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Daily Options Intelligence Report

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Option traders suggest further retail sector weakness

Thu, Nov 5 2009, 18:23 GMT
by Andrew Wilkinson

Interactive Brokers LLC

 XRT – SPDR S&P Retail ETF – Disappointing earnings from a number of retailers such as Aeropostale and American Eagle Outfitters, declining same-store sales at Whole Foods, and gloomy guidance at CVS Caremark Corp are just some of the factors weighing down the retail exchange-traded fund today. Shares of the XRT started the trading session higher but have since edged 1% lower to $33.97. Curiously, dismal data from the retail sector this morning is not curtailing overall market gains. Option trading by one investor on the fund suggests shares are likely to trend lower by expiration in December. The trader appears to have established a short strangle in combination with a long put position. The strangle portion of the strategy involved the sale of 5,000 calls at the December 35 strike for 92 cents apiece and the sale of 5,000 puts at the December 30 strike for 56 cents premium. The gross premium of 1.48 on the strangle more than offset the cost of purchasing 5,000 puts at the December 33 strike for 1.45 apiece. The investor pockets a 3 cent credit on the three-legged transaction, which he retains in full as long as shares of the XRT remain ‘strangled’ within the confines of the 30/35 strike prices through expiration. Additional profits accumulate if shares decline beneath $33.00. The trader will benefit from lower volatility as well as bearish movement in the price of the underlying shares through expiration in December.

CVS – CVS Caremark Corp. – Shares dipped 22% lower to $28.13 as the trading session approached midday (EDT). Option traders employed both bearish and bullish strategies in the November contract, while longer-term investors were decidedly bearish on the pharmacy chain. Investors who are not yet ready to throw in the towel on CVS took advantage of today’s significant share price declines by buying out-of-the-money call options. The November 29 strike had 4,600 calls picked up for an average premium of 95 cents each while the higher November 30 strike attracted buying of 10,000 calls for a 68 cents premium. Other traders initiated bullish positions by selling 3,600 puts short at the November 26 strike for 38 cents each. Put-sellers pocket and retain the premium if shares remain above $26.00 through expiration. The short sale of put options at that strike implies traders are happy to have shares put to them at an effective price of $25.62 should the contracts land in-the-money. Bearish traders purchased 1,800 in-the-money puts at the November 29 strike for 1.50 apiece. Another 7,600 put options were scooped up at the lower November 27.5 strike for 76 cents each. Long-term uber-bearish traders bought 5,100 puts at the January 22.5 strike for 34 cents apiece. Finally, the May 2010 25 strike had nearly 3,000 puts picked up for an average of 1.60 per contract. Investors exchanged more than 133,950 contracts – a whopping 40% of existing open interest on the stock of 334,788 lots – before noon-time (EDT).

STT – State Street Corp. – Bullish options activity in the December contract on the financial holding company suggests one investor expects shares to improve significantly by expiration next month. State Street’s shares rallied about 1% today to $41.01. Optimism on STT took the form of a plain-vanilla call spread. The transaction involved the purchase of 10,000 calls at the December 46 strike for 98 cents each, spread against the sale of the same number of calls at the higher December 50 strike for 28 cents apiece. The net cost of the bullish play amounts to 70 cents per contract and yields maximum potential profits of 3.30 if the stock jumps to $50.00 by expiration. Shares must rise at least 14% from the current price in order for the investor to breakeven at $46.70. A rally of 22% ensures the trader banks maximum profits of 3.30 per contract for a total of $3.3 million. We note that shares of STT were trading above $55.00 just a few weeks ago on October 12, 2009.

PFE – Pfizer, Inc. – Global pharmaceutical company, Pfizer, attracted bullish players to the June 2010 contract. Shares rose slightly earlier on in the trading session but are currently trading 0.5% lower to stand at $16.87 by midday. Investors expecting shares to improve by expiration in June initiated plain-vanilla call buying tactics. Traders scooped up approximately 10,500 calls at the June 20 strike for an average premium of 56 cents apiece. Call-buyers will accrue profits by expiration if shares of PFE rally 22% to breach the breakeven point at $20.56. Pfizer’s shares last traded above $20.00 back on May 19, 2008.

Published on  Thu, Nov 5 2009, 18:29 GMT