Wednesday Options Update: STI, XTO, NTES & MCHP

SunTrust Banks, Inc. (STI) – Shares of the financial services company have rallied by 14% to $19.35 amid declines in investor fear and uncertainty over the results of the stress-tests due out tomorrow. The news that Bank of America (BAC) needs to close a $34 billion capital gap actually eased investor tension as those thirsty for added clarity regarding the state of financials were given a drink. STI popped onto our ‘most active by options volume’ market scanner after a few massive put transactions were observed in the May and June contracts. It appears that one investor sold 32,500 puts at the May 14 strike price for 35 cents apiece in order to partially finance a put spread. The spread was established through the purchase of 32,500 puts at the June 16 strike for 1.65 each spread against the sale of 32,500 puts at the June 11 strike price for a premium of 40 cents per contract. The net cost of the transaction – including the funding from the sale of the May puts – amounts to 90 cents. This investor may already have been long of the May 14 puts and is possibly taking advantage of the 35% jump in shares at STI in recent days. At the same time the put spread allows him to move the strike price higher while simultaneously extending the duration by a further month. Option implied volatility on the stock has come off from yesterday’s reading of 122% to the current value of 112%.

XTO Energy, Inc. (XTO) – The U.S. natural-gas company has gained more than 11% today to arrive at the current share price of $42.15. Production at XTO has surged 29% to an all-time high, nurturing the reported 4.5% growth in first-quarter profits. Additionally, the firm’s success is largely due to its ability to avoid getting slammed by eroding energy prices by locking in sales through hedging before the commodities markets tumbled. Option investors were observed locking in gains on the stock by picking up put options. About 1,100 puts were bought at the May 41 strike price for 1.07 apiece. In the event that shares reverse before expiration this month, traders long of May 41 puts are now protected starting at a breakeven share price of $39.93. Earlier there was call activity as buyers locked into a $42.00 purchase price using the May contract where 1,000 lots were bought at a premium of 1.06. Premiums have continued to rise to 1.45 as XTO rallies. In the well out-of-the-money August 26 strike price, one investor looks to have purchased 7,000 puts for 35 cents each. That strike seems well off base, but a rise in volatility surrounding the stock accompanying a nudge back down in the share price would boost premiums.

Netease.com, Inc. ADR (NTES) – The provider of online Chinese language content and services has experienced a share price increase of 3% to $32.05. Our attention was drawn to the June contract where one trader made some interesting bullish plays. It appears that he has banked gains on the sale of 6,000 calls at the June 30 strike price for 3.43 apiece. A similar volume of calls was originally purchased on March 31, 2009, for just 1.30 a pop when shares stood at $26.90. By closing out his position during today’s rally the investor has reeled in per contract profits of 2.13. Looking for further bullish moves in the stock he rolled the position forward in the same month by purchasing 6,000 calls at the June 35 strike for 1.18 each. The investor retains a profit of 95 cents by getting long the calls. Shares will need to rise by about 9% from the current price in order for the June 35 calls to land in-the-money by expiration.

Microchip Technology (MCHP) – Specialist semiconductor manufacturer, Microchip Technologies saw a modest amount of bearish put activity on its shares whose price is marginally higher at $23.10 today. Earnings are expected on Thursday, and it appears that an investor sold the May/June 25 calendar spread at a cost of 37 cents some 8,500 times. The trade might mark the roll of an established put holding at the May contract judging by the more than 10,000 lots of established open interest. This could be the work of a bullish investor in the company seeking protection through earnings on a core investment in the company whose shares have risen from $21.50 during the past 10 days.