Thursday Options Update: F, WFC, XLU & FXI

Ford Motor Company (F) – Shares of the U.S. automaker surged more than 10% to $7.04, surpassing the 52-week high for the stock of $6.53, after reporting earnings which exceeded analyst expectations. Cost cutting efforts and increased domestic market share contributed to losses of 21 cents per share versus average losses of 50 cents per share projected by analysts. Investors looking to lock in gains purchased more than 25,000 put options at the September 7.0 strike price for an average premium of 80 cents per contract. If the stock reverses direction ahead of expiration, put-holders who may be long shares of the underlying, are protected beneath the breakeven price of $6.20. Bullish trading was observed in the January 2011 contract where it appears that investors have effectively established call spreads. The January 10 strike price likely had 6,300 calls purchased for a premium of 1.35 apiece, while the higher January 15 strike looks to have had 6,300 calls shed for 50 cents each. The net cost of such positioning amounts to 85 cents and yields maximum potential profits of 4.15 per contract if the stock can rally up to $15.00 by expiration. The bullish earnings news allowed investors to breathe a sigh of relief, and pushed option implied volatility on the stock lower to 50% from yesterday’s closing reading of nearly 60%.

Wells Fargo & Co. (WFC) – The biggest U.S. home lender revealed that bad loans increased in the second quarter as borrowers struggled to maintain payments in the recessionary climate. Shares slipped lower by about 0.5% to arrive at the current price of $24.53. One bearish investor looked to profit from Wells Fargo’s pain by establishing a put spread in the September contract. The spread involves the purchase of 7,000 puts at the September 23 strike for 1.25 apiece against the sale of 7,000 puts at the lower September 20 strike for 45 cents each. The net cost of the transaction amounts to 80 cents, yielding maximum potential profits of 2.20 if shares decline to $20.00 by expiration. The trader responsible for the spread will begin to amass profits given a 9% decline in the stock through the breakeven point at $22.20.

SPDR Utilities Select Sector ETF (XLU) – Shares of the utilities exchange-traded fund are currently higher by more than 1.5% to $28.85. A bullish trader hoping for a continued rally established a calendar spread on the XLU. It appears that the investor sold 15,000 calls short at the December 29 strike price for a 1.15 apiece in order to purchase 15,000 calls at the nearer-term September 29 strike for an average premium of 37 cents per contract. The trader enjoys a net credit of about 78 cents on the spread. Shares of the ETF must rise a paltry 15 cents from the current price in order for the investor to continue to accumulate profits on the transaction. The short position held in the December contract must be closed out at some point if the calls are in-the-money by the conclusion of 2009. Otherwise, the investor would likely have shares of the underlying called away from him at expiration at a price of $29.00.

iShares FTSE/Xinhua China Index Fund (FXI) – The China ETF edged higher on our ‘most active by options volume’ market scanner today amid a mixture of overtly bullish call-buying and protective positioning. Shares of the FXI have rallied higher by more than 4% to $42.18. One investor, who does not expect the fund to rise through $45.00 any time in the near-future, initiated a risk reversal in the September contract. The trader shed 10,000 calls at the September 45 strike price for a premium of 95 cents in order to partially finance the purchase of 10,000 puts at the September 39 strike for 1.35 each. The net cost of the downside protection amounts to 40 cents and yields profits if shares slip beneath the breakeven point at $38.60. Bullish traders scooped up call options, positioning for continued upward movement in the ETF. The September 45 strike price had 3,000 calls picked up for about 95 cents each while the higher September 46 strike also had 3,000 calls coveted for 85 cents apiece. Finally, bullishness spread as high as the November 48 strike price where uber-optimists purchased 4,000 calls for an average premium of 1.30 per contract. Profits will amass for investors long the November 48 strike calls given a 17% rally in shares through the breakeven price of $49.30 by expiration.