Today's tickers: WFC, XLF & CAT

WFC – Wells Fargo – Several large option trades have shown up on our market scanners today involving more bearish plays on Wells Fargo whose shares traded beneath a $13.40 52-week low earlier. With shares at $13.38 and lower by 2.2% today there is something of a cautious tone and a high put/call ratio indicating more than four puts being traded than call options. In the March contract investors paid 1.10 for rights to sell Wells Fargo shares should its price tag slide by another 30%, while at the in-the-money 15.0 strike some 60,000 puts were bought at 4.00 each. Deeper in-the-money puts were also purchased today at the 18.0 and 20.0 strikes. At the April contract at the 12.5 strike two large 22,500 trades went through in which puts were bought at 3.20 and traded to a mid-market price of 3.10 implying a break even of $9.40 to a bear. Option implied volatility is fast approaching November panic levels and today reads 167%. We see no reason for an acceleration in shares to the downside, but note yesterday's unsubstantiated market chatter that the company faces fresh writedowns after the Wachovia takeover.

XLF – Financial Select Sector SPDR – Shares of the banking index have risen 0.75% today to $8.03, and our 'most active by option volume' market scanner picked up on some medium-term bullish trades in the June contract of the exchange traded fund that tracks the major banks. Investors took a more optimistic view on the XLF as over 7,300 calls were purchased at the June 12 strike price for 33 cents apiece. Even more bullish was the purchase of 5,000 calls at the June 14 strike at a cost of 13 cents per contract. Perhaps amid all the doom-and-gloom currently surrounding financials, some traders are beginning to see glimmers of light at the end of the tunnel as spring gives way to summer 4 months from now. Option implied volatility at 94% is little changed on Tuesday's reading.

CAT – Caterpillar Inc. – Shares of the machinery company are off by less than 1% today to $28.77, just 25 cents off the 52-week low of $28.52. One eye-catching trade occurred in May, where one investor appears to have initiated a ratio put spread by selling 10,000 puts at the May 17.5 strike for 43 cents apiece, and purchasing 5,000 puts at the May 25 strike price at a cost of 2.14 per contract. Thus, the net cost to the trader amounts to 1.71. It seems that he is looking for further fallout on CAT shares to as far as the $17.50 (the lower strike), where maximum profits of 5.79 – the distance between the two strikes minus the net cost of the trade - would be realized. In order for the trade to make the investor money, shares would need to decline by 18.3% to $23.29, at which point profits begin to amass. Since the investor is net short of one put option should Caterpillar shares decline beneath $17.50 the profits start to erode and would be eaten away by the time the share price fell to $11.71.

Andrew Wilkinson

Senior Market Analyst

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