Thursday Options Update: XRT, CLF, WFMI & VRTX

Retail Select Sector SPDR (XRT) – Shares of the retail ETF were off slightly early in the trading day, but have since rallied by more than 1% to $25.84 despite the 3.1% decline year over year in retail sales (excluding autos and gasoline). Sales have fallen for the second month in a row with April’s shift downward of about 0.4% following the worse-than-expected 1.3% drop observed in March. Some option traders were seen bracing themselves for continued bearish movement in the fund as more than 30,000 puts look to have been purchased at the September 20 strike price for an average premium of 98 cents apiece. Such positioning suggests significant pessimism as those individuals long of puts at that strike begin to profit to the downside at a breakeven price of $19.02 by expiration. In order for profits to be realized, shares of the XRT would need to erode by about 26% from the current price over the next 4 months. In stark contrast one investor was seen looking for significant near-term gains in the ETF. The contrarian trade involved the sale of 7,500 puts at the June 24 strike price for 85 cents each spread against the purchase of 7,500 calls at the June 29 strike for 35 cents. The bullish individual enjoys a 50 cent credit on the trade and is looking for shares to rally by at least 12% so that the June 29 calls may land in-the-money by expiration next month.

Cliffs Natural Resources Inc. (CLF) – The trials and tribulations of the commodity boom-and-bust cycle have certainly weighed heavily at CLF. The iron-ore pellet producer recently said it lost money in the first quarter and yesterday announced measures to save money after it unveiled pollution penalties. While shareholders saw their investments slide as its shares fell, they were served a double does of bad news with a capital-preserving dividend cut, while employees and directors saw their benefits slashed. The final straw was the offering of 15 million common shares priced at $21.00. Last week its shares were trading at $32.12. Today shares of CLF have fallen more than 8% to $21.30. A June strangle at the 21.0 strike indicates that one trader expects the shares to remain on an even keel over the next month but sees them locked between $15.83 and $26.17. The trade involved the sale of 3,000 calls and puts at the strike to rake in a 5.17 premium. Another investor expects the depression to be gone by the fall and sold an October strangle selling 1,200 puts at the October 25 strike and sold 1,200 calls at the October 35. This individual rakes in 8.56 and is looking for shares to remain ‘strangled’ by the strike prices described. The opportunity to play on such a hefty premium was brought about by a rise in the option implied volatility on the stock, which has been on the rise since last Friday’s reading of 85% to today’s high of 103%. The sold straddle and strangle strategies may prove profitable to the responsible traders if volatility comes off and allows them to buy back the short positions for less than they initially paid.

Whole Foods Market Inc. (WFMI) – Investors rallied around Whole Foods heading into yesterday’s earnings report, which in the event revealed that the Texas-based provider of natural and organic foods was successful in promoting its lower-priced lines as well as reining in its cost structure. After coinciding its results with a lousy retail sales report, its shares languished. Today there is a sense of stability with shares up 1.4% to $20.28. However, a post-earnings slide in options implied volatility is encouraging investors to buy into downside protection as they pay heavily eroded put premiums at the May 20 strike. At just 35 cents per contract protective put option buyers are paying 70% less than yesterday’s premium. Elsewhere the June 20 strike, which has fallen by 27% in value on the day, is seeing most activity with 8,444 contracts in play so far today. The premium implies a down move for Whole Foods through expiration to $18.45. On the call side the heaviest-trafficked contract is at the may 23 strike where sellers have dictated the activity as they unwind around 3,000 lots for a mere 3 cent premium. Volatility has subsided from 87 to 64% today.

Vertex Pharmaceuticals, Inc. (VRTX) – Shares of the pharmaceuticals firm have rallied by about 0.5% today to $29.13 amid speculation reported by one news source that VRTX may have agreed to be acquired by Britain’s GlaxoSmithKline (GSK). In line with the unconfirmed takeover rumors, we observed traders getting long of call options in the June contract. The June 35 strike price saw more than 6,000 calls bought for an average premium of 59 cents apiece. Such a stance requires that the stock receive more than the doctor-prescribed dose of bullishness in order for investors to profit by expiration next month. Activity in the options market suggests a substantial premium to any buyout price as shares would need to gain 22% in order to breach the breakeven point on the calls at $35.59. Option implied volatility on the stock jumped up to 64% this morning but has since tapered off to the current reading of 59% in line with yesterday’s closing value.

Comments

[einstein p ...:]

Looks like Cleveland fell off the Cliffs. ANR, on the other hand, seems to moving in the opposite direction.

I seem to recall that a hedge fund blocked the acquisition. Should be interesting to see where the two companies trade in 12 months.

May 14 06:16 PM