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iShares Dow Jones U.S. Real Estate Index ETF (NYSEARCA:IYR) – A three-legged bearish options combination play on the IYR, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Dow Jones U.S. Real Estate Index – an index created to measure the performance of the real estate sector of the U.S. equity market, indicates one big player is bracing for a pullback in shares of the ETF through the end of 2010. Shares of the fund went the way of the market this afternoon and rallied 1.05% to $50.71 with less than one hour remaining in the trading week. The investor sold roughly 10,000 calls at the December $55 strike at an average premium of $1.35 each, purchased about 10,000 puts at the December $50 strike for an average premium of $3.65 apiece, and shed 10,000 puts at the lower December $43 strike at an average premium of $1.43 a-pop. The net cost of the pessimistic play is reduced to $0.87 per contract. The transaction could be a hedge to protect the value of a large position in IYR shares. But, if the spread represents an outright bearish bet on the ETF, the investor is poised to profit should shares dip below the average breakeven price of $49.13 by December expiration. Maximum available profits in this scenario amount to $6.13 per contract if the fund’s shares plummet 15.2% from the current price to trade below $43.00 by expiration day.

National Semiconductor Corp. (NSM) – Shares in semiconductor manufacturer, National Semiconductor Corp., earlier slipped 2.05% to touch a new 52-week low of $12.41, but the stock came roaring back to life in afternoon trading, rallying as much as 3.2% to an intraday high of $13.08. The significant shifts in the price of the underlying shares inspired investors to purchase both call and put options on the stock today. Options traders may also be gravitating toward NSM options ahead of the firm’s first-quarter earnings report scheduled for September 9, 2010. Investors heartened by the turn-around in shares purchased approximately 5,800 calls at the November $13 strike for an average premium of $0.85 apiece. Call buyers make money if National Semiconductor’s shares rally another 5.9% over today’s high of $13.08 to trade above the average breakeven price of $13.85 by expiration day in November. Meanwhile, investors bracing for potential erosion in NSM shares scooped up put options at the $13 strike price in both the November and February 2011 contracts. Nearer-term pessimists bought roughly 2,700 puts for an average premium of $0.91 each, while long-term bearish players picked up 4,700 puts at an average premium of $1.50 a-pop. Buying interest in both calls and puts at the November $13 strike suggests the likelihood of increased volatility in National Semiconductor Corp. in the next several months to expiration.

International Game Technology (NYSE:IGT) – A short straddle enacted on the maker of electronic gaming equipment today suggests one strategist expects the price of the underlying shares to settle at $15.00 by expiration day next month. IGT’s shares inched up 0.20% to $15.10 in late afternoon trading. It looks like the straddler sold 12,500 in-the-money calls at the September $15 strike for premium of $0.50 apiece in combination with the sale of 12,500 puts at the same strike for a premium of $0.40 each. Gross premium pocketed on the transaction amounts to $0.90 per contract. The trader responsible for the short straddle keeps the full amount of premium received as long as shares settle at $15.00 at expiration. Premium retained by the investor will dissipate if shares shift away from the strike price in either direction. The entire $0.90 premium disappears and gives way to potentially devastating losses if IGT’s shares rally above the upper breakeven price of $15.90, or if the stock trades below the lower breakeven point at $14.10, ahead of September expiration.

Gulf Resources, Inc. (GFRE) – Options activity on the manufacturer of specialty chemical products indicates one investor is hoping to see Gulf Resources’ shares trading at a far higher price by expiration in April 2011. GFRE shares inched up 0.80% in afternoon trading to stand at $8.56 by 1:25 pm ET. It looks like the optimistic individual purchased 4,500 calls at the April 2011 $10 strike for an average premium of $1.20 each, and sold the same number of calls at the higher April 2011 $12.5 strike for premium of $0.60 apiece. Net premium paid by the investor to establish the spread amounts to $0.60 per contract. The trader makes money on the transaction as long as Gulf’s shares surge 23.8% over the current price of $8.56 to exceed the effective breakeven price of $10.60 by expiration day in April. Maximum potential profits of $1.90 per contract pad the investor’s wallet if the chemical maker’s shares jump 46.00% in the next 8 months to settle above $12.50 at expiration. The overall reading of options implied volatility on GFRE tumbled 11.5% lower to 58.32% in the second half of the session.

