Option Traders Remain Skeptical Over Real Estate Shares

By option_review

August 18, 2009

308

Today’s tickers: IYR, CIEN, FXI, MTB, TGT, MTW & HURN

IYRBearish option traders honed in on puts in the January 2010 contract of the U.S. real estate ETF. Such positioning indicates that the current 1.5% rally in shares to $38.17 today will not last. Pessimists picked up 10,000 puts at the in-the-money January 40 strike price for 6.23 apiece and spread the purchase against the sale of 20,000 puts at the lower January 25 strike for an average premium of 86 cents each. The net cost of the ratio put spread amounts to 4.51 and yields maximum potential profits of 10.49 per contract if the IYR plummets 35% to $25.00 by expiration in January. Shares must decline 7% from the current price before profits begin to accumulate beneath the breakeven price of $35.49. – iShares Dow Jones U.S. Real Estate Index –

CIENBullish action on the maker of transmission and switching systems for fiber-optic communication networks pushed Ciena onto our ‘hot by options volume’ market scanner this afternoon. Demand for near-term call options has surged amid a more than 7% rally in shares to $12.58. More than 16,000 calls were coveted at the August 12.5 strike price for an average premium of 19 cents apiece. We note that investors who paid 19 cents just before 1 pm EDT were rewarded for beating the crowd. Traders currently (2 pm EDT) looking to get long the same calls must now shell out 45 cents per contract. Those individuals who paid an average of 19 cents will begin to bank profits if shares surpass the breakeven point at $12.69 by expiration on Friday. Option implied volatility on CIEN is currently slightly higher to stand at 73% from an intra-day low of 69%. – Ciena Corp. –

FXILong-term downside protection was scooped up by traders bracing for potential declines in the China exchange-traded fund by expiration in February 2010. Shares of the FXI are currently enjoying a more than 2% rally to $40.02. Approximately 15,000 puts were picked up at the February 38 strike price for an average premium of 4.20 per contract. Downside protection on a long position in the underlying, or profits on a short position, will kick in if the fund declines 15.5% from the current price to breach the breakeven point at $33.80 by expiration. – iShares FTSE/Xinhua China 25 Index Fund –

MTBShares of the bank holding company have enjoyed a 0.5% increase today to $58.00 after the firm received a new rating of ‘neutral’ and a price target of $60.00 per share at FTN Equity Capital Markets Corp. Despite the bullish move in the stock, one contrarian option trader established a bearish put spread in the October contract. The transaction involved the purchase of 10,000 puts at the October 45 strike price for a premium of 1.04 apiece spread against the sale of 10,000 puts at the lower October 40 strike for 44 cents each. The net cost of the trade amounts to 60 cents and yields maximum potential profits of 4.40 per contract in the event that shares plummet 31% to $40.00 by expiration. The 20,000-lot put spread enacted today represents a whopping 43% of the total existing open interest on the stock of 46,406 contracts. – M&T Bank Corp. –

TGTBetter-than-expected earnings from retailer Target today has one option investor looking for more upside from the company on top of today’s 7.7% gain to $44.39. The investor swapped out a long straddle for a short straddle using the October contract in a trade involving 20,000 contracts. The investor bought the same volume of calls and puts at the 40 strike in exchange for the reverse position at the higher 45 strike. Although this investor has a poor risk/reward potential on this trade, he does have the hindsight of earnings now that they have been delivered. Getting long a deep in-the-money call generates profits at any point above $43.00 in this case and owing to the short opposing call, he faces a maximum gain of $4.0 per contract at any point above $45.00. As noted above the risk of the trade is larger than the reward leading to maximum downside losses of $6.0 per contract from $40.00 and below. This is a confident play post-earnings that says risk/reward doesn’t matter if this stock is going higher. – Target Corp. –

MTWWisconsin-based Manitowoc Company recently boosted revenues from the acquisition of Enodis to its food services segment, but still turned in a loss. The company produces cranes as a mainstay. Its shares are curiously almost 10% higher today at $6.79 and it would appear that there is a big fan of the company lurking out there somewhere. We see little news driving the recovery in the stock today, but we can see call option purchases totaling 30,000 contracts at the 15 strike with an expiration date of January 2011. We immediately wondered if this volume might be related to a covered call, but as noted above the options appear to have been bought at the asking price. Option implied volatility remained static today and stands at 76%. About one year ago the company’s share price reached $26.01. This rather large trade looks like a longer-term recovery play on this company. At the end of July the company showed that it had reduced its debt burden to $161 million and reaffirmed its full-year debt reduction target to $450 million according to Reuters news. – Manitowoc Company Inc. –

HURNThe provider of financial and operational consulting services surged nearly 40% to $19.11 at times during the trading session after reporting growth in revenue and profits for the second quarter. Profits jumped to 47 cents for the quarter, up from earnings of just 6 cents per share in the previous year. Bullish traders eyed near-term call options on the stock, purchasing approximately 3,300 lots at the August 20 strike price for an average premium of 80 cents apiece. Investors hoping to see continued significant gains in the stock by expiration on Friday bought about 1,500 calls at the higher August 22.5 strike for 37 cents each. Shares of the consulting firm would need to rise another 20% for these traders to begin to amass profits above the breakeven price of $22.87. One individual was apparently prepared for today’s bullish move. It appears that he originally purchased about 7,600 calls at the December 15 strike price back on August 6, 2009, for an average premium of 3.22 per contract. Today he sold the calls for 5.90 and rolled his position to the higher, albeit still in-the-money, December 17.5 strike price for 4.80 apiece. Thus, the trader banked gains of 2.68 per contract on the original call position for a total of $2,036,800. He paid 4.80 to reestablish the long calls at a higher strike and will begin to realize profits on the new position if HURN surpasses the effective breakeven point at $22.30 by expiration in December. – Huron Consulting Group Inc. –

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