RF – Regions Financial Corp. – Banking services firm, Regions Financial, jumped onto our ‘most active by options volume’ market scanner this afternoon after one investor exchanged 120,000 option contracts on the stock. The investor made bullish moves on RF despite the more than 3.5% decline in shares to $5.97. It appears the trader sold puts short 40,000 times at the May 6.0 strike for an average premium of 1.30 apiece, in order to finance the purchase of a bull call spread. The investor constructed the spread by buying 40,000 calls at the January 6.0 strike for one dollar each and simultaneously selling 40,000 calls at the higher January 10 strike for 12 pennies apiece. The trader receives a net credit of 42 cents per contract on the three-legged strategy. He retains the full credit of $1,680,000 as long as shares remain higher than $6.00 through expiration in May of 2010. However, additional profits are available if shares of Regions Financial rally by expiration in January. Maximum potential profits on the call spread amount to 4.0 per contract – or a total of $16,000,000 – if shares of RF surge 68% from the current price to $10.00 before the calls expire in January.
GNW – Genworth Financial, Inc. – The financial security company experienced a more than 5.5% decline in shares to arrive at the current price of $11.28. Bearish investors active on GNW today exchanged more than 3.5 put options to every single call option in play on the stock. One investor took a long-term pessimistic stance by initiating a ratio calendar spread. The transaction involved the purchase of 10,000 puts at the December 10 strike for an average premium of 1.22 per contract, spread against the sale of 15,000 puts at the lower January 2011 7.5 strike for 1.70 each. The investor takes a credit on the trade because he received richer option premium on the sale of a greater number of puts set to expire in January 2011. The placement of this trade suggests the investor is bracing for potential declines in GNW through expiration in December.
EEM – iShares MSCI Emerging Markets Index – Shares of the emerging markets exchange-traded fund have dipped 2.5% lower to $37.90, prompting one trader to establish a bearish risk reversal in the January contract. The trader targeted the January 38 strike to sell 12,000 just out-of-the-money calls for 2.65 each. The sale of the call options helped finance the purchase of 12,000 puts at the same strike for an average premium of 2.95 apiece. The reversal play results in a net cost of 30 cents per contract. We believe the investor likely expects further erosion in shares through expiration in January. Thus, he has exchanged calls for puts in an attempt to perhaps accumulate profits beneath the breakeven point at $37.70. The investor could be long the stock and seeking downside protection rather than profits if shares of the EEM slip beneath $37.70 over the next four months.
