The IB Options and Futures Intelligence Report

As of: Friday November 20, 2009 3:15 pm EST

Investor plants WFC short straddle - set to bloom in April 2010

Today’s tickers: WFC, IYT, RYL, YHOO, XLE, MU, ADCT, KBH, DELL, NE & GPS

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.

XLE - Energy Select Sector SPDR – The exchange-traded fund, which mirrors the performance of the Energy Select Sector of the S&P 500 Index, popped up on our ‘most active by options volume’ market scanner after a butterfly spread unfurled its wings in the December contract. Shares of the XLE are off 1.5% to stand at the current price of $56.30. The spread indicates one bearish investor expects shares of the fund to gravitate lower by expiration next month. The trader established the pessimistic play by purchasing 5,300 in-the-money puts at the December 57 strike for a premium of 2.47 apiece [wing 1] and by picked up another 5,300 puts at the lower December 51 strike for 66 cents premium each [wing 2]. Finally, the trader sold 10,600 puts at the central December 54 strike for a premium of 1.27 apiece [body].The net cost of the transaction amounts to 59 cents per contract and yields maximum potential profits of 2.41 each if shares settle at $54.00 by expiration. Profits begin to amass if shares slip beneath the breakeven point at $56.41.

MU - Micron Technology, Inc. – Options activity on the manufacturer of semiconductor devices suggests shares may recover slightly by expiration in December. Micron’s share price suffered significant declines throughout the latter portion of the trading week, and continued lower today by 1.25% to $7.03. Bank of America’s downgrade of the sector was largely responsible for a more than 4% slide on Thursday. A ratio bullish risk reversal by one investor offers a glimmer of optimism on the stock. It appears the trader sold 10,000 puts at the December 7.0 strike for 45 cents premium in order to offset the cost of buying 20,000 calls at the higher December 8.0 strike for 15 pennies apiece. The investor pockets a net credit of 15 cents per contract, which he retains in full as long as shares remain higher than $7.00 through expiration. Additional profits are available in the event that the stock rallies 14% from the current price to surpass the breakeven point at $8.00.

ADCT - ADC Telecommunications Inc. – Shares of the telecommunications equipment manufacturer fell 15% this morning to $5.66 and was downgraded to ‘accumulate’ from ‘buy’ at Craig Hallum. ADCT’s shares slipped after the firm forecast first-quarter revenue of $250-$275 million and stated client spending is likely to decline. Despite the gloomy reports, option traders initiated bullish stances on the stock. It appears some 3,100 in-the-money calls were purchased for an average premium of 90 cents apiece at the December 5.0 strike. Shares of ADCT must increase above the breakeven point at $5.90 by expiration in order for call-buyers to accrue profits on the trade.

KBH - KB Home – Perhaps a little nervous about how the remainder of the trading session might unfold, one option trader banked profits today by closing out a previously established short put position on the homebuilding company. Shares of KB Home are currently down 3.5% to $14.10. The investor originally sold 15,200 puts short at the November 14 strike for a premium of 50 cents per contract back on October 9, 2009. Today the trader reeled in net profits of 35 cents apiece – for total gains of $532,000 – by buying back the puts for just 15 cents. Next, it appears like the same trader employed a similar strategy in the December contract. Approximately 14,000 puts were sold short today at the December 14 strike for an average premium of 90 cents apiece. The investor keeps the full premium if shares remain above $14.00 through expiration next month. The trader may also decide to close out the short position ahead of expiration as was the case with the November contract transaction. The December contract breakeven stands at $13.90 on account of today’s premium of 90 cents. Below that point the investor will bear rising losses should shares fall further.

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.