WFC - Wells Fargo & Co. – Shares of the financial holding company surrendered 1.5% today to stand at $27.88. One investor initiated a sold straddle on WFC in the April 2010 contract. The trader sold 10,000 calls at the April 32 strike for 1.59 apiece in conjunction with the sale of 10,000 now in-the-money puts at the same strike for 5.81 each. The gross premium on the transaction amounts to 7.40 per contract. The investor will retain the full premium if shares settle at $32.00 by expiration. The premium received acts as a buffer against losses in the event that shares swing in either direction away from the $32.00-level. However, the trader will accumulate losses if shares breach the upper breakeven price of $39.40, or if shares decline beneath the lower breakeven point at $24.60, by expiration in April.
IYT - iShares Dow Jones Transportation Average Index ETF – The exchange-traded fund, which measures the performance of the transportation sector of the U.S. equity market, appeared on our ‘hot by options volume’ market scanner this afternoon after one investor initiated a bearish put play. Shares of the fund moved 0.5% lower to $70.53 during the session. The trader established a put spread by purchasing 5,000 puts at the December 70 strike for 1.80 each, and by selling the same number of puts at the lower December 65 strike for 40 cents apiece. The net cost of the trade amounts to 1.40 per contract and provides downside protection beneath the breakeven price of $68.60 down to $65.00 through December’s expiration.
RYL - The Ryland Group, Inc. – Shares of homebuilder and mortgage-finance company, Ryland Group, declined nearly 4% this afternoon to stand at $18.86. Investors exchanging options on the stock today spread pessimistic sentiment through to expiration December. Traders sold 10,000 calls at the December 19 strike for an average premium of 1.10 apiece. The full 1.10 premium pocketed by investors is retained in full as long as shares of RYL remain below $19.00 through expiration day. Call-sellers do not seem to expect that shares of Ryland will recover before the start of 2010.
YHOO - Yahoo!, Inc. – We observed two different option strategies in play on Yahoo this afternoon. A large-volume sold strangle in the January 2011 contract suggests shares are likely to remain stagnant through expiration. The transaction involved the sale of 20,000 puts at the January 12.5 strike for 1.10 each, and the sale of 20,000 calls at the higher January 17.5 strike for 1.65 apiece. The investor responsible for ‘strangling’ Yahoo retains the gross premium of 2.75 per contract if shares stay within the confines of the two strike prices described through expiration. Perhaps the trade was inspired by Goldman Sachs’ earlier recommendation of selling “covered strangles” in the January 2011 contract. Approximately 30 minutes before the strangle took place, a large credit spread was initiated in the same January 2011 contract. It looks like 24,000 calls were sold at the January 20 strike for 97 cents, spread against the purchase of the same number of calls at the higher January 30 strike for 10 cents each. The trader pockets a net credit of 87 cents on the spread, which is safe in the bank as long as shares of YHOO remain beneath $20.00. The investor responsible for the trade is exposed to large losses should Yahoo’s shares double by expiration. The 87 cent reward on the trade pales in comparison to the massive loss potential of 9.13 per contract that the investor faces if the stock jumps to $30.00 by expiration.
DELL - Dell, Inc. – The just-in-time manufacturer of personal computers revealed weaker-than-expected third-quarter earnings of 23 cents per share after the closing bell on Thursday. Shares plummeted more than 9% this morning to $14.41 – the lowest level experienced during the month of November. Investors traded more than 83,000 contracts on the stock by 10:20 am (EDT). Dell’s option implied volatility retreated 12.5% after earnings to stand at 35%.
NE - Noble Corp. – The offshore drilling contractor’s shares slipped 5.5% lower to $39.34 as of 10:25 am (EDT). Option traders initiated fresh put positions in the November contract even though the options expire today. Investors exchanged more than 1.5 put options for each call option in play on the stock. The demand for puts on Noble boosted option implied volatility up 8.5% to an intraday high of 43.98%. Approximately 11,800 option contracts were traded on NE in the first hour of the trading day.
GPS - The Gap, Inc. – Shares of the clothing retailer are up nearly 0.5% this morning to $21.93 after the firm posted better-than-expected third-quarter profits of 44 cents per share. Option trades exchanged more than 8,200 option contracts on the stock within the first 40 minutes of the trading session. Option implied volatility contracted 14.26% to $36.26% following the earnings report.
