Cubist Calls Active As Shares Rise 10%

Today’s tickers: CBST, EFA, IYR, WFMI, PG, FXI, UNG & DVA

CBST – The biopharmaceutical company edged onto our ‘hot by options volume’ market scanner this afternoon amid bullish call buying activity. Shares of CBST have surged 10% higher to stand at the current price of $21.91. Near-term optimists hoping for continued gains picked up more than 4,700 calls at the August 22.5 strike price for an average premium of 42 cents per contract. Investors long the calls will begin to accumulate profits in the event that shares rise another 5% to surpass the breakeven point at $22.92 by expiration. Investors exchanged 16,125 lots on the stock today which represents 91.5% of the existing open interest on the stock of 17,594 option contracts. – Cubist Pharmaceuticals, Inc.

EFA– The implementation of a bearish put spread on the EFA this afternoon indicates that some see the price of the underlying shares slipping lower by expiration in January 2010. The exchange-traded fund is currently off slightly by less than 0.5% to $51.32. The spread involved the purchase of 7,500 puts at the January 50 strike price for 3.50 each against the sale of 7,500 puts at the lower January 43 strike for 1.40 apiece. The net cost of the transaction amounts to 2.10 per contract and yields maximum potential profits of 4.90 if the stock declines to $43.00 by expiration. – iShares MSCI EAFE Index ETF

IYR– Shares of the real estate exchange-traded fund have rallied more than 2.5% to $39.40 during today’s trading session. Despite the intraday gains, option traders initiated bearish plays on the fund. One investor anticipating significant declines in the fund established a long butterfly spread set to expire in September. The butterfly was constructed through the sale of 20,000 puts [the body] at the central September 34 strike price for 65 cents apiece. The body was then flanked by the purchase of two wings. The higher September 36 strike price had 10,000 puts picked up for 1.15 per contract and the lower September 32 strike had another 10,000 puts bought for 40 cents each. The net cost of the spread amounts to just 25 cents per contract and yields maximum potential profits of 1.75 if the stock declines to $34.00 by expiration. Profits will begin to accrue for the investor if shares fall 9% to breach the upper breakeven point at $35.75. If shares continue to decline down to $34.00, maximum gains will be pocketed by the trader. But, the investor will have completely eroded all profits if the stock plummets through the lower breakeven point at $32.25 by expiration. By utilizing the butterfly strategy, the investor has limited his losses to a maximum of 25 cents, or the price paid to put on the trade. Bearish sentiment spread to the December contract where another trader hopes to profit from downward movement in the stock. This individual enacted a ratio put spread by purchasing 5,000 puts at the December 38 strike price for 3.72 each, spread against the sale of 10,000 puts at the lower December 33 strike for 1.80 per contract. The net cost of the transaction amounts to just 12 cents and yields maximum potential profits to the investor of 4.88 if the IYR falls to $33.00 by expiration at the conclusion of 2009. – iShares Dow Jones U.S. Real Estate Index ETF

WFMI – Shares of the natural and organic foods retailer exploded higher by more than 20% to $29.95 after reporting better-than-expected third-quarter profits and raising its full-year earnings forecast. The upward revision for full-year profits to about 80 cents per share from a previous estimate of 65 cents, sent the stock soaring right through the old 52-week high of $25.14, attained on July 30, 2009. Option bulls, hoping for the rally to continue, looked to the August 30 strike price to purchase approximately 1,900 calls for an average premium of 93 cents apiece. Shares of WFMI would need to climb just 3% higher in order for these call-buying investors to break even at a price of $30.93 by expiration. Other investors were seen picking up put options, perhaps in an attempt to lock in gains enjoyed during the rally. The August 29 strike had about 1,100 puts purchased for 95 cents each while the in-the-money August 30 strike had 1,200 puts coveted for 1.40 apiece. Finally, bullish traders with an appetite for call options scooped up 1,400 calls at the September 30 strike for an average premium of 1.67 per contract. Profits will begin to amass by expiration if shares climb at least 6% to $31.67. Implied volatility imploded following earnings, contracting nearly 33% from yesterday’s reading to 44% this morning. – Whole Foods Market, Inc.

PG – The world’s largest household-products maker has experienced a share price decline of 3% to $53.84 today after its fourth-quarter earnings slipped 18%. The Cincinnati, OH-based firm blames shrinking profits for the quarter on declines in consumer spending on higher-priced detergents and skin care products in the current recessionary environment. PG reported that sales fell 11% to $18.7 billion as cash-strapped consumers make the switch to less-expensive generic goods to save money. Looking ahead a few months, it looks as though some option traders are gearing up for a recovery in PG by expiration in October. The sale of approximately 5,000 puts at the October 47.5 strike price for an average premium of 52 cents apiece, and the purchase of some 5,000 calls at the October 60 strike price for 33 cents per contract, suggests optimism. We note that not all of the contracts were spread against one another. However, the pattern for the most part mimics the bullish reversal strategy. Investors who have shed puts to buy calls on PG are perhaps hoping to see the stock recover in the next few months. – The Proctor & Gamble Company

FXI – The Chinese exchange-traded fund jumped onto our ‘most active by options volume’ market scanner this morning after one bearish investor was observed binging on put options. Shares of FXI have surrendered approximately 3% to arrive at the current price of $41.39. The September 38 strike price had 28,000 puts purchased for an average premium of 1.21 per contract. Maybe the investor responsible for the transaction holds a long position in the stock, and has gobbled up the protective puts in case shares continue to head south by expiration. Downside protection would kick in given an 11% decline in the stock to the breakeven price of $36.79. Otherwise, the trader is short the stock and has simply engaged in plain-vanilla put buying in an attempt to profit from bearish movement in the price of the underlying shares. – iShares FTSE/Xinhua China 25 Index Fund

UNG – Natural gas prices have been a sad underperformer despite the fervor displayed in other energy markets. Unlike the resurrection for crude oil or heating oil prices so far this year, natural gas has missed out on a price gain. Despite a 2.1% gain to $14.04 today for the fund prices are still pretty close to the $11.91 low achieved three weeks ago. It would appear that one option trader expects this pattern to be maintained and today used the rally in the underlying to trade in more expensive calls for cheaper premium puts. The investor sold around 3,000 October expiration calls at the 15 strike to buy the same amount of puts at the lower 13 strike. Of course the investors could be long the underlying shares in the gas fund and is taking a 10 cent credit to establish protection on the view that the rally doesn’t hold. – U.S. Natural Gas Fund

DVA – The U.S. provider of dialysis services for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD), reported that profits jumped 11% in the second-quarter on higher treatment volume. The bullish earnings news pushed shares of DVA higher by 1.5% to $51.80 during today’s trading session. Option traders looking to lock in gains targeted the August 50 strike price where some 5,100 puts were picked up for 93 cents per contract. Investors holding the put options are now protected in case the stock slips beneath the breakeven point to the downside at $49.07 by expiration this month. We note that the 7,547 option contracts exchanged on DVA today represent 45% of the existing open interest on the stock of 16,759 lots. – DaVita Inc.