China Fund Sees Brisk Two-Way Action

June 17, 2009

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Today’s tickers: FXI, KRE, WFC, FDX, JWN, HUM, ALL & MSFT

FXI– The Chinese ETF is higher by less than 1% to stand at $37.35, but we noticed a number of investors getting long of protective put options in the July contract. It appears that approximately 50,000 puts were purchased at the July 34 strike price for an average premium of 1.25 per contract. Due to the large size of the trade, it is likely that the investor was either already long shares of the underlying or perhaps bought shares of the stock today. The puts provide downside protection beginning at any share price below the breakeven point at $32.75. Additional put buying was observed at the nearly at-the-money July 37 strike price where about 5,000 puts were picked up for 2.53 each. Later this afternoon a large straddle has been sold at the July 38 series involving 15,000 calls and puts on each side for a combined premium of 4.35. The investor doesn’t want shares to stray above a share price of $42.35 or fall beneath $33.65 ahead of expiration. – iShares FTSE/Xinhua China 25 Index Fund

KRE– The regional banking fund has declined less than 1% to $18.97. The KRE ticker symbol leapt onto our ‘most active by options volume’ market scanner after a burst of activity in the July contract. One investor took profits today by selling to close a long put position. He originally purchased 30,000 puts at the July 22.5 strike price for 3.30 apiece back on June 2, 2009. Today He sold all 30,000 lots for 4.10 per contract. The profit on the trade amounts to 80 cents or $2,400,000. Hoping to see similar gains in the future, the same individual appears to have enacted a repeat performance by purchasing another 30,000 puts at the lower July 20 strike price for an average premium of 2.15 each. The trader will once again pocket profits if he can manage to sell to close at a price higher than the premium paid today. – SPDR KBW Regional Banking ETF

WFC– Shares of the large TARP-recipient bank have slipped more than 3% today to $23.67 amid Standard & Poor’s revision of WFC’s counterparty credit rating down to AA-/A-1+. The outlook from S&P Ratings Services is reportedly negative and options activity on the stock today suggests some investors expect continued bearish movement on the stock through expiration in July. A massive put spread was initiated by an investor looking to profit to the downside. The transaction involved the purchase of 45,000 puts at the July 24 strike price for an average premium of 2.40 each spread against the sale of 45,000 puts at the lower July 19 strike for about 55 cents apiece. The net cost of the debit spread amounts to 1.85 to the trader who stands to acquire maximum potential profits of 3.15 per contract or a whopping $14,175,000 if shares decline to $19.00 by expiration. Perhaps investors are wary of share price erosion for WFC because, at present, the list of banks approved to repay TARP-loans excludes the firm. – Wells Fargo & Co.

FDX– The second-largest U.S. package-shipping company has forecast that first-quarter profits are likely to under whelm investors and analysts alike, sending its shares lower by approximately 2.5% to $50.08. The firm continues to wrestle with the “most difficult economic conditions” in its history as businesses continue to pare down spending. The demand for air shipments remains weak further undermined by rising unemployment. Though green shoots of recovery have been reported, FDX sees economic recovery as a slow process and expects its first two quarters of fiscal year 2010 to be very tough. Attempts to profit from bearish movement in the stock were observed through the enactment of a put spread in the October contract. The transaction involved the purchase of approximately 12,500 puts at the October 50 strike price for an average premium of 5.22 apiece spread against the sale of 12,500 puts at the lower October 40 strike for 1.60 each. The net cost of the pessimistic play amounts to 3.62 and yields maximum potential profits of 6.38 to the investor if shares fall to $40.00 by expiration. FDX last traded around $40.24 on March 16, 2009. With earnings now out of the way option implied volatility on the stock has plummeted to the current value of 39% from yesterday’s closing reading of 49%. – FedEx Corporation

JWN – The fashion specialty retailer of high-quality apparel was accessorized with a large put spread this morning when shares were on the decline, although currently the stock has recovered to gain approximately 1.5% to $19.30. The JWN ticker symbol commanded the top spot on our ‘hot by options volume’ market scanner following an investor’s bearish play in the October contract. The transaction involved the purchase of 20,000 just out-of-the-money puts at the October 19 strike price for 3.40 apiece spread against the sale of 20,000 puts at the lower October 14 strike for a premium of 1.20 each. The net cost of the spread amounts to 2.20 and yields maximum potential profits to the investor of 2.80 if shares sink down to $14.00 by expiration. Shares must fall about 13% from the current price before the trader breaks even at $16.80. – Nordstrom, Inc.

HUM– Shares of the second-largest U.S. provider of government-backed health benefits have rallied less than 1% to $28.43 today. Options activity on the stock appeared bullish at first glance with the call-to-put ratio indicating that more than 15 calls were traded for every put option in action. However, further investigation of the call options suggested that some 9,200 calls were sold short at the November 32 strike price for an average premium of 2.75 per contract. This transaction may be consistent with a covered call, initiated by an investor who is long shares of the underlying. If this is the case, writing the calls provides an effective exit strategy for the trader if shares rally through $32.00 by expiration. If the options land in-the-money, the shares will be called away from the investor and he will have realized gains of about 12.5% on the rise in the stock in addition to the 2.75 premium received for writing the calls today. – Humana Inc.

ALL – Early afternoon options action on the insurer comes in the form of hefty call activity centered on the July contract at the 29 strike. With shares trading just 0.3% lower at $23.60 by lunchtime, we’re seeing around 16,000 calls at play for a 20 cent premium. This strike is already heavily favored by investors and has an open interest reading in excess of 29,000 contracts. Given the fact that today’s volume is trading in sizeable round-lot chunks at mid-market prices, we sense that this is the closing half of a bull play with the option trader possibly taking down some losses. – Allstate Corp.

MSFT– A large-volume strangle in the January 2010 contract caught our eye amid slight gains of less than 1% to $23.52 experienced by the software maker today. The strangle strategy involved the sale of 22,000 puts at the January 17.5 strike price for 70 cents each in combination with the sale of 22,000 calls at the January 27 strike for approximately 87 cents premium. The gross premium pocketed by the trader amounts to 1.57 per contract or a total sum of $3,454,000, and will be fully retained as long as shares remain ‘strangled’ between the two strike prices described by expiration. This individual faces losses at any share price above the breakeven point to the upside at $28.57, as well as at any price below the breakeven to the downside at $15.93. – Microsoft Corp.

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