IYR – iShares Dow Jones U.S. Real Estate Index ETF – The real estate exchange-traded fund has edged 2.5% lower today to $42.44. Bearish plays in the November contract consisted of a 1,000 contract risk reversal wherein 1,000 calls were sold for 1.80 each at the November 45 strike in order to finance the purchase of 1,000 in-the-money puts at the same strike for 4.60 apiece. The net cost of the reversal amounts to 2.80 and yields profits to the downside beneath the breakeven price of $42.20. Further along, in the December contract, it appears one investor established a sold strangle in the expectation of lower volatility by expiration. The transaction involved the sale of 10,000 puts at the December 35 strike for 1.15 each, as well as the sale of 10,000 calls at the higher December 47 strike for 1.60 per contract. The gross premium enjoyed on the strangle amounts to 2.75. The investor retains the full premium received as long as shares of the IYR remain ‘strangled’ within the confines of the strike prices described through expiration. The short option positions leave the trader vulnerable to losses in the event that shares swing outside the breakeven point to the upside at $49.75, or beneath the breakeven price to the downside at $32.25.
M – Macy’s, Inc. – Put activity on the second-largest department store chain drove Macy’s ticker symbol onto our ‘most active by option volume’ market scanner this morning amid a more than 2% decline in shares to $18.02. Earlier this week the stock rallied to its highest price in a year after Citigroup analysts raised the shares to ‘buy’ from ‘hold’ on expectation for revenue growth in 2010. One investor appears near-term bearish on the stock given the protective put positioning he has employed today. The trader partially financed the purchase of 5,000 puts at the nearly in-the-money October 18 strike for 82 cents premium apiece, by selling short 5,000 puts at the lower November 16 strike for 70 cents each. The net cost of the transaction amounts to 12 cents per contract. The investor is likely long shares of the underlying stock. Thus, the put positions initiated today provide downside protection in the event that shares slip beneath the breakeven point to the downside at $17.88 by expiration in October. The short put position in the November contract will not be problematic for the trader unless shares take a big hit. By maintaining the short position, the investor bears the risk of having shares of the underlying put to him at $16.00 if the stock slips 11% lower to breach the $16.00-level by expiration in November.
VALE – Vale SA – Shares of the world’s largest iron ore miner fell nearly 3% during the trading session to $22.39, despite the fact that Goldman Sachs raised its 2010 profit estimates for the firm today. Nearer-term bearish bets by option traders were evident in the November contract through meager sales of calls and paltry put purchases. Approximately 1,700 puts were picked up for 57 cents each at the November 20 strike, while 1,400 calls were shed at the higher November 24 strike for 96 cents apiece. But, the real action occurred in the December contract where one bullish investor made his mark. Expecting shares to rebound by expiration at the end of 2009, the trader purchased 4,000 calls at the December 24 strike for a premium of 1.21 each, and simultaneously shed 12,000 calls at the higher December 27 strike for 43 cents per contract. The ratio call spread results in a net credit of 8 pennies. Additional profits are available in the event that shares of VALE rally 7% from the current price to breach the breakeven point at $24.00 by expiration. Maximum potential profits of 3.08 per contract will be realized if shares surge about 21% higher to $27.00.
FCX – Freeport-McMoran Copper & Gold, Inc. – The more than 3.5% decline in shares of the metals and mining company to $68.50 today did not deter the long-term bullish stance taken by one investor observed populating the May contract. The investor appears to have established a risk reversal by shedding 2,000 puts for 9.30 each at the May 65 strike to purchase 2,000 calls at the May 75 strike for 8.80 apiece. The transaction results in a net credit of 50 cents per contract for the trader, which he will retain in full as long as shares of FCX remain higher than $65.00 through expiration. Additional profits will begin to accumulate if the stock increases 9% from the current price to $75.00 over the next eight months. FCX has traded beneath $75.00 since September 4, 2008, but shares came within 1.57 of the $75-level when the stock reached its current 52-week high of $73.43 just 2 days ago on September 22, 2009.
ABX – Barrick Gold Corp. – Bullish traders purchased call options in the November contract on ABX today, perhaps after the firm’s target price was raised to $50 from $49 at Scotia Capital, and increased to $52 from $47 at RBC Capital Markets. Shares are currently off approximately .5% to $36.31. It appears some 5,000 calls were scooped up at the November 37 strike for an average premium of 2.70 per contract. Investors coveting these options are hoping shares of ABX rally at least 9% from the current price to the breakeven point at $39.70 by expiration in November. We note that shares of Barrick Gold breached $40.00 this month on September 4, 2009.
C – Citigroup – Trading in Citi options was once again heavy and characterized by greater bullish wagers as opposed to bearish ones. Its shares are down a little at $4.50. In the January contract one trader placed an intriguing trade. Some 10,000 puts appear to have been bought at the 4.0 strike at 42 cents, while the 6.0 calls appear to be sold at 25 cents today. This could be a trader getting long Citi shares and buying downside protection at the same time – don’t forget, they’d only reach the strike price by rallying 33%. Yet he could be simply bearish and looking for calls to decay and puts to appreciate on any fresh decline in the underlying. Option implied volatility continues to run at 294%.
