XLF – Financial Select Sector SPDR ETF – Financials joined the broad market breather today, extending declines spurred by Tuesday’s FOMC minutes, and exacerbated first by a weak bond auction in Spain, and next by the lower-than-expected ISM non-manufacturing number. The XLF is off its lows of the session, but remains down 1.7% at $15.56 as of 1:30 p.m. in New York. The dip in financials today appears to have sparked a rush for downside protection, perhaps as some strategists seek to protect the double-digit rally in the sector since the start of the New Year. The XLF is up 17.0% year-to-date even with today’s decline, and it seems some traders are snapping up put options on the ETF to brace for potential continued bearish movement in the price of the underlying. Options players exchanged more than 55,000 puts at the May $15 strike against open interest of 18,287 contracts. It looks like nearly all of the puts were purchased for an average premium of $0.29 apiece, with the single largest trade printing 29,894 contracts in the first hour of the session. The put options yield profits – or downside protection – in the event that XLF shares drop 5.5% to breach the average breakeven price of $14.71 at expiration next month.
JACK – Jack in the Box Inc. – A large block of call options in play on Jack in the Box appears to be one part of a bearish stock and options combination strategy that pays off if shares in the operator of Jack in the Box and Qdoba Mexican Grill restaurants pull back. JACK’s shares are down 2.6% at $23.19 as of 12:05 p.m. in New York. It looks like one trader purchased 6,000 calls at the Sep. $25 strike for a premium of $1.10, and sold 240,000 shares in the name at $23.20 apiece, on a 40 delta. The synthetic put play suggests the strategist expects shares in Jack in the Box to decline in the next six months. At the current level, JACK’s shares are up 11.0% year-to-date, but had been up as much as 18.0% a couple weeks ago when the stock touched a fresh 52-week high of $24.59. Shares currently trade 6.0% below the February 23rd high. The trader responsible for the transaction is poised to benefit from continued bearish movement in the price of the underlying through expiration. The large block of 6,000 calls is more than two times the total number of existing options positions on the stock as indicated by JACK’s overall open interest reading of 2,651 contracts.
SNDK – SanDisk Corp. – Activity in SanDisk weekly options this morning indicates traders are prepared to see the price of the underlying extend losses heading into the holiday weekend. Shares in the maker of flash storage products are down 9.5% to stand at $45.31 after the Company lowered its first-quarter sales and earnings forecast. April ’05 $45 strike put options saw the heaviest volume of the weekly contracts, with more than 3,800 lots in play against zero open positions. It looks like the majority of the puts were purchased for an average premium of $0.29 apiece, thus positioning buyers to profit in the event that SanDisk’s shares decline another 1.3% to breach the effective breakeven price of $44.71. Traders that purchased the short-dated puts earlier in the week saw the value of the contracts sky-rocket today as shares tumbled. Put open interest in the weekly options exists only at the $50 strike, where there are 833 open positions. It appears some traders purchased a few hundred of these contracts for an average premium of $0.73 each on Monday afternoon. These puts are now deep in-the-money and trading at a premium of $4.80 apiece this afternoon.