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Bearish Play In Avon Products Options Suggests Rally Short Lived

Today’s tickers: AVP, FSLR & GLD

AVP - Avon Products, Inc. – Investors cheered news that the beauty products seller will seek a replacement for its current CEO next year, sending shares in Avon Products up as much as 11.1% to $17.93 at the start of the trading session. The purchase of 10,000 calls at the July 2012 $20 strike on a 33 delta may at first glance appear to be the work of a bullish investor gearing up for shares in the cosmetics seller to extend gains. However, the long calls were tied to short stock, indicating the trader responsible is bearish on Avon and hoping to profit from a pullback in the price of the underlying. The investor sold 330,000 shares of AVP stock at $17.40 this morning and bought the calls, thereby synthetically buying long puts to benefit from share price erosion.

FSLR - First Solar, Inc. – Options activity suggests the end of this week may be even uglier for First Solar shareholders who saw the price of the stock tank today after the company again cut its earnings and revenue forecasts for 2011. Shares in the largest U.S. solar company are currently trading at their lowest since 2007, down 20.0% on the day at $33.98 as of 12:15 PM in New York. The stock has dropped more than 80.0% off the February 18, 2011, two-year high of $175.45. December expiry call and put trading on First Solar indicates investors are expecting the sell-off to continue through the end of the trading week and expiration. Bears purchased in- and out-of-the-money puts to prepare for further share price erosion in the next few days. Strategists positioning for the stock to sink to fresh lows picked up 1,600 puts at the Dec. $33 strike this morning for an average premium of $0.78 each. Buyers of the put options stand ready to profit at expiration day in the event that FSLR shares fall 5.2% to breach the average breakeven price of $32.22. Bearish sentiment spread to the lower Dec. $32 strike where some 600 put options were snapped up for an average premium of $0.57 a-pop. Meanwhile, some investors threw in the towel on an FSLR-rebound ahead of December expiration, selling 1,300 calls at the Dec. $34 strike to receive an average premium of $1.12 per contract. Call sellers looked to the Dec. $35 strike as well, taking in an average premium of $0.96 on the sale of some 2,000 call options. Investors selling the calls keep the full amount of premium as long as the contract expire worthless at the end of the week.

GLD - SPDR Gold Shares Trust – The sell-off in gold accelerated Wednesday, pushing shares in the GLD down as much as 4.0% to $152.05 and driving options implied volatility on the ETF up as much as 17.3% to 26.5%. Options volume on the GLD today is nearing 375,000 contracts in early-afternoon trade, with put trading outpacing that of calls. One sizable transaction in particular on the SPDR Gold Shares Trust caught our eye this morning. It looks like one strategist expecting shares in the GLD to remain range-bound through expiration next month sold a 13,400-lot straddle at the Jan. 2012 $157 strike to take in total premium of $9.65 per contract. The investor implementing the short straddle may keep the full amount of premium received on the trade if shares in the ETF settle at $157.00 at expiration day. The trader may keep some portion of the premium received, unless the price of the underlying swings outside of the effective breakeven points at $166.65 on the upside and $147.35 to the downside. The investor faces losses in the event that shares settle above $166.65 or below $147.35 at expiration next year.

 

Caitlin Duffy

Equity Options Analyst


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