Today's tickers: XLF, BWLD, PLC, KO, VIX, WFC, VNO & LFC
XLF – Financial Select Sector SPDR – Shares of the banking index well off its weakest point of the day closed 1.5% down at $9.18 and an interesting trade has caught our eye. In a repeat performance of a trade we watched go through yesterday at the 6/10 strike in the June contract, today we have a feeling of déjà vu in the September contract. Two ratio put spreads were initiated by a bearish investor at the September 6/10 and the 7/11 strikes just before 1p.m. (EST). At the September 10 strike, 5,000 puts were purchased for 2.52 each against the sale of 10,000 September 6 strike puts for a premium of 70 cents. This ratio yields a net cost to the trader of 1.12 for the spread. Thus, this investor will start to make a profit at the breakeven point located at $8.88, and his maximum profit of 2.88, which would be realized at the lower strike price of 6.0. If this bear isn't bearish enough he could stand to lose money if shares fall below $3.12 by expiration. Identical to the 6/10 play, was the September 7/11 ratio put spread initiated at the same time today. Purchasing 5,000 puts at the 11 strike price for 3.20 and selling 10,000 puts at the 7.0 strike for a premium of 1.05 each, yielded a net cost of 1.10 for the ratio spread. The trader will thus breakeven at $9.90 and stands to gain a maximum profit of 2.90, and will lose money if shares fall beneath the lower breakeven located at $5.90.
BWLD – Buffalo Wild Wings Inc. – Traders have apparently gone wild for wings today, reflecting the restaurant's more than 31% surge in share price to $28.79. Fourth quarter earnings for the wing-master beat Street estimates and reeled in 43 cents per share on 35.7% growth in sales at company-owned restaurants. BWLD's earnings are a breath of fresh air in an industry that continues to struggle in this recession. Its 2009 goals of 25% revenue growth and 20% to 25% net earnings growth appear to be on track, and offer a welcomed glimmer of optimism in the marketplace. Option traders reacted bullishly by picking up over 1,200 calls at the February 30 strike for 60 cents each. If shares can continue to rally to a breakeven of $30.60 before next Friday then these calls will wind up in the black. Out at the September 40 strike price, more bullishness abounds as over 3,000 calls were traded for an average price of 2.01 per contract, indicating that some feel today's rally is just the beginning.
PLC – Plum Creek Timber Co. – The wind has changed for the largest private timberland owner in the United States, as one investor sees brighter prospects in its future. Selling volatility and shedding 16,000 puts at the February 30 strike price for a premium of 90 cents apiece, indicates that this trader is bullish on the timber company. Shares are currently off by 5% at $30.85, slightly above today's low of $30.27. Apparently this level represents a floor for this trader who appears to have taken advantage of today's rich put premiums with his large sale. This investor pockets the 90 cent premium and stands prepared to buy the shares at a breakeven of $29.10 should prices fall below the 30 strike price. The company recently disappointed with its earnings out turn a week ago thanks to a decline in timber demand from residential builders, but was upbeat about current quarter and for 2009 prospects overall.
KO – Coca-Cola Company – Shares of the world's largest soft-drink company are enjoying a 6% rise in shares today to $43.78 after S&P Equity Research released a forecast for the beverage company to report 2008 earnings of $3.17 per share, an improvement of 17% over 2007. Option traders were active on Coke today, selling out-of-the-money puts in February and scooping up calls. At the February 40 strike price, nearly 6,500 puts were sold for a premium of 8 cents, while at the February 42.5 strike, 3,400 puts were shed for 40 cents apiece. About 3,000 in-the-money calls were sold for a premium of 1.23 at the February 42.5 strike, while at the higher strike price of 45, more than 4,300 calls were bought for 26 cents each. Perhaps these hopped up traders are hoping today's high will carry on, driving shares through a breakeven of $45.26.
VIX – CBOE Volatility Index – We're watching options implied volatility these days as the market plumbs the depths making a beeline for the November lows. We're watching this key indicator to see how investor fear reacts in the event we do test the low. Right now the VIX appears comfortable trading beneath a reading of 50 even in light of more bearish sentiment. Option traders have been busy buying call options in anticipation of a step up in the VIX before expiration early next week. Today the index stands 2.5% higher at 45.67 while February calls have been bought at the 55, 60 and 65 strikes on collective volume of 14,000. Traders expecting elevated anxiety next week are looking for respective breakevens of 55.83, 60.55 and 65.37 based upon premiums paid today.
WFC – Wells Fargo & Co. – It looks like one investor has given up hope of a significant rally for WFC in the next eight days given that shares are currently down by 11% to $15.57. Options expire next Friday. The trader sold 10,000 calls at the February 23 strike price for a premium of just 5 cents per contract. Perhaps the fact that shares would need to explode by at least 32% in order for the calls to land in-the-money by expiration, led this investor to throw in the towel on an unsuccessful bull play or is simply willing to take in premium on what he believes to be a highly unlikely outcome.
VNO – Vornado Realty Trust – Real estate investor, Vornado is inexplicably suffering today despite affirmation from ratings agency, Fitch & Co. on its outstanding debt quality. Shares are 6.7% lower at $46.25 and appear to be accelerating through recent support. An investor has used options to create an interesting calendar spread play that creates an overall credit to the account, but leaves the position exposed to risk should shares snap back. The investor bought 12,000 call options at the 55.0 strike for just 20 cents while simultaneously selling the same amount of same strike calls expiring in March at a 1.30 premium. It makes no sense that the investor is long of near-expiration calls so we think that he is taking advantage of time value in this case. The outright cost of the February calls is small, but would protect against a vicious rebound in the stock, but after Friday's expiration, the investor is naked short. However, the loss of time value on the March calls is currently running at 5 cents per day using the reading of theta. That means that, assuming the share price stands still through expiration, the premium would decline by around 40 cents. Given the erosion of the February calls of 20 cents the investor would still make out just fine here if the overall position was closed at next week's expiration.
LFC – China Life Insurance Company Ltd. (ADR) – The life insurance company of The People's Republic of China popped onto our 'hot by options volume' market scanner this morning due to some interesting straddle sales. Shares are currently down by about 3% to $43.05. Between 9:42 and 9:49 a.m. (EST), one investor sold three straddles in April and July. At the April 42.5 strike price a 3,100 lot straddle was sold for a gross premium of 8.50, yielding breakeven points at $34 and $51. This investor appears to be acting on expectations of a gentle decline in volatility from a current reading of 59% and a subsequent slight increase in share price. Optimally, shares would remain around the selected strike prices, in which case all of the premiums taken in would be pocketed. But, if shares stray outside of the breakeven boundaries on the straddles, this trader would be at risk of losses. The other two straddles occurred in the July contract. At the 42.5 strike, a 1,250 lot straddle was shed for a combined premium of 12.60, yielding breakeven points at $29.90 and $55.10. At the higher July strike price of 47.5, a 500 contract straddle was sold for a hefty sum of 13.10 apiece. Thus, this trader is raking in the premium as long as shares of the insurer do not breach the breakeven points at $34.40 and $60.60, respectively.