Three-Legged Bear Shops for Retail Sector ETF Options

 Today’s tickers: XRT, APOL, VCI & MRVL

XRT – SPDR S&P Retail ETF – The retail sector may be poised for a pullback according to one options strategist who initiated a three-legged bearish combination spread using call and put options set to expire in March. Shares of the XRT, an exchange-traded fund designed to replicate the performance of the S&P Retail Select Industry Index, fell as much as 0.93% during the session thus far to touch an intraday low of $46.64. The three-legged bear sold out-of-the-money calls in order to partially offset the cost of buying a put spread. Legs of the spread include the sale of 7,500 calls at the March $51 strike for a premium of $0.40 each, purchase of 7,500 now in-the-money puts at the March $47 strike at a premium of $1.64 per contract, and the sale of 7,500 puts at the March $41 strike for premium of $0.42 apiece. The net cost of establishing the spread amounts to $0.82 per contract and positions the pessimistic player to profit should shares in the XRT decline another 1.00% from the current price to breach the breakeven point on the downside at $46.18 by March expiration. Maximum potential profits of $5.18 per contract are available to the investor in the event that XRT shares plummet 12.1% in the next couple of months to trade below $41.00 by expiration day. The outright bearish transaction contrasts with what appears to be a short straddle at the March $47 strike. It looks like the 3,500-lot short straddle provided the investor with gross premium of $3.87 per contract, which he keeps in full as long as shares settle at $47.00 at expiration day. The trader responsible for the short straddle could suffer devastating losses if the fund’s shares break out of the share price range dictated by the premium received, or buffer against losses through expiration. Losses start to accrue should shares rally above the upper breakeven point at $50.87, or if shares slip beneath the lower breakeven price of $43.13 before the contracts expire in March.

APOL – Apollo Group, Inc. – Options traders are bearish on the for-profit education company ahead of the first-quarter earnings report scheduled to hit the stands after the closing bell on Monday. Put buyers are building positions that suggest the stock could hit a new four year in the next couple of weeks. Shares in Apollo Group are down 3.6% just before 1:10pm in New York to trade at $38.05. The beleaguered education provider’s shares are down 42.9% since April 22, 2010, when the stock was trading at $66.69. Ongoing concern and uncertainty regarding impending regulatory changes and the potential for additional restrictions on federal funding for colleges continues to plague Apollo. Investors expecting the bloodshed to continue picked up more than 6,500 puts at the January $34 strike for an average premium of $0.45 per contract. Put buyers make money if Apollo’s shares plunge 11.8% from the current price of $38.05 to hit a new 4-year low point of $33.55 by January expiration. The more than 6,500 puts exchanged at the January $34 strike thus far today represents volume far greater than the 1,415 contracts comprising previously existing put open interest at that strike. Out-of-the-money call selling at the January $40 strike, where some 2,600 lots were shed for an average premium of $1.26 each, also signals bearish investor opinion on the education company. Finally, approximately 1,000 put options were picked up at the January $36 strike for an average premium of $0.92 each. These put buyers profit in the event that Apollo Group’s shares fall 7.8% to trade below the average breakeven price of $35.08 by the time the contracts expire.

VCI – Valassis Communications, Inc. – The media and marketing services company popped up on our ‘hot by options volume’ market scanner this morning after one strategist initiated a bullish trade in the March contract. Shares in Valassis Communications are currently down 0.30% to stand at $30.62 as of 11:30am in New York. The investor is positioning for limited, albeit substantial bullish movement in the price of the underlying shares by implementing a ratio call spread on the stock. The trader picked up 2,000 in-the-money calls at the March $30 strike for a premium of $2.75 apiece, and sold 4,000 calls at the higher March $35 strike at a premium of $0.70 each. Net premium required to establish the spread amounts to $1.35 per contract. Thus, the investor is positioned to make money should VCI shares rally 2.4% over the current price of $30.62 to surpass the effective breakeven point at $31.35 by expiration day in March. Maximum potential profits of $3.65 per contract are available to the options player if shares in Valassis surge 14.3% to settle at $35.00 at expiration. Selling twice as many higher-strike calls significantly reduced the cost of the directional play, but is not without its risks. The investor’s profits will evaporate completely and he will start to absorb losses on the spread in the event that shares jump 26.2% and exceed the upper breakeven price of $38.65 ahead of expiration day. Valassis Communications is schedule to report fourth-quarter earnings before the market opens for trading on February 22, 2011.

MRVL – Marvell Technology Group, Ltd. – Call options on the global semiconductor company are a hit with bullish traders positioning for the stock to extend gains in the near term. Shares in Marvell Technology Group are presently trading 1.90% higher on the session at $19.93, but earlier increased nearly 4.00% to touch an intraday high of $20.34. Optimism on Marvell may stem from the firm’s collaboration with Entropic Communications, Inc. to push development of new products and solutions that will reportedly allow service providers to shuttle unfettered bandwidth to consumers. Near-term bulls picked up 1,000 in-the-money calls at the January $19 strike for an average premium of $1.25 each, and scooped up roughly 3,000 calls at the higher January $20 strike at an average premium of $0.54 a-pop. Investors holding the higher-strike call options make money if Marvell’s shares rally 3.05% over the current price of $19.93 to surpass the average breakeven point on the upside at $20.54 ahead of expiration day. Optimism spread to the February $20 strike where more than 1,000 calls were purchased for an average premium of $1.00 each. Investors gravitated up to the February $21 strike as well to buy around 1,000 calls at an average premium of $0.55 per contract. Call buyers at this strike are poised to profit should Marvell’s shares surge 8.1% to trade above the average breakeven price of $21.55 before the calls expire in February.