Tuesday Options Update: JPM, ARIA, EWZ, PSS, FLEX, NXY, XRT & HON

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Includes: ARIA, CEO, EWZ, FLEX, HON, JPM, PSS, XRT
by: Interactive Brokers

JPMorgan Chase & Co. (NYSE:JPM)Volume in options traded on the financial services firm spiked in the final hours of the session after two big butterfly spreads were initiated in longer-dated call options. It looks like long-term bullish investor responsible for the transactions expects to see JPMorgan’s shares rebound in the next three to seven months. JPM’s shares are down 1.95% at $39.30 with 15 minutes remaining in the trading session, but fell as much as 2.60% earlier today to touch an intraday low of $39.04. The larger of the two bullish butterfly spreads utilized February 2011 contract calls. The investor paid a net premium of $1.12 per contract on the transaction, picking up 20,000 calls at the Feb. 2011 $40 strike, selling 40,000 calls at the Feb. 2011 $45 strike, and buying 20,000 calls at the higher Feb. 2011 $50 strike. Parameters of this spread dictate an effective breakeven share price of $41.12, above which the investor starts to make money, as well as maximum potential profits of $3.88 per contract if shares surge 14.5% over the current price of $39.30 to settle up at $45.00 at expiration. The trader could lose up to a maximum of $1.12 per contract or $2.24 million, but stands ready to accrue maximum potential profits of $3.88 per contract or $7.76 million. The smaller of the two butterflies was constructed with longer-dated June 2011 contract call options. This spread’s proportions are different than the larger call ‘fly in that the lower wing is twice as wide as the upper wing. The investor picked up 9,000 calls at the June 2011 $40 strike, sold 18,000 calls at the central June 2011 $50 strike, and bought 9,000 calls up at the June 2011 $55 strike, all at a net cost of $2.49 per contract. Maximum potential profits of $7.51 per contract are available to the bullish player if JPM’s shares jump 27.2% over the current share price to settle at $50.00 at June expiration. Options implied volatility on JPMorgan is up 7.9% to stand at 31.01% as of the close this afternoon.

Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) Shares of the pharmaceuticals firm engaged in developing therapies to treat solid tumors and hematologic cancers bucked the overall market trend this afternoon, rising as much as 1.90% to touch an intraday high of $3.73. The firm’s CEO reportedly presented at the Lazard Capital Markets Healthcare Conference earlier today in New York City. Ariad appeared on our ‘hot by options volume’ market scanner after one bullish player sold 3,750 puts at the May 2011 $2.5 strike to pocket a premium of $0.40 per contract. The put seller keeps the full premium received on the transaction as long as ARIA’s shares exceed $2.50 through expiration day in May. The investor expects shares to trade above $2.50, but is apparently willing to have shares of the underlying stock put to him at an effective price of $2.10 apiece in the event that the put options land in-the-money at expiration.

iShares MSCI Brazil Index Fund (NYSEARCA:EWZ)Options traders concerned that the pullback in emerging markets is just getting warmed up initiated bearish strategies on the Brazil fund today. Shares of the EWZ, an exchange-traded fund that tracks the performance of publicly traded securities in the aggregate in the Brazilian market as measured by the MSCI Brazil Index, are down 3.25% at $74.41 as of 3:00 pm in New York trading. One nervous options player appears to have picked up a ratio put spread, buying 5,000 puts at the March 2011 $74 strike for a premium of $6.30 each, and selling 10,000 lots at the lower March 2011 $65 strike at a premium of $2.95 a-pop. The net cost of the transaction amounts to $0.40 per contract and provides downside protection – should the investor hold a long position in the underlying fund – if shares of the EWZ slip beneath the effective breakeven price of $73.60 by March expiration. The trader is protected in the event that shares plummet 12.65% from the current price of $74.41 and trade down to $65.00 ahead of expiration day. Of course, by selling twice as many lower-strike put options, the investor could suffer losses, but shares of the EWZ would need to plunge 24.2% from the current price to trade below the lower breakeven point at $56.40 before losses start to accumulate to the downside in this case. Market uncertainty regarding future share price moves for the EWZ are reflected in the 8.1% increase in the fund’s overall reading of options implied volatility to 32.94% this afternoon.

Collective Brands, Inc. (NYSE:PSS) Shares of the operator of Payless ShoeSource rallied as much as 3.9% at the start of the trading day to hit an intraday high of $16.13 on news the firm plans to continue to expand internationally by taking its children’s shoe brand, Stride Rite, to mainland China next year. The rally in Collective Brands’ shares has cooled significantly as of 1:15 pm in New York with shares up a lesser 0.45% to stand at $15.60. Options strategists populating PSS today are positioning for shares to continue higher by initiating bullish risk reversals in the January 2012 contract. It looks like traders employing this tactic sold 2,500 puts at the January 2012 $15 strike for a premium of $2.65 each in order to buy the same number of calls at the higher January 2012 $17.5 strike at a premium of $2.65 apiece. The trade is essentially free and prepares investors to make money if Collective’s shares jump 12.2% over the current price of $15.60 and trade above the effective breakeven point at $17.50 by expiration day. Selling the put options at the Jan. 2012 $15 strike suggests traders are willing to have shares of the underlying stock put to them at that price if the puts should land in-the-money by expiration.

Flextronics International, Ltd. (NASDAQ:FLEX) A sizeable short straddle initiated on Singapore-based Flextronics International this morning indicates one options player expects to see limited fluctuations in the price of the underlying shares through January 2011 expiration. Shares in Flextronics, which manufactures thousands of electronic devices, are up 0.45% at $6.90 as of 12:05 pm after Singapore reported a surge in exports in the month of October. The straddler sold 10,000 calls at the January 2011 $7.5 strike for a premium of $0.26 each in combination with the sale of 10,000 puts at the same strike for a premium of $0.81 a-pop. Gross premium pocketed on the straddle amounts to $1.07 per contract. The investor keeps the full amount of premium received if FLEX shares settle at $7.50 at expiration. Short positions taken in both call and put options expose the trader to losses in the event that shares shift significantly away from the selected strike price. Losses start to amass if shares rally above the upper breakeven price of $8.57, or if shares slip beneath the lower breakeven point at $6.43 ahead of expiration. Flextronics’ overall reading of options implied volatility is up 8.3% at 41.57% as of 12:10 pm.

Nexen, Inc. (NXY) Contrarian trading in longer-dated call options on the Canadian oil and natural gas company appears to be the work of an optimistic strategist expecting Nexen’s shares to rebound ahead of June 2011 expiration. Nexen’s shares are currently down 5.4% to stand at $21.00 as of 11:35 am in New York. At an investor conference this morning the firm’s CEO said Nexen will likely focus on developing existing holdings rather than pursuing additional acquisitions. Yesterday Nexen revealed plans to spend roughly $2.4 to $2.7 billion next year to promote projects domestically as well as abroad. NXY popped up on our ‘hot by options volume’ market scanner after one player scooped up 3,875 in-the-money calls at the June 2011 $20 strike for a premium of $3.25 apiece. The call buyer stands is poised to profit should Nexen’s shares rally 10.7% over the current price of $21.00 to surpass the effective breakeven point to the upside at $23.25 by June expiration. The Calgary-based company’s shares last exceeded $23.25 back on May 5, 2010.

SPDR S&P Retail ETF (NYSEARCA:XRT) The Retail SPDR popped onto