Retail ETF Sees Large Protective Ratio Put Play

By option_review

June 1, 2009

417

Today’s tickers: XRT, CSX, POT, MON, LO & DRYS

XRT– Shares of the retail ETF have lifted higher by more than 6% to $29.19 today despite the decline in U.S. consumer spending for the second month in a row. Spending continues to suffer in the face of rising unemployment and increased efforts to save by consumers still raw from the record wealth destruction experienced in the recession. We observed one investor populate the XRT with a ratio put spread likely employed to lock into gains enjoyed on the recent rally and to establish protection from potential downward movement in shares through September’s expiration. The ratio spread involved the purchase of 25,000 puts at the September 25 strike price for a premium of 1.17 apiece which were spread against the sale of 50,000 puts at the lower September 20 strike for about 35 cents per contract. The net cost of the transaction amounts to 82 cents and yields maximum potential profits of 4.18 if shares were to edge down to $20.00 by expiration. – SPDR Retail ETF

CSX– The rail-based transportation supplier has experienced a share price rally of more than 6.5% to $33.94 in today’s trading session, attracting a plethora of option traders to the station. Near-term investors locked into recent gains by getting long of put options some 3,000 times at the June 33 strike price for 1.19 each. The higher and now in-the-money June 34 strike price saw 1,200 puts bought for 1.51 apiece. Bullish options sentiment spread to the July 35 strike price where 3,900 calls were scooped up for an average premium of 2.10 each. Call buyers at the July 35 strike are looking for shares of CSX to climb another 9% through the breakeven point at $37.10 in order to garner profits by expiration. Optimism for continued bullish movement in the stock spread to the November contract where it appears one trader has enacted a butterfly spread. The purchase of 6,000 calls at the November 40 strike price for 2.10 apiece [body] was offset by the sale of 3,000 calls at the November 35 strike for 3.80 each [wing 1] and by the sale of 3,000 calls at the higher November 45 strike price for 1.00 per contract [wing 2]. The trader receives a 60 cent credit for the transaction (1*3.80 + 1*1.00 – 2*2.10 = 0.60 cents). The investor would retain the net premium so long as the share price at CSX rallies no more than 4.9% to the lower breakeven point at $35.60. The worst case scenario occurs at the central strike where the investor faces a 4.40 loss per contract. Losses disappear beyond $44.60 – the upper breakeven. – CSX Corporation

POT– With stock indices raging ever-higher, our trading screens are largely showing call buying supportive of the rally today. However, one of the contenders for heavy option volume is Canada’s potash and fertilizer producer, but the option volume is on the other side of the tape. While its shares are nearly 4% higher at $120.43 the heavy option volume is found in the July puts at the 85 strike where an investor has sold around 22,250 lots today at a 90 cent per contract premium. Essentially this investor is equally as bullish as the rest of the market, but is happy to confirm the upwards trajectory for this commodity-sensitive manufacturer by writing premium. The investor stands to keep the approximate $2 million in premium by selling puts, but his obligation is to have shares put to him in the event that Potash’s share price slips beneath the strike before options expire on July 17. A good deal? Hard to say, but we do know that shares left that strike price behind on April 29 and haven’t looked back since. Today, shares are at precisely half of the company’s 52-week high, which has allowed implied volatility to seep into the ground by around one-third since April. – Potash Corp. of Saskatchewan

MON– Shares in seed-producer, Monsanto are higher – but only just 0.5% at $82.61. Just over a week ago they were trading through $92.50 on prospects for rising commodity prices. However, the company last week noted that tougher competition in the herbicide business would push results to the weaker end of street expectations. That revision created a loss of confidence and must have seen investors ditch their stake with shares losing more than 16% off the recent peak. Over the weekend Barron’s reports that the selling was overdone and that shares offer value citing one bullish analyst who feels that $115 is a good target even including management’s sober take. But option investors were in no mood for a rally today, with the most active contract found at the July 80 line where 12,250 lots changed hands at an average price of 3.60. Clearly some investors still feel cautious about the prospects for Monsanto and seek protection below a breakeven price of $76.40. Option implied volatility rose around 14% in light of today’s heavier protective demand. – Monsanto Co.

LO– The manufacturer of cigarettes appeared on our ‘most active by options volume’ market scanner early in the trading day after one investor was seen getting bullish on the stock. Shares of the firm have lifted slightly by less than 1% to $68.58. The trader received a net credit for rolling a long call position forward to a higher strike price in the December contract. The sale of 10,000 calls at the September 75 strike price for 2.40 apiece was utilized to fund the purchase of 10,000 calls at the December 80 strike for 2.20 each. Thus, the investor has pocketed 20 cents and positioned himself for significant bullish movement in the stock over the next seven months. The December calls will land in-the-money by expiration if shares rally higher by approximately 17% from the current price. – Lorillard, Inc.

DRYS– The dry-bulk haulage company, along with a number of other dry-bulk ship owners, has benefited from a rise in transport rates for the month of May, which were lifted by rising demand for China-bound commodities. Shares of DRYS were rallying higher this morning but have since tapered off to a loss of about 3% to $7.96. Looking past the near-term contracts to September’s expiration, one option trader is evidently hoping for a significant recovery as he initiated a bull call spread on the stock. The purchase of 10,000 calls at the September 10 strike for 1.45 each was spread against the sale of 10,000 calls at the higher September 15 strike for an average premium of 50 cents per contract. The net cost of the bullish position amounts to 95 cents and yields maximum potential profits to the trader of 4.05 if shares can climb up to $15.00 by expiration. The stock would need to rise approximately 38% to the breakeven point at $10.95 before the trader begins to amass profits on today’s trade. – DryShips, Inc.

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