Wednesday Market Themes: Options Bets on XLE Decline

Includes: KR, MMM, S, SWM, XLE
by: Cullen Roche

The VIX bounced off its 50 DMA to finish over 4% lower as investors re-evaluate the amount of exposure they have to the risk trade.

Crude oil fell 2% as inventories made an unexpected jump. The energy ETF saw some very active institutional trading:

[[XLE]] – Energy Select Sector SPDR ETF – Shares of the exchange-traded fund comprised of companies in the oil, gas, and energy equipment industries, fell 1% during the trading day to $54.30. A massive put spread by one investor indicates shares of the XLE may decline further by the time the quarterly December contract options expire on December 31st, 2009. It appears the bearish trader purchased 74,800 puts at the December 53 strike for 95 cents apiece, spread against the sale of 74,800 puts at the lower December 48 strike for 13 pennies each. The net cost of the pessimistic play amounts to 82 cents per contract. The investor likely holds a long position in the underlying stock. The puts serve to protect the value of the stock position in case shares continue to decline. Downside protection kicks in if shares of the XLE decline beneath the breakeven point at $52.18 by expiration on the final day of 2009.

Other picks

Goldman Sachs started Schweitzer-Mauduit International, Inc. (NYSE:SWM) as a conviction buy list name with an $80 price target. They cite 3 main reasons for the bullishness:

(1) 4Q2009 earnings and updated 2010 guidance to be released in late Jan., (2) full implementation of ’safer-cigarette’ standard in the U.S. in 2010, and (3) the European Union formalizing its ’safe-cigarette’ standard and establishing an implementation date, which we expect will occur by mid-2010 with implementation by mid-2011.

Citi upgraded 3M (NYSE:MMM) to a buy with a $92 price target.

Citi upgraded shares of Sprint (NYSE:S) to a buy with a price target of $5.50.

UBS downgraded Kroger (NYSE:KR) to neutral with a $22 price target.