XTO – XTO Energy Inc. – Options activity appears to reveal a bullish stance on the energy company hoping to chop away at the cost of getting lock the stock by August expiration. Shares are responding to cheaper crude oil prices today and are 2.9% lower at $30.50 while this investor spent a 5.57 premium to buy calls at the 30 strike. However, the premium was doubly eroded by the sale of 22.5 strike puts at 1.86 and 40 strike calls at 1.91 in the same month. The net cost of the calls is then reduced to 1.80, which reduces the investors breakeven from a share price of $35.57 to just $31.80. Of course there is no free lunch in the world of options and the investor is at risk of having shares put to him in the event that the trade goes belly up with shares closing below $22.50 at expiration. In addition, a greater amount of calls were sold at the upper strike than were bought at the lower strike. It is possible that stock was involved in this cost-effective combination.

C – Citigroup, Inc. – While shares remain on the rise, today’s 7% rally to $1.56 pales in comparison with the 28% jump experienced yesterday. The excitement surrounding CEO Vikram Pandit’s encouraging words seem to have died down a bit as investors realize rallies – particularly in impaired financial stocks – may become ephemeral. Thus, option traders were seen banking gains by selling calls across several contracts. Some 20,000 calls shed at the September 3.0 strike price stuck out as investors sold out between 34-50 cents per contract on options that traded at 15 cents over the course of the last week.

MS – Morgan Stanley – The global financial services firm must feel elated over today’s 12% share price gain to $23.35. Option traders were seen banking profits in the April contract where 15,000 calls were shed for an average premium of 1.82 each. Despite the encouraging gains made yesterday and today, investors remain cautious on financials. Traders scooped up downside protection at the March 22 strike price by purchasing 9,600 puts for an average of 1.69 each.

HIG – The Hartford Financial Services Group, Inc. – The insurance and financial services company has seen shares increase by 5% to $5.46. Despite the rally, bearish option investors appear to be dominating activity today. In the March contract at the 2.5 strike price, about 9,600 puts were purchased for an average of 12 cents each, indicating perhaps that traders feel the need for downside protection. At the March 5.0 strike price, some 11,000 calls appear to have been sold for an average premium of 1.05. It is likely that these investors are banking gains given rising premiums on now in-the-money call options. Call sales were also observed at the March 7.5 strike where 1,900 traded for an average of 21 cents apiece. Perhaps investors have decided to take the money and run amid recent share price inclines as the sting of the past month’s market turmoil remains fresh in their memories.

MT – ArcelorMittal ADS – The manufacturer of semi-finished and finished steel products has seen its shares rally by about 3% to $20.64. The steel company hopped onto our ‘hot by options volume’ market scanner this morning after one investor established a bearish ratio put spread in the June contract. At the June 17.5 strike price 5,000 puts were purchased for 2.75 each, while at the June 12.5 strike 10,000 puts were sold for a premium of 1.00 per contract. The investor’s net cost for the spread amounts to 75 cents. This strategy implies that the trader sees today’s rally as short-lived and seeks profits from the put spread if shares fall 21% from the current price to the breakeven point located at $16.75. Maximum profits in the amount of 4.25 will have been realized if shares continue to decline to the lower strike price at $12.50. Should shares continue to fall below the lower strike, the net short put leaves the investor vulnerable to losses starting at $8.25 – the breakeven on the downside.

Andrew Wilkinson

Senior Market Analyst


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