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SPDR S&P Homebuilders ETF (NYSEARCA:XHB)Shares of the XHB, an exchange-traded fund designed to track the performance of the S&P Homebuilders Select Industry Index, are trading 3% lower this afternoon to stand at $18.29 as of 2:50 pm (ET). Pessimistic positioning by one options strategist suggests shares of the underlying fund could continue to decline ahead of June expiration. The investor initiated a three-legged options combination play, essentially selling call options to finance the purchase of a debit put spread on the fund. The pessimistic player established the trade by purchasing 12,000 puts at the June $18 strike for a premium of $0.79 apiece, spread against the purchase of the same number of puts at the lower June $17 strike for $0.44 each. The third leg of the transaction involved the sale of 12,000 calls at the June $20 strike for a premium of $0.36 a-pop. The investor responsible for the bearish play pockets a net credit of one penny per contract, and keeps it as long as shares trade below $20.00 through expiration day. Maximum potential profits available to the trader – including the net credit received – amount to $1.01 per contract and pad the investor’s wallet if shares of the underlying fund decline another 7.05% from the current price of $18.29 to breach the $17.00-level by June expiration.

Meritage Home Corp. (NYSE:MTH) The homebuilding company, like the homebuilders ETF, enticed bearish options investors late in the trading session. Meritage Home’s shares are down sharply by 5.35% to $22.11 as of 3:00 pm (ET). But, Meritage is not the only one suffering today as shares of rival firms Pulte Group Inc., Lennar Corp and D.R. Horton, Inc., also declined significantly along with the price per share of the SPDR S&P Homebuilders ETF. Pessimistic options players expecting MTH’s shares to continue lower in the next several months purchased at least 4,300 puts outright at the September $20 strike for a premium of $1.60 per contract. The confirmed purchase of the these contracts represents just a portion of the more than 10,000 puts exchanged at that strike today where previously open interest stood at just 377 lots. Put-buyers make money if Meritage’s shares plummet 16.75% below the current price of $22.11 to breach the effective breakeven point to the downside at $18.40 by September expiration.

American International Group, Inc. (NYSE:AIG)Bearish investors established pessimistic positions using put options on AIG this afternoon with shares of the underlying stock trading 1.90% lower to $37.53 with 45 minutes to go before the closing bell tolls. One or more investors utilized the ratio put spread strategy to brace for continued share price erosion through May expiration. It looks like traders purchased approximately 4,000 puts at the May $37 strike for an average premium of $2.48 apiece, and sold about 8,000 lots at the lower May $30 strike for an average premium of $0.39 each. The average net cost incurred by ratio-spreaders in this case amounts to $1.70 per contract. The investor or investors responsible for the put play make money if AIG’s shares trade beneath the average breakeven price of $35.30. Maximum potential profits of $5.30 per contract are available should shares of the underlying stock collapse 20% lower to $30.00 by expiration day.

Tenet Healthcare Corp. (NYSE:THC)A long strangle strategist populating Tenet Healthcare Corp. this morning is positioning for shares of the health care services provider to sink or swim by November expiration. Tenet’s shares fell sharply during Tuesday’s trading session by as much as 8.2% to an intraday low of $5.83 after the Dallas-based firm said it expects to earn $0.14 to $0.19 per share in 2010, which failed to meet average analyst estimates of $0.22 a share. The hospital operator’s shares are off 0.85% during the current session to stand at $5.82 as of 12:10 pm (ET). The options player established the long strangle by purchasing 10,000 puts at the November $5.0 strike for an average premium of $0.47 apiece, and by picking up 10,000 calls at the higher November $6.0 strike for $0.82 each. The net cost of the transaction amounts to $1.29 per contract. The investor long the strangle makes money if shares of the underlying stock shift dramatically in either direction away from the strike prices described. Profits start to accumulate if Tenet’s shares rally above the upper breakeven price of $7.29, or if shares slip beneath the lower breakeven point at $3.71, ahead of November expiration. Generally speaking, the trader is looking for increased volatility in the price of Tenet’s shares and stands to benefit from higher options implied volatility on the stock, as well. The worst case scenario for this individual is that shares stagnate and fail to break out of the range specified as this would result in total loss of the premium paid to purchase the options transaction.

Polo Ralph Lauren Corp. (NYSE:RL) Shares of fashion giant, Polo Ralph Lauren Corp., are trading slightly higher by 0.40% to $91.00 as of 12:25 pm (ET). RL popped onto our ‘hot by options volume’ market scanner in the first half of the trading day after one options trader initiated a ratio put spread on the stock. Perhaps the put player is seeking downside protection on a long underlying stock position ahead of RL’s fourth-quarter earnings report slated for release ahead of the opening bell on Wednesday, May 19, 2010. Otherwise, the fresh activity could be the work of an investor enacting an outright bearish play on RL in anticipation of an earnings disappointment. The ratio put spreader purchased 2,000 lots at the June $90 strike for a premium of $4.45 each, and sold 4,000 puts at the lower June $85 strike for a premium of $2.45 apiece. The transaction results in a net credit of $0.45 per contract, which the responsible party keeps if shares of the underlying stock trade above $90.00 through expiration day in June. Maximum potential profits of $5.45 per contract – including the credit pocketed on the spread – are available to the trader should Polo Ralph Lauren’s shares decline 6.6% from the current price of $91.00 to settle at $85.00 by expiration day.

