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Daily Options Intelligence Report

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Energy sector option player predicts slippage with butterfly combo

Fri, Nov 20 2009, 18:14 GMT
by Andrew Wilkinson

Interactive Brokers LLC

XLE – Energy Select Sector SPDR – The exchange-traded fund, which mirrors the performance of the Energy Select Sector of the S&P 500 Index, popped up on our ‘most active by options volume’ market scanner after a butterfly spread unfurled its wings in the December contract. Shares of the XLE are off 1.5% to stand at the current price of $56.30. The spread indicates one bearish investor expects shares of the fund to gravitate lower by expiration next month. The trader established the pessimistic play by purchasing 5,300 in-the-money puts at the December 57 strike for a premium of 2.47 apiece [wing 1] and by picked up another 5,300 puts at the lower December 51 strike for 66 cents premium each [wing 2]. Finally, the trader sold 10,600 puts at the central December 54 strike for a premium of 1.27 apiece [body].The net cost of the transaction amounts to 59 cents per contract and yields maximum potential profits of 2.41 each if shares settle at $54.00 by expiration. Profits begin to amass if shares slip beneath the breakeven point at $56.41.

MU – Micron Technology, Inc. – Options activity on the manufacturer of semiconductor devices suggests shares may recover slightly by expiration in December. Micron’s share price suffered significant declines throughout the latter portion of the trading week, and continued lower today by 1.25% to $7.03. Bank of America’s downgrade of the sector was largely responsible for a more than 4% slide on Thursday. A ratio bullish risk reversal by one investor offers a glimmer of optimism on the stock. It appears the trader sold 10,000 puts at the December 7.0 strike for 45 cents premium in order to offset the cost of buying 20,000 calls at the higher December 8.0 strike for 15 pennies apiece. The investor pockets a net credit of 15 cents per contract, which he retains in full as long as shares remain higher than $7.00 through expiration. Additional profits are available in the event that the stock rallies 14% from the current price to surpass the breakeven point at $8.00.

ADCT – ADC Telecommunications Inc. – Shares of the telecommunications equipment manufacturer fell 15% this morning to $5.66 and was downgraded to ‘accumulate’ from ‘buy’ at Craig Hallum. ADCT’s shares slipped after the firm forecast first-quarter revenue of $250-$275 million and stated client spending is likely to decline. Despite the gloomy reports, option traders initiated bullish stances on the stock. It appears some 3,100 in-the-money calls were purchased for an average premium of 90 cents apiece at the December 5.0 strike. Shares of ADCT must increase above the breakeven point at $5.90 by expiration in order for call-buyers to accrue profits on the trade. 

KBH – KB Home – Perhaps a little nervous about how the remainder of the trading session might unfold, one option trader banked profits today by closing out a previously established short put position on the homebuilding company. Shares of KB Home are currently down 3.5% to $14.10. The investor originally sold 15,200 puts short at the November 14 strike for a premium of 50 cents per contract back on October 9, 2009. Today the trader reeled in net profits of 35 cents apiece – for total gains of $532,000 – by buying back the puts for just 15 cents. Next, it appears like the same trader employed a similar strategy in the December contract. Approximately 14,000 puts were sold short today at the December 14 strike for an average premium of 90 cents apiece. The investor keeps the full premium if shares remain above $14.00 through expiration next month. The trader may also decide to close out the short position ahead of expiration as was the case with the November contract transaction. The December contract breakeven stands at $13.90 on account of today’s premium of 90 cents. Below that point the investor will bear rising losses should shares fall further

Published on  Fri, Nov 20 2009, 18:14 GMT