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Financial Select Sector SPDR ETF (NYSEARCA:XLF) – Large-volume option plays on the financials exchange-traded fund caught our attention today as shares of the XLF rose 1% to $14.43. It appears one bullish investor sold about 150,000 out-of-the-money put options across various strike prices to purchase 50,000 out-of-the-money calls. The trader sold 50,000 puts at the January 12 strike for 12 cents each, 50,000 puts at the higher January 13 strike for 24 cents apiece, and finally shed another 50,000 puts at the January 14 strike for 51 cents per contract. The put sales were spread against the purchase of 50,000 calls at the January 16 strike for 16 pennies apiece. Let’s assume all 200,000 contracts exchanged by the investor today represent fresh activity. If this is the case, the trader pockets a net credit of 71 cents per contract, which he retains in full as long as shares of the XLF remain above $14.00 through expiration in January. Additional profits accumulate if shares of the fund rally 11% from the current price to surpass the $16.00-level by expiration day.

U.S. Steel (NYSE:X) – United States Steel was one of four steel companies named by a Goldman Sachs’ analyst whose shares investors should buy. The sector was upgraded from “neutral” to “attractive” in the expectation that favorable pricing will follow the sector’s fortunes out of recession. Steel and scrap prices, having hit rock bottom should improve next year thanks to rising demand from automakers and China. Shares in U.S. Steel responded thanks to the favorable note with a 3% rally to $44.39 with the 52-week high of $51.60 set in late-September clearly in sight. Option traders responded through buying December expiration calls from the 45 through 50 strikes and lifting marginally the reading of options implied volatility to 46.5%. The January contract was less active although the 45 strike price saw 1,000 contract trade at a premium of around 2.74.

Freeport McMoRan (NYSE:FCX) – At the same time Goldman removed shares of gold and copper miner, Freeport from its conviction “buy” list causing its share price a 1.7% reversal of fortunes to $82.75. As a result option trades sold December expiration calls at the $85 strike where volume rose to near-6,000 contracts representing almost one-third of the number of open options positions. Premiums quickly subsided on the bullish contracts having reached an intraday peak of 2.85 as investors responded to the removal of the weight of Goldman’s recommendation. Those calls slipped to a premium of 2.05 by lunchtime. Investors also took aim at more defensive posturing and bought December put options at the 80 strike driving the premium up by around one-third to 2.26. As a result of today’s movement, implied volatility, a measure of forward-looking uncertainty added a few basis points to 44.5%.

American International Group, Inc. (NYSE:AIG) – Shares of the insurance company are down more than 12% today to $29.19 after Sanford Berstein slashed its price target on AIG by 40% to $12.00 from $20.00. Berstein reiterated its ‘underperform’ rating on the stock today. Bearish option investors flooded the near-term December contract to purchase put options. AIG-pessimists picked up 4,200 puts at the December 17.5 strike for an average premium of 16 cents apiece. These contracts will land in-the-money if shares of AIG plummet 40% from the current price by expiration in December. Traders scooped up 3,300 puts at the December 20 strike for 23 cents each. The higher December 25 strike had approximately 13,500 puts purchased for an average premium of 61 cents per contract before accelerating declines in the underlying boosted premiums above 1.0 and put volume doubled to around 26,000 contracts. Finally, the now in-the-money December 30 strike attracted option bears who bought 6,700 puts for 1.78 each. Option implied volatility on the stock surged 44.8% to 81.2% by the middle of the trading session.

CF Industries Holdings, Inc. (NYSE:CF) – The manufacturer and distributor of nitrogen and phosphate fertilizer products experienced a 0.25% increase in shares today to stand at $84.18. One investor initiated a bearish option strategy in the January 2010 contract. It appears the trader established a put spread by purchasing 4,000 puts at the January 80 strike for a premium of 3.50 apiece, marked against the sale of the same number of puts at the lower January 75 strike for an average premium of 1.95 each. The net cost of the spread amounts to 1.55 per contract. Perhaps the investor is long shares of the underlying stock. If this is the case, the trader is utilizing the put spread to protect the value of the underlying position in the event that shares of CF decline beneath the breakeven price of $78.45. Option implied volatility on the stock is up on the day at 42.66%.

Source: Monday Options Update: XLF, X, FCX, AIG & CF