Wednesday Options Update: STI, VLO, UPS & RF

Includes: RF, STI, UPS, VLO
by: Interactive Brokers

SunTrust Banks, Inc. (NYSE:STI) – Shares of the financial services holding company are trading up 3.10% at a new 52-week high of $26.62. The SunTrust name was put in the frame on Tuesday when stories emerged that Britain’s Barclays Bank was on the prowl for an affordable U.S. bank with substantial deposit base. April contracts options trading, however, was dominated by a bearish investor bracing for a pull-back by expiration. It appears the trader purchased 7,500 puts at the April $24 strike for an average premium of $0.42 apiece, spread against the sale of 15,000 puts at the lower April $22 strike for $0.18 each. The so-called ratio put spread yields a net credit of $0.06 per contract. Additional profits accumulate if SunTrust’s shares suffer a 10% decline and breach the $24.00-level by April expiration. Maximum potential profits of $2.06 – including the $0.06 credit pocketed today – are available to the trader if shares plummet 17.35% from the current price to $22.00 by expiration day next month.

Valero Energy Corp. (NYSE:VLO) – The operator of refineries that produce gasoline, jet fuel, petrochemicals and other refined products experienced a 3.50% rally in its shares today to $20.22. Bullish options traders celebrated Valero’s share price improvement by booking profits on previously established positions, and by initiating fresh bullish stances on the stock. It looks like one trader prepared for today’s rally by selling 1,500 puts at the April $17 strike for an average premium of $0.35 apiece back on February 2, 2010. Today the investor was able to buy back the short puts for just $0.11 each, thus banking net profits of $0.24 per contract. The trader extended a new bullish stance on Valero by selling short 1,500 puts at the higher April $19 strike for a premium of $0.45 each. Shares of the underlying stock must be trading above $19.00 by expiration day next month in order for the investor to walk away with the full amount of premium received today. Fresh bullish positioning in call options took place in the September contract where one optimistic individual purchased a debit call spread. The investor picked up approximately 3,000 calls at the September $23 strike for an average premium of $0.71 each, and sold about the same number of calls at the higher September $25 strike for a premium of $0.35 apiece. The net cost of the transaction amounts to $0.36 per contract. Maximum potential profits of $1.64 per contract are available to the trader if Valero’s shares surge more than 23.50% from the current price to $25.00 by expiration day in September.

United Parcel Service, Inc. (NYSE:UPS) – Shipping services firm, United Parcel Service, received a medium-term vote of confidence by one bullish individual anticipating continued upward movement in the price of the underlying shares by expiration in July. UPS’s shares rallied 0.50% during the current session to $60.58. The options player initiated a bullish risk reversal by shedding 4,000 puts at the July $50 strike for an average premium of $0.44 per contract in order to finance the purchase of 4,000 calls at the higher July $70 strike for $0.19 apiece. The investor pockets a net credit of $0.25 per contract on the reversal, which he keeps as long as shares trade above $50.00 through expiration day. Additional profits, however, require shares to move sharply to the upside. The trader starts to accumulate additional gains only if shares jump 15.50% from the current price to surpass the upper breakeven point at $70.00 by expiration in July. We note that shares of the shipping company have not exceeded $70.00 since June 5, 2008.

Regions Financial Corp. (NYSE:RF) – Plain-vanilla call-buying on Regions Financial Corp. suggests some investors are positioning for a more than 25% rally in the price of its shares by August expiration. Shares of the underlying stock are up 5% already today to stand at $7.25 as of 12:40 pm (NYSE:ET). Optimistic options traders purchased approximately 4,000 calls at the August $9.0 strike for an average premium of $0.29 per contract. Call-buyers stand ready to accrue profits to the upside should Regions’ shares explode 28% from the current price to surpass the effective breakeven point on the call options at $9.29 by expiration day in August. The spoke in demand for options on Regions Financial today lifted overall options implied volatility on the stock 15.7% to 46.52%.