ADS – Alliance Data Systems – An investor appears to have a pretty good insight on the fortunes or otherwise of merchant services provider, Alliance Data Systems, which was in good company reaching a fresh 52-week low today at $27.83. We had to go back to trading patterns in put options as far as October to see when a 12,500 lot chunk of puts was bought at the January 2010 expiration. An investor at that time paid 3.00 for rights to sell shares at a fixed 25.0 price tag on the company while at the time the underlying shares were at a lofty $44.74. As we approach the strike price today the investor has taken profit by selling the puts at 5.0 apiece and doubled down at the 15.0 strike price expiring January for a 1.65 premium. Clearly this investor sees a worsening in consumption hurting core business.

FXI – iShares FTSE/Xinhua China 25 – Shares are higher in this Chinese ETF just slightly today at $25.16. One option trade in particular caught our attention in the May contract, where an investor sold 5,000 puts at the May 18 strike price for a premium of 55 cents, and purchased 5,000 calls at the May 31 strike for 95 cents each. The net cost of the trade amounts to 40 cents per contract and yields a breakeven share price of $31.40, at which point profits begin to amass. This investor has cast his vote of confidence in China and in the recovery plan currently in progress by seeking upside exposure at the 31 strike. The establishment of put sales as a vehicle to fund the cost of getting bullish on the Chinese fund was a creative way to significantly reduce the price paid by this investor. If shares can rally higher by 24% by expiration then the calls will be money-makers for this trader.

GE – General Electric – Another 52-week low today at $8.80 and a decent volume of around 15,000 put options heavily bought by bearish investors paying 47 cents for the privilege of getting short of the shares for March expiration. Heavier volume was apparent at the in-the-money puts at the 10 strike, where one 11,000 lot trade was sold perhaps by an investor locking into gains. On the call side in March both 10 and 11 strikes were heavily sold indicating an evaporation of confidence in a nearby rebound.

APOL – Apollo Group, Inc. - Shares A – The higher education company has seen shares slip by over 1% to stand at $79.05. It appears that one investor has sold 17,000 calls at the March 95 strike price for a premium of 55 cents. While this large sale could be tied to stock in the form of a covered call, we believe it is essentially an individual looking for free premium. Shares would need to surge upward by 20% and go through the 52-week high on APOL of $90.00 to $95.00 in order for this trader to get stuck with obligations to a call buyer. With a delta of just .09 on the trade, it looks like this investor is unconcerned by the 9% chance of the calls landing in-the-money by expiration. Thus, this individual has pocketed premium today while bearing minimal risk on the calls over the next month.

MDCO – The Medicines Company – Shares have rallied by more than 3% today to $13.38 for the pharmaceutical company, which specializes in acute care hospital products. One bullish option trader has revised his outlook by initiating a calendar spread on the stock. Looking for a gradual incline in share price for MDCO, this trader sold 5,000 calls at the July 17.5 strike price for a premium of approximately 1.00 per contract, and then purchased 5,000 calls at the lower strike price October 15 strike at a cost of 2.64 apiece. It appears to us that by increasing the time to expiration and lowering the strike price to 15, this investor is looking for shares to rise, though not as quickly or as much as his previous position would suggest. The net cost of the trade amounts to 1.64, and thus if shares can rally to a breakeven share price of $16.64 come fall, this investor will begin to garner profits.