Option Activity Alert: SLXP, UTHR, XLB, XLE

SLXP – Salix Pharmaceuticals, Inc. – Put options are popular at Salix Pharmaceuticals today with shares in the drug maker trading 2.5% lower on the session at $40.38 in early afternoon trade. A delta neutral transaction involving March contract put options tied to activity in SLXP shares indicates one strategist expects the price of the underlying to slip further in the next couple of months. Salix reports fourth-quarter earnings after the final bell on March 7, 2011. The options trader appears to have purchased 280,000 shares in the drug maker at $41.55 each, and purchased 10,000 puts at the March $37 strike for a premium of $2.80 apiece, on a 0.28 delta. The parameters of the transaction are such that the investor could make out well on the position given sufficient moves in the price of SLXP shares in either direction. The long stock leg of the trade will rise in value if shares reverse course and appreciate enough to at least cover the cost of buying the put options. But, it is the substantial stake in long puts that are likely to yield more substantial gains for the trader given continued bearish movement in the price of the stock. The value of the puts will grow quickly enough, under the appropriate circumstances, to more than offset losses realized on the declining value of the shares. The huge jump in demand for Salix put options helped lift the stock’s overall reading of options implied volatility 42.7% to 79.71% just before 1:00pm in New York. It looks like other pessimistic players are purchasing the March $35/$40 put spread for an average premium of $2.05 per contract. Investors initiating debit spreads make money if SLXP shares drop 6.0% from the current price of $40.38 to breach the average breakeven point on the downside at $37.95 by March expiration day.

UTHR – United Therapeutics Corp. – The biotechnology firm popped up on our ‘hot by options volume’ market scanner this morning due to bearish trading in long-dated put options. Shares in United Therapeutics are currently down 0.90% to stand at $68.37 as of 11:25am in New York, but earlier rallied to a new all-time high of $69.48. The stock has increased around 50.6% in the past 6 months. It looks like pessimistic player positioning for a pullback in the price of the underlying picked up 2,000 puts at the August $60 strike for an average premium of $6.725 each, and sold the same number of puts at the lower August $50 strike at an average premium of $2.9750 apiece. Net premium paid to initiate the put play amounts to $3.75 per contract. The trader responsible for the spread faces a breakeven share price of $56.25, which is 17.7% below the current price of the stock. Maximum potential profits of $6.25 per contract are available to the investor if shares in United Therapeutics drop 26.9% lower to trade below $50.00 ahead of August expiration. UTHR shares have exceeded $50.00 since September 13, 2010, and have not slipped under $56.25 since October 28, 2010. Unite Therapeutics is scheduled to report fourth-quarter earnings before the market opens on February 15, 2011.

XLB – Materials Select Sector SPDR ETF – Bearish positions cropped up on the Materials Select Sector SPDR within the first 30 minutes of the opening bell this morning. Shares in the XLB, an exchange-traded fund tracking the performance of the Materials Select Sector of the S&P 500 Index, touched a new 52-week high of $39.60 earlier in the session, but are currently flat on the day at $39.47 as of 11:50am. One investor positioning for shares in the fund to fall initiated a debit put spread, buying 7,700 puts at the June $39 strike for a premium of $2.04 each, and selling the same number of puts at the lower June $35 strike at a premium of $0.82 a-pop. The net cost of the transaction amounts to $1.22 per contract. Thus, the trader is poised to profit should shares in the ETF drop 4.3% from the current price of $39.47 to breach the effective breakeven point on the downside at $37.78 ahead of June expiration. The investor could walk away with maximum potential profits of $2.78 per contract if XLB shares fall 11.9% in the next 5 months to trade below $35.00 by expiration in June. The Materials SPDR has worked its way up from a 52-week low of $27.67 on July 1, 2010, rallying 43.1% since then to touch $39.60 earlier today.

XLE – Energy Select Sector SPDR ETF – Shares in the XLE, an exchange-traded fund that provides investment results that correspond to the price and yield performance of the Energy Select Sector of the S&P 500 Index, reached their highest level since September of 2008 this morning. The price of the fund’s shares increased as much as 0.65% during the session thus far to touch an intraday high of $74.83. It looks like some option strategists are extending bullish sentiment on the energy sector through March expiration. Other optimists appear to be staking fresh bullish claims in the same expiry. Large volume generated in March $71 and $74 strike in-the-money call options is likely the work of investors rolling previously established long calls at the lower strike up to the $74 strike price. Open interest patterns in the March $71 strike calls suggests the contracts selling there today were originally purchased for an average premium of $1.82 each back on January 20 and 21. Approximately 25,000 deep in-the-money calls at the March $71 strike were sold this morning for an average premium of $4.34 each in order to purchase the same number of calls up at the March $74 strike at an average premium of $2.34 apiece. The roll up to a higher strike suggests some investors continue to be bullish on the energy sector through March expiration. Another energy-optimist purchased a 5,000-lot March $77/$80 call spread for a net premium of $0.77 per contract. This trader makes money if shares in the XLE rally another 3.9% to surpass the effective breakeven price of $77.77 by expiration day next month. Maximum potential payout on the spread amounts to $2.23 per contract, but requires that shares surge 6.9% over today’s high of $74.83 to trade above $80.00 before the contracts expire in March.

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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