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SPDR S&P 500 ETF (SPY)A massive bearish put spread purchased on the SPY this morning suggests one big options market participant is bracing for the S&P 500 Index to pull back ahead of November expiration. Shares of the SPY, an exchange-traded fund designed to correspond to the price and yield performance of the S&P 500 Index, edged 0.15% lower to $116.47 by 11:45 a.m. in New York trading. Domestic stocks have had a terrific run up since the end of August, but bullish momentum hit a speed bump this morning as news out of China inspired a return to risk aversion, rally in the dollar and renewed concerns the Chinese economy may slow down. The bearish put spread was initiated ahead of the release of FOMC minutes and perhaps reflects uncertainty regarding the amount and form quantitative easing may take. The put player purchased 100,000 puts at the November $112 strike at an average premium of $1.575 each, and sold the same number of puts at the lower November $110 strike for a premium of $1.15 apiece. Net premium paid to establish the spread amounts to $0.425 each, or total premium of $4.250 million. Thus, profits or downside protection are available to the investor if shares of the SPY fall approximately 4.145% from the current level of 164.4 to breach the average breakeven point at 115.575 by expiration day. Maximum potential profits of $1.575 or $15.750 million are available to the put spreader if the SPY ETF falls 5.5% to trade below 110.0 by November expiration. The S&P 500 Index would need to undergo an approximate 50% retracement of the past month’s gains in order for the trader to book maximum available profits by expiration day.

International Paper Co. (IP) Shares of the paper maker are up 0.45% to stand at $22.49 as of 12:10 p.m., but earlier surged as much as 3.25% to touch an intraday high of $23.12. The rally in its shares this morning enticed a number of bullish options strategists to position for the stock to extend gains. Investors engaged in plain-vanilla call buying at the October $23 strike where it looks like some 6,600 calls were purchased at an average premium of $0.26 apiece. Call buyers make money if International Paper’s shares exceed the average breakeven price of $23.26 through expiration on Friday. Optimism spread to the November contract where other bulls established call spreads. Traders picked up approximately 1,500 calls at the November $24 strike at an average premium of $0.74 each, and sold about the same number of calls at the higher November $26 strike for an average premium of $0.29 apiece. The average net cost faced by call spreaders amounts to $0.45 a-pop. Investors are poised to profit should IP’s shares rally 8.7% over the current price of $22.49 to surpass the average breakeven point to the upside at $23.45 by expiration day next month. Maximum potential profits of $1.55 per contract are available to traders if the paper maker’s shares surge 15.6% to trade above $26.00 by November expiration. The sharp increase in demand for IP calls helped lift the stock’s overall reading of options implied volatility 16.8% to 48.03% by 12:20 p.m.

Smithfield Foods, Inc. (SFD)The hog producer and pork processor popped up on our ‘most active by options volume’ market scanner this morning after one options strategist initiated what appears to be a bullish ratio risk reversal in the November contract. Smithfield’s shares are up 2.90% at $15.60 in early afternoon trading, but earlier increased as much as 4.485% to secure an intraday high of $15.84. The optimistic player sold 4,000 puts at the November $15 strike for an average premium of $0.56 each in order to purchase 2,000 calls at the higher November $16 strike at an average premium of $0.55 apiece. The investor pockets a net credit of $0.57 per contract on the risk reversal, and keeps the full amount as long as the meat maker’s shares exceed $15.00 through November expiration. Additional profits start to accumulate should SFD shares rally above $16.00 by expiration next month. Selling 4,000 puts at the November $15 strike indicates the trader is willing to have 400,000 shares of the underlying stock put to him at an effective price of $14.43 each in the event that the puts land in-the-money at expiration.

Chico’s FAS, Inc. (CHS) Options traders touting bullish views of the retailer are shopping around for call options today with the price of the underlying stock rallying as much as 4.00% in the first half of the session to an intraday high of $11.38. CHS was rated new ‘market perform’ by analysts at Raymond James this morning. Investors picked up roughly 4,200 now in-the-money calls at the October $11 strike for an average premium of $0.31 each. Call buyers at this strike make money if the clothing retailer’s shares trade above the average breakeven price of $11.31 through expiration on Friday. Near-term bulls looked to the higher October $12 strike where another 1,175 calls were purchased at an average premium of $0.10 a-pop. Optimism spread to the November contract where traders scooped up 1,500 in-the-money calls at the $10 strike for an average premium of $1.25 apiece. Roughly 3,000 in-the-money calls were picked up at the November $11 strike at a premium of $0.90 each, while 2,200 calls were purchased at the November $12 strike for an average premium of $0.40 apiece. Calls buyers are well-positioned to benefit should shares of the retailer continue to rally through expiration. Additionally, the company is slated to report third-quarter earnings ahead of the opening bell on November 17, 2010. Options implied volatility on CHS is up 13.00% at 63.10% as of 12:30 p.m. in New York.

Source: Tuesday Options Brief: SPY, IP, SFD & CHS