Option Activity Alert: XLB, XLF, VRGY, STJ

XLB – Materials Select Sector SPDR ETF – Options traders are initiating bearish strategies on the XLB, an exchange-traded fund designed to track the performance of the Materials Select Sector of the S&P 500 Index, with shares of the fund currently trading just 0.05% lower on the day at $38.43 as of 12:25pm. Investors bracing for a pullback in shares of the fund focused their attention on put options expiring in January and February of 2011 right out of the gate this morning. Plain-vanilla put buying took place at the February 2011 $38 strike where more than 7,600 puts changed hands, versus paltry previously existing open interest of 125 contracts. It looks like the majority of the puts, at least 5,100 of the contracts, were purchased at an average premium of $1.09 apiece this morning. Put buyers are poised to profit should the price of the underlying fund fall 3.95% from the current price of $38.43 to breach the average breakeven point to the downside at $36.91 by expiration in February. A nearer-term pessimistic player appears to have purchased a 1,000-lot January 2011 $37/$38 strike put spread for a net premium of $0.27 per contract. The investor makes money if XLB shares decline 1.8% to trade below the effective breakeven price of $37.73 by January expiration day. Maximum potential profits of $0.73 per contract are available to the put player should shares of the fund drop 3.7% to trade below $37.00 before the contracts expire next year. The overall reading of options implied volatility on the ETF is higher by 6.4% this afternoon to arrive at 20.86% as of 12:45pm.

XLF – Financial Select Sector SPDR ETF – The XLF jumped to the top of our ‘most active by options volume’ market scanner within the first 15 minutes of the trading session after 250,000 call options traded in the January 2011 contract. It looks like the investor responsible for the transaction is taking profits off the table by unraveling a bull call spread that was originally purchased back on November 4, 2010. Shares of the XLF, an exchange-traded fund designed to track the performance of the Financial Select Sector of the S&P 500 Index, are currently down 0.30% to stand at $15.93 as of 11:05am in New York. The options trader originally paid a net $0.52 per contract for the 125,000-lot January 2011 $15/$17 call spread on November 4, 2010, when shares of the fund were trading around $15.07. Today, the investor dismantled the massive bullish spread, selling 125,000 calls at the Jan. 2011 $15 strike at a premium of $1.03 each, and buying the same number of calls at the Jan. 2011 $17 strike for a premium of $0.05 apiece. The options player receives a net $0.98 per contract on the sale, thus exiting the position with net profits of $0.46 per contract after factoring in the premium paid to initiate the transaction back in November. Booking profits at this stage of the game could be a sign that this investor no longer sees shares rising through $17.00 by January expiration. The trader is perhaps happy to take profits off the table today, rather than holding out hope for greater returns in the new year, as shares of the fund are trading just $0.13 off Tuesday’s 7-month high of $16.06. The unraveling the massive call spread and a sizeable debit put spread initiated on the XLF on Wednesday may be signs that some options market participants expect the financial sector of the economy to encounter some bumps along the road to recovery going forward.

VRGY – Verigy, Ltd. – Shares in the manufacturer of advanced test systems and solutions for the semiconductor industry are up 0.30% this morning to arrive at $13.08. At the current price of $13.08, Verigy’s shares are up 74.8% over the September 23, 2010, 52-week low of $7.48, on unsolicited takeover bids now valued at around $15.00 a share from Advantest this month. Analysts at Oppenheimer affirmed their rating of ‘outperform’ on Verigy with a $17.00 share price target on Monday. Near-term bullish activity on the semiconductor company suggests one strategist hopes to see Verigy’s shares hit a new 52-week high before expiration day in January. It looks like the trader initiated a plain-vanilla debit call spread, buying 5,000 in-the-money calls at the Jan. 2011 $13 strike for a premium of $0.85 each, and selling the same number of calls at the higher Jan. 2011 $14 strike at a premium of $0.25 apiece. Net premium paid to establish the spread amounts to $0.60 per contract. Thus, the investor is prepared to make money should shares in Verigy, Ltd. rally another 4.0% over the current price of $13.08 to surpass the effective breakeven price of $13.60 ahead of expiration day next month. Maximum potential profits of $0.40 per contract are available to the trader if VRGY shares first breakout above the current 52-week high of $13.79, and ultimately rise at least 7.00% to trade above $14.00 before the contracts expire in January.

STJ – St. Jude Medical, Inc. – The maker of cardiovascular medical devices popped up on our ‘most active by options volume’ market scanner in the first half of the trading session after bullish players picked up call options expiring in February and April of next year. Shares in St. Jude Medical are currently trading 0.25% higher on the session to stand at $42.90, which is a scant $0.06 off the stock’s 52-week high of $42.96, as of 12:10pm in New York. Investors hoping to see the price of the underlying stock appreciate substantially in the next couple of months purchased some 1,925 calls at the February 2011 $45 strike for a premium of $0.70 per contract. Call buyers at this strike are prepared to make money should shares in STJ increase 6.5% over the current price of $42.90 to exceed the effective breakeven price of $45.70 ahead of February expiration day. Optimists also purchased some 1,100 calls at the April 2011 $45 strike at a premium of $1.30 apiece, and scooped up another 1,226 call options at the higher April 2011 $50 strike for a premium of $0.30 a-pop. Investors holding these contracts profit if St. Jude’s shares surge 7.9%, and 17.2%, to surpass the breakeven prices located at $46.30 and $50.40, respectively, by April expiration. The medical devices manufacturer is scheduled to report fourth-quarter earnings ahead of the opening bell on January 27, 2011. Demand for call options on the stock helped lift STJ’s overall reading of options implied volatility 5.6% to 22.51% by 12:20pm this afternoon.

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.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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