Option Activity Alert: KRE, CPN, PRGO

KRE – SPDR KBW Regional Banking ETF – A large-volume debit put spread initiated on the SPDR KBW Regional Banking ETF this afternoon suggests one options investor is wary that the significant run up in the price of the underlying fund since the start of December could reverse course next year. Shares of the KRE, an exchange-traded fund that tracks the performance of the KBW Regional Banking Index, are up slightly by 0.10% to trade at $25.18 as of 3:30pm. The strategist responsible for the put spread may be building up downside protection, or alternatively, could be taking an outright bearish stance on the regional banking sector through March 2011. Shares in the fund rallied 14.25% during December so far to reach a 6-month high of $25.59 this past Wednesday. The put-spreader picked up 19,000 put options at the March 2011 $24 strike for a premium of $0.81 each, and sold the same number of puts at the lower March 2011 $20 strike at a premium of $0.16 apiece. Net premium paid to initiate the spread amounts to $0.65 per contract. Thus, the investor is prepared to make money, or realize downside protection, if shares of the KRE fall 7.3% from the current price of $25.18 to breach the effective breakeven point on the spread at $23.35 by March 2011 expiration. Maximum potential profits of $3.35 per contract are available to the put-spreader should shares of the underlying fund plummet 20.6% lower to trade below $20.00 by expiration day next year. The fund’s shares have not traded below $20.00 in more than a year.

CPN – Calpine Corp. – A large chunk of call options were picked up on Calpine Corp. late in session by a bullish strategist positioning for shares to rally substantially ahead of January 2011 expiration. Shares of the independent power generation company are up 2.6% this afternoon to stand at $13.22 in the final hour of the trading week. Calpine was recently rated new ‘buy’ with a 12-month target share price of $16.00 at Goldman Sachs. The options optimist looked to the January 2011 $14 strike to purchased 5,500 calls at a premium of $0.15 per contract. Profits start to amass for the call buyer if Calpine’s shares surge 7.00% over the current price of $13.22 to exceed the effective breakeven point to the upside at $14.15 by expiration day next month. Calpine Corp.’s overall reading of options implied volatility is higher by 6.0% to arrive at 22.98% as of 3:25pm in New York.

PRGO – Perrigo Company – The global healthcare supplier that manufactures and distributes over-the-counter and generic prescription pharmaceuticals and products appeared on our ‘hot by options volume’ market scanner today after one investor picked up a put spread in the January 2011 contract. Perrigo’s shares fell as much as 1.3% during the course of the trading day to touch down at an intraday low of $67.10. It looks like the bearish player purchased 1,500 puts at the January 2011 $65 strike for a premium of $1.35 each, and sold the same number of puts at the lower January 2011 $60 strike at a premium of $0.25 apiece. The net cost of the transaction amounts to $1.10 per contract, thus positioning the investor to make money if Perrigo’s shares slide 4.8% off today’s low of $67.10 to breach the effective breakeven price of $63.90 by expiration day next month. The options trader could walk away with maximum potential profits of $3.90 per contract should shares of the drug maker plunge 10.6% lower to trade under $60.00 by January expiration. Shares in Perrigo Company dipped below $60.00 as recently as November 30, 2011.

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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