Option Activity Alert: SPDR S&P Retail ETF, Monsanto, American Eagle Outfitters

XRT – SPDR S&P Retail ETF – Pessimism on the retail fund is apparent today following the implementation of the oft-employed ratio put spread strategy in the December contract. Shares of the XRT, an exchange-traded fund designed to replicate the performance of the S&P Retail Select Industry Index, are down 1.05% at $41.58 as of 12:00 pm ET. The bearish strategist purchased 5,000 now in-the-money puts at the December $42 strike at a premium of $1.91 each, and sold 10,000 puts at the lower December $36 strike for a premium of $0.68 apiece. The net cost of the transaction amounts to $0.55 per contract. The trader responsible for the spread stands ready to accrue profits should the XRT’s shares fall another 0.625% from the current price to breach the effective breakeven point to the downside at $41.32 by expiration day in December. Maximum potential profits of $5.45 per contract are available to the pessimistic player if the fund’s shares plunge 13.40% lower to settle at $36.00 at expiration. Options implied volatility on the retail fund is up 3.8% at 28.03% at the start of afternoon trading.

MON – Monsanto Co. – A repeat performance of a bullish transaction initiated on the world’s largest seed producer yesterday indicates some semblance of consensus with investors looking for Monsanto’s shares to rebound substantially by November expiration. Shares of the St. Louis, MO-based firm are up 0.20% at $48.09 as of 11:10 am ET. Earlier this week, Monsanto’s shares fell sharply on concerns that the company’s new SmartStax corn seeds are not performing as well as expected. One Wednesday one optimistic trader purchased a 5,000-lot November $55/$60 call spread at a net cost of $0.58 per contract. Today, another bullish player added to the foundation by picking up a 4,500-lot call spread at the same strike prices by shelling out a net premium of $0.54 per contract. The investor responsible for today’s bullish play is positioned to profit should Monsanto’s shares surge 15.5% over the current price of $48.09 to exceed the effective breakeven point at $55.54 by November expiration. Maximum potential profits of $4.46 per contract are available to the investor if MON’s shares jump 24.80% to exceed $60.00 by expiration day.

AEO – American Eagle Outfitters, Inc. – Call options on the retailer of clothing and accessories are fashionable with bullish players this morning with the price of the underlying stock climbing as much as 4.70% to an intraday high of $15.61. AEO’s shares are currently up 2.30% at $15.25 as of 10:55 am ET. Options traders exchanged more than 9 calls on the stock for each single put in play thus far in the session. Call volume is heaviest at the near-term October $16 strike where more than 6,900 calls changed hands versus previously existing open interest of just 665 contracts. It looks like investors purchased 4,990 of those October $16 strike calls for an average premium of $0.28 apiece. Call buyers make money if American Eagle’s shares rally 6.75% over the current price of $15.25 to surpass the average breakeven point to the upside at $16.28 by October expiration. Optimism spread to the November $16 strike where 1,500 calls were scooped up for an average premium of $0.60 each. Finally, some 5,000 of the November $17.5 strike call options were traded by both buyers and sellers for an average premium of $0.27 apiece. Call sellers are expecting AEO’s shares to trade below $17.50 through November expiration while buyers are hoping to see the retailer’s rally continue. The surge in demand for calls on American Eagle bumped up the stock’s overall reading of options implied volatility 9.6% to 42.36% by 11:05 am ET.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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