year.

M - Macy’s, Inc. – Call options on the department store operator are on trend with traders positioning for a near-term rally in the price of the underlying shares. Macy’s shares are currently up 1.00% to trade at $25.99 as of 12:20pm in New York. Investors hoping to see shares extend gains before December contract options expire this evening purchased more than 1,800 calls at the December $26 strike for an average premium of $0.14 each. Call buyers at this strike may choose to take delivery of Macy’s shares if the contracts land in-the-money, but could just as easily kiss the $0.14 average premium paid for the calls goodbye if shares fail to rally above $26.00 by the time the options expire. Bulls with a longer time horizon targeted January 2011 contract calls. It looks like more than 1,100 calls were picked up at the January 2011 $26 strike at an average premium of $1.03 apiece, while some 1,600 calls were coveted at the higher January 2011 $27 strike for an average premium of $0.60 a-pop. Finally, some 1,000 call options were purchased up at the January 2011 $29 strike at an average premium of $0.18 each. Investors holding these contracts are prepared to profit should shares in Macy’s, Inc. jump 12.3% over the current price of $25.99 to first surpass the retailer’s current 52-week high of $26.33, and ultimately exceed the average breakeven point on the calls at $29.18 by expiration day in January.


Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst


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