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by David Russell

State Street (NYSE:STT) is rallying today, and traders are using options to mitigate potential downside in the bank's share price.

State Street ChartIn one of the largest trades, 10,000 June 40 calls were sold for $4.10, according to optionMONSTER's monitoring systems. By writing in-the-money calls, investors are probably locking in profits on existing long positions in the stock and hedging against a potential decline. In another big trade, 10,000 June 45 calls were sold for $1.90. Volume was at least double open interest in both strikes.

STT rose 6.47 percent to $41 in morning trading after the company announced plans to issue $1.45 billion of new shares and to sell debt to repay government funds. Earlier in the month, STT reached a four-month high of $44, triple the January low. There was also above-average selling of the June 43 calls, which changed hands for $2.

In another large trade, 10,000 June 38 puts were purchased for $2.10, likely reflecting protection buying by a new investor in the stock. Other traders sold the June 35 puts for $1.60, which reflects a willingness to own the shares on a pullback and a belief downside in the stock will be limited.

Source: Options Used to Cut State Street Risk