The Gap, Inc. (NYSE:GPS) One options investor sold a strangle on The Gap, Inc. today, indicating shares of the specialty retailer of clothing and accessories are likely to remain range-bound through May expiration. GPS shares are trading 0.60% higher to $24.86 as of 12:35 pm (ET). The options strategist sold approximately 6,000 calls at the May $26 strike for an average premium of $0.60 apiece in combination with the sale of roughly the same number of puts at the lower May $24 strike for an average premium of $0.67 each. Average gross premium pocketed by the strangle-seller amounts to $1.27 per contract. The investor keeps the full amount of premium received on the transaction as long as shares of the underlying stock trade within the range of $24.00 to $26.00 through May expiration day. The short position assumed in both call and put options expose the options player to losses should shares rally above the upper breakeven price of $27.27, or if shares slip beneath the lower breakeven point at $22.73, by expiration.

InterMune, Inc. (NASDAQ:ITMN) Shares of the biotechnology company plummeted 76.87% to $10.51 today after U.S. regulators rejected the firm’s application for a $1 billion/year lung treatment. News of the rejection inspired a flurry of analyst downgrades on InterMune. For example, analysts at JPMorgan cut their rating on ITMN to ‘neutral’ from ‘overweight’, while analysts at Wedbush downgraded the company to ‘neutral’ from ‘outperform’. Options investors were quick to react to the news right out of the gate this morning and generated heavy trading traffic in both call and put options in the near-term May contract. Contrarian players signaled they believe the price of the stock has collapsed to a bottom – at least in the near-term – and thus purchased 1,400 in-the-money calls at the May $10 strike for an average premium of $1.27 apiece. Call-coveters make money if shares of the biotechnology firm rebound above the average breakeven price of $11.27 ahead of expiration day. Similarly contrarian sentiment appeared at the May $7.5 strike where investors shed 1,300 puts to pocket an average premium of $0.12 per contract. Put-sellers keep the premium received today as long as InterMune’s shares trade above $7.50 through May expiration. All told, options players exchanged 77,860 contracts on ITMN as of 12:50 pm (ET).

iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM) One big options player was ready and waiting for shares of the EEM, an exchange-traded fund which corresponds to the MSCI Emerging Markets Index designed to measure equity market performance in the global emerging markets, to fall sharply ahead of May expiration. The investor booked profits on a large, previously established put position this morning and reaffirmed bearish sentiment on the fund by initiating a fresh put stance twice the size of the original. Shares of the underlying fund are currently down 1.25% to $39.84 as of 11:20 am (ET). It looks like the trader purchased 50,000 puts at the May $43 strike for a premium of $1.27 apiece back on April 14, 2010, when shares of the EEM were trading at a volume-weighted average price of $43.16 each. The fund’s share price is down 7.70% since the investor established a long put stance at the May $43 strike price. Thus, the trader was able to sell all 50,000 now deep-in-the-money contracts today for a premium of $3.37 apiece, banking net profits of $2.10 per contract on the transaction. The investor, however, apparently does not expect shares to rebound ahead of May expiration because he doubled the size of the original bearish stance on the fund by purchasing 100,000 puts at the May $39 strike today for an average premium of $0.845 per contract. The individual responsible for the put activity stands ready to accrue profits on the new position should shares of the underlying fund decline another 4.2% from the current price to breach the average breakeven point at $38.155 by May expiration.

iShares MSCI Brazil Index ETF (NYSEARCA:EWZ)A transaction strikingly similar to the trade described above on the emerging markets fund (EEM) appeared on the iShares MSCI Brazil Index ETF this morning. One properly positioned bearish options player banked profits on a large previously established long put position and subsequently purchased new chunk of puts comprised of twice as many contracts. Shares of the EWZ, an exchange-traded fund designed to correspond to the price and yield performance of publicly traded securities in the aggregate in the Brazilian market as measured by the MSCI Brazil Index, are down 1% to $67.29 as of 11:10 am (ET). The savvy bearish options trader originally purchased 20,000 puts at the May $75 strike for an average premium of $2.67 per contract back on April 5, 2010, when shares of the underlying fund were trading at a volume-weighted average price of $75.56 each. Shares of the fund have since slipped 10.95% down to today’s current value of $67.29. Today, the investor sold the now deep-in-the-money put options for a richer premium of $7.76 apiece to pocket net profits of $5.09 per contract. Next, the pessimistic individual augmented his position by purchasing 40,000 puts – that’s twice the size of the original bearish stance – at the lower May $66 strike for a premium of $1.78 per contract. Profits on the new position accumulate should shares of the underlying fund fall another 4.6% from the current price to breach the effective breakeven point to the downside at $64.22 by May expiration day.

Source: Wednesday Options Brief: XHB, MTH, AIG, THC, RL, GPS, ITMN, EEM & EWZ