CBST – Cubist Pharmaceuticals, Inc. – The biopharmaceutical company edged onto our ‘hot by options volume’ market scanner this afternoon amid bullish call buying activity. Shares of CBST have surged 10% higher to stand at the current price of $21.91. Near-term optimists hoping for continued gains picked up more than 4,700 calls at the August 22.5 strike price for an average premium of 42 cents per contract. Investors long the calls will begin to accumulate profits in the event that shares rise another 5% to surpass the breakeven point at $22.92 by expiration. Investors exchanged 16,125 lots on the stock today which represents 91.5% of the existing open interest on the stock of 17,594 option contracts.

EFA – iShares MSCI EAFE Index ETF – The implementation of a bearish put spread on the EFA this afternoon indicates that some see the price of the underlying shares slipping lower by expiration in January 2010. The exchange-traded fund is currently off slightly by less than 0.5% to $51.32. The spread involved the purchase of 7,500 puts at the January 50 strike price for 3.50 each against the sale of 7,500 puts at the lower January 43 strike for 1.40 apiece. The net cost of the transaction amounts to 2.10 per contract and yields maximum potential profits of 4.90 if the stock declines to $43.00 by expiration.

IYR – iShares Dow Jones U.S. Real Estate Index ETF – Shares of the real estate exchange-traded fund have rallied more than 2.5% to $39.40 during today’s trading session. Despite the intraday gains, option traders initiated bearish plays on the fund. One investor anticipating significant declines in the fund established a long butterfly spread set to expire in September. The butterfly was constructed through the sale of 20,000 puts [the body] at the central September 34 strike price for 65 cents apiece. The body was then flanked by the purchase of two wings. The higher September 36 strike price had 10,000 puts picked up for 1.15 per contract and the lower September 32 strike had another 10,000 puts bought for 40 cents each. The net cost of the spread amounts to just 25 cents per contract and yields maximum potential profits of 1.75 if the stock declines to $34.00 by expiration. Profits will begin to accrue for the investor if shares fall 9% to breach the upper breakeven point at $35.75. If shares continue to decline down to $34.00, maximum gains will be pocketed by the trader. But, the investor will have completely eroded all profits if the stock plummets through the lower breakeven point at $32.25 by expiration. By utilizing the butterfly strategy, the investor has limited his losses to a maximum of 25 cents, or the price paid to put on the trade. Bearish sentiment spread to the December contract where another trader hopes to profit from downward movement in the stock. This individual enacted a ratio put spread by purchasing 5,000 puts at the December 38 strike price for 3.72 each, spread against the sale of 10,000 puts at the lower December 33 strike for 1.80 per contract. The net cost of the transaction amounts to just 12 cents and yields maximum potential profits to the investor of 4.88 if the IYR falls to $33.00 by expiration at the conclusion of 2009.