Today’s tickers: GE, LDK, FXI, WFC, XLF & CAT
GE – General Electric – Shares are up today after holding above a $10.66 historic low for GE yesterday. As we look across the option market time horizon we note an interesting spread trade involving puts at the 5.0 strike. The January 2010 puts were sold 13,000 times at an 80 cent premium while the January 2011 puts were bought in exchange at a 1.21 premium. The investor is doing two things. First, he’s selling 98% implied volatility and buying 80% volatility, which essentially helps lower the cost of long-run protection against the potential weakness in the underlying stock. Second, he’s possibly taking CEO Immelt at his word when he promised no dividend cut for 2009, but he’s possibly looking for that prize to be taken away thereafter. The prospect that shares in GE will remain beneath $5.00 two years from now is a pretty bearish view when taken to expiration.
LDK – LDK Solar Co., Ltd – Shares of the manufacturer of multicrystalline solar wafers have fallen over 6% to $9.08, as other players in the solar energy industry, such as Suntech Power Holdings Co., Ltd (STP), have also taken hits today. The solar wafers produced by LDK are used to create solar cells which facilitate the conversion of sunlight to electricity, but the company was highlighted today by our ‘hot by options volume’ market scanner. One investor initiated an interesting ratio put spread which expires in January of 2010. At the January 5.0 strike price, 10,500 puts were purchased for 1.55 each, while at the January 10 strike, 7,000 puts were sold for a premium of 4.30 apiece. Looking at this trade from purely an options viewpoint, it appears that this trader is taking far-term bullish stance and hoping shares will remain above $10 by January. If shares do remain above $10, then this trade will yield the full net premium pocketed today of 2.75. But, most people cannot see into the future and this trader wisely protected himself against a collapse in share price by being long of a larger amount of the 5.0 puts. Crudely speaking given the ratio nature of this play we make it that the investor faces a window of losses beneath $5.70 and above $3.45.
FXI – iShares FTSE/Xinhua China 25 – Shares of FXI are trading 2.5% higher today to $25.53, and an interesting straddle was played out in the January 2010 contract. At the January 25 strike price, one trader purchased 5,200 calls for 5.00 apiece and 5,200 puts for 5.40 per contract. Thus, the total cost of the trade was 10.40, yielding breakeven points around the January 25 strike (and today’s share price) at $14.60 and $35.40, respectively. By looks of it, this position indicates a large movement in the current share price over the remainder of this year. In order to benefit from the straddle the share price will need to swing upward by nearly 38% in order to profit, or downward by about 42% to make this trade worthwhile.
WFC – Wells Fargo – Several large option trades have shown up on our market scanners today involving more bearish plays on Wells Fargo whose shares traded beneath a $13.40 52-week low earlier. With shares at $13.38 and lower by 2.2% today there is something of a cautious tone and a high put/call ratio indicating more than four puts being traded than call options. In the March contract investors paid 1.10 for rights to sell Wells Fargo shares should its price tag slide by another 30%, while at the in-the-money 15.0 strike some 60,000 puts were bought at 4.00 each. Deeper in-the-money puts were also purchased today at the 18.0 and 20.0 strikes. At the April contract at the 12.5 strike two large 22,500 trades went through in which puts were bought at 3.20 and traded to a mid-market price of 3.10 implying a break even of $9.40 to a bear. Option implied volatility is fast approaching November panic levels and today reads 167%. We see no reason for an acceleration in shares to the downside, but note yesterday’s unsubstantiated market chatter that the company faces fresh writedowns after the Wachovia takeover.
XLF – Financial Select Sector SPDR – Shares of the banking index have risen 0.75% today to $8.03, and our ‘most active by option volume’ market scanner picked up on some medium-term bullish trades in the June contract of the exchange traded fund that tracks the major banks. Investors took a more optimistic view on the XLF as over 7,300 calls were purchased at the June 12 strike price for 33 cents apiece. Even more bullish was the purchase of 5,000 calls at the June 14 strike at a cost of 13 cents per contract. Perhaps amid all the doom-and-gloom currently surrounding financials, some traders are beginning to see glimmers of light at the end of the tunnel as spring gives way to summer 4 months from now. Option implied volatility at 94% is little changed on Tuesday’s reading.
CAT – Caterpillar Inc. – Shares of the machinery company are off by less than 1% today to $28.77, just 25 cents off the 52-week low of $28.52. One eye-catching trade occurred in May, where one investor appears to have initiated a ratio put spread by selling 10,000 puts at the May 17.5 strike for 43 cents apiece, and purchasing 5,000 puts at the May 25 strike price at a cost of 2.14 per contract. Thus, the net cost to the trader amounts to 1.71. It seems that he is looking for further fallout on CAT shares to as far as the $17.50 (the lower strike), where maximum profits of 5.79 – the distance between the two strikes minus the net cost of the trade – would be realized. In order for the trade to make the investor money, shares would need to decline by 18.3% to $23.29, at which point profits begin to amass. Since the investor is net short of one put option should Caterpillar shares decline beneath $17.50 the profits start to erode and would be eaten away by the time the share price fell to $11.71.