Lincoln National Corp. (NYSE:LNC) – Rumors that Manulife Financial submitted a $32.00 per share offer to buy Lincoln National Corp. fueled a 7.8% rally in LNC’s shares to an intraday high of $23.20 as of 12:50 pm ET. The stock’s overall reading of options implied volatility increased as much as 25.2% on the takeover chatter to reach an intraday peak of 57.68%. Investors established near-term bullish positions on the operator of insurance and retirement businesses by scooping up call options I n the September and October contracts. Traders picked up 2,000 now in-the-money calls at the September $23 strike for an average premium of $0.65 each, and purchased another 3,000 calls at the higher September $24 strike at an average premium of $0.40 a-pop. Bulls coveted more than 5,500 call options at the September $26 strike by shelling out an average premium of $0.19 per contract. Investors long the September $26 strike calls are prepared to profit in the event the takeover rumors have legs to stand on, and shares rally at least 12.9% over today’s intraday high of $23.20 to exceed the average breakeven price of $26.19 by September expiration. A different strategy was employed at the October $27 strike where it looks like one trader sold 11,000 calls to receive $0.61 in premium per contract. Perhaps the call seller either doubts the rumors are credible, or otherwise sees a takeover of LNC as unlikely to occur in the next couple of months. If the sale of the calls is uncovered by a long position in the underlying stock, the trader is vulnerable to potentially devastating losses should Lincoln’s shares surge 19.00% to exceed $27.61 by expiration day in October. The investor could simply be taking advantage of the richness in premium on the calls given the stock’s massive run up in implied volatility and sharp rally in share price. If volatility collapses or takeover rumors abate, the trader could buy back the short position at an advantageous price to exit with profits in hand. Another possibility is the trader is long the stock and more than happy to pocket the $0.61 premium today with the knowledge that he may have to walk away with gains of 19.00% on the run up in shares from $23.20 to $27.00 if the shares are called from him at $27.00 each at expiration. Finally, other bulls buying into the rally picked up some 1,200 calls at the October $28 strike for an average premium of $0.23 per contract.

Baker Hughes, Inc. (NYSE:BHI) – Options traders employed two different bullish trading tactics on the supplier of oil equipment and services today. One strategist purchased a debit call spread, while another trader engaged in plain-vanilla call buying in the January 2011 contract. Baker Hughes’ shares rallied as much as 2.2% during the first half of the session to touch an intraday high of $38.41. The stock took a severe beating during the month of August, falling roughly 27.20% from $50.50 on August 2, 2010, down to today’s intraday low of $36.76. But, it looks like options investors populating BHI today are expecting shares to continue to rebound in the second half of the year. One long-term bull purchased 2,500 calls outright at the January 2011 $48 strike for an average premium of $1.09 apiece. The call buyer is poised to profit should BHI shares surge 27.8% to trade above the average breakeven price of $49.09 by expiration. Another optimistic strategist reduced the cost of taking a bullish stance on the stock by buying a call spread. The trader picked up 5,000 calls at the January 2011 $48 strike at an average premium of $1.12 each, and sold the same number of calls at the January 2011 $50 strike for premium of $0.78 apiece. The net cost of the trade amounts to $0.34 per contract. Shares of the underlying stock must rally 25.85% to reach the effective breakeven point on the spread at $48.34. The spread trader stands ready to accumulate maximum potential profits of $1.66 per contract if shares jump 30.15% to settle above $50.00 by expiration next year. While implementing the spread reduces the investor’s net cost today, it also limits profits to the upside if the stock winds up blowing straight past the $50.00 level. The plain-vanilla call buyer’s profits are not capped in this way, but he does face a higher price at which the trade breaks even.

ON Semiconductor Corp. (NASDAQ:ONNN) – Shares of the global supplier of semiconductor components jumped more than 4.8% this afternoon to an intraday high of $6.52. Investors expecting the stock’s performance to improve over the next year and a half initiated bullish risk reversals in the January 2012 contract this morning. A total of 5,000 puts were sold at the January 2012 $5.0 strike at an average premium of $0.72 apiece, and spread against the purchase of the same number of calls at the higher January 2012 $7.5 strike at an average premium of $1.02 each. The average net cost incurred by risk reversal players amounts to $0.30 per contract. Thus, investors stand ready to make money if ONNN’s shares gain another 19.6% to exceed the average breakeven price of $7.80 by expiration day in 2012.

Hewlett-Packard Co. (NYSE:HPQ) – Bullish trading in HPQ LEAPs this morning indicates some options strategists are painting a rosy picture of where the tech giant’s shares will be trading by expiration in January 2012. HPQ’s shares are currently down more than 1.05% at $37.81 as of 11:30 am ET. The company did its part to continue the bidding war over 3Par, Inc., increasing its offer to $30.00 a share for the data-storage provider, topping Dell’s most recent bid of $27.00 a share. Options traders enacted three-legged bullish spreads, buying approximately 5,000 calls at the January 2012 $40 strike for an average premium of $5.42 each, selling about the same number of calls at the higher January 2012 $50 strike for premium of $2.15 apiece, and finally shedding some 5,000 puts at the January 2012 $30 strike at an average premium of $2.68 a-pop. The average net cost of putting on the transaction is reduced to just $0.59 per contract. Investors employing the bullish strategy are well positioned to make money if Hewlett-Packard’s shares head higher by expiration day. Profits start to accumulate if HPQ’s shares rally 7.35% over the current price of $37.81 to surpass the average breakeven point to the upside at $40.59. Maximum potential profits of $9.41 per contract are available to traders should shares of the world’s largest PC maker jump 32.2% to trade above $50.00 by expiration day in January of 2012. HPQ’s shares last exceeded $50.00 back on May 10, 2010.

Source: Friday Options Update: IYR, NSM, IGT, GFRE, LNC, BHI, ONNN, HPQ