XLF – Financial Select Sector SPDR ETF – The financials ETF popped Thursday morning on news Warren Buffet’s Berkshire Hathaway bought $5 billion worth of cumulative perpetual preferred stock in beleaguered U.S. lender, Bank of America Corp. The XLF’s morning rally gave way to losses in early-afternoon trade as heavy selling in Germany and soaring yields on Euro-area sovereign debt reminded markets that the crisis overseas may worsen. Shares in the XLF stand 0.50% lower on the session at $12.64, erasing earlier gains of as much as 4.95% to $13.33. Nearly 430,000 option contracts have changed hands on the Financial SPDR, with traders favoring puts over calls roughly 1.8 times to 1. Much of the heavy options volume resides in contracts expiring in the next few months, but longer-dated contracts attracted sizable interest, as well. Fresh positioning in the March 2012 $13 strike call and put options suggests some strategists expect shares in the fund to stagnate. Traders appear to have sold roughly 20,000 of the March 2012 $13 strike straddle to pocket average gross premium of $2.98 per contract. Straddle-sellers may be taking advantage of inflated levels of options implied volatility on the fund, which currently stands well above historical, as well as the time-rich premium built into the price of both the calls and the puts. Investors selling the straddle benefit from the roughly .07 of a penny daily decline in the value of the position, according to the roughly -.0035 reading of Theta on both the calls and the puts. Additionally, subsiding levels of implied volatility may lower the cost of buying back the straddle at some point ahead of expiration. In seven months time, when March expiration rolls around, traders walk away with the full amount of premium received on the straddle as long as shares in the XLF settle at $13.00.
LIZ – Liz Claiborne, Inc. – The owner of a portfolio of retail-based premium brands, including Kate Spade and Juicy Couture, popped up on our ‘hot by options volume’ market scanner due to heavier-than-usual trading in its calls. Shares in LIZ earlier surged 6.7% to an intraday high of $4.59, but currently trade 3.25% higher on the session to arrive at $4.44 just after 12:00 pm in New York. It looks like one or more options players are positioning for shares in Liz Claiborne to extend gains through expiration next month. Investors exchanged more than 4,400 calls at the September $5.0 strike this morning, against open interest of just 493 contracts. The majority of the contracts appear to have been purchased for an average premium of $0.20 per contract. Buyers of the call options profit at expiration day if shares in LIZ rally 17.1% over the current price of $4.44 to surpass the effective breakeven point at $5.20. Shares in Liz Claiborne closed above $5.20 as recently as August 15.
MRK – Merck & Co., Inc. – The drug maker’s shares have recently clawed back some of the sharp losses realized since mid-July, although the stock today surrendered 1.3% to trade at $31.80 as of 1:15 pm ET. Merck’s shares lost nearly 20.0% of their value between July 21 and August 9 when the stock touched a new 2-year low of $29.47. One options player populating long-dated calls and puts on Merck may be positioning for the price of the underlying to rebound substantially by expiration in January 2013. The investor appears to have sold 15,000 puts at the Jan. 2013 $20 strike for a premium of $1.10 each, in order to purchase 7,500 calls up at the Jan. 2013 $35 strike at a premium of $2.04 apiece. The sale of twice as many of the deep out-of-the-money puts yields more than enough premium to offset the cost of buying the calls. The trader pockets a net credit of $0.16 per contract on the transaction, which he keeps as long as shares in MRK exceed $20.00 through expiration day in more than a year. Additional profits are available to the investor if shares in the pharmaceutical company surge 10.0% to exceed $35.00 at expiration. The sizable options position may be tied to stock, which could change the interpretation of the transaction. Options implied volatility on Merck rose 8.6% to 29.32% in early-afternoon trade.
PSS – Collective Brands, Inc. – Shares in the operator of Payless ShoeSource and Stride Rite jumped nearly 30.0% overnight to as high as $13.33 Thursday morning after the Topeka, KS-based company said it will take “aggressive actions” to improve the business and increase shareholder value. Collective Brands will reportedly plans to close 475 stores. The explosive rally in the price of the underlying cooled somewhat as the morning session wore on, although the stock still stands 20.15% higher on the day at $12.35 as of 11:20 am ET. Options traders observed selling call options on the stock ahead of its second-quarter earnings report Wednesday evening must be quite disappointed today. Open interest in the September $10 strike call suggests options players sold more than 4,300 contracts at that strike for an average premium of $0.59 apiece during the past four trading sessions. Call sellers may or may not have been long the underlying stock. Traders naked short the calls were betting shares in Collective Brands would likely trade below $10.00 come expiration day next month. Investors in this position are feeling the sting this morning with shares in PSS screaming higher, and the price tag to buy back the September $10 strike call soaring to $2.50 a-pop as of 11:30 am ET. Meanwhile, trading traffic in PSS options is heaviest in the September $12 strike put, where more than 7,200 contracts have changed hands. Open interest in the put is sufficient to cover volume generated at that strike thus far today. Put players are both buying and selling the contracts at an average premium of $0.42 each. Buyers of the puts may be locking in gains, while sellers are perhaps expecting shares in PSS to exceed $12.00 through expiration in four weeks time. Options implied volatility on the stock is currently down 15.6% to stand at 58.78%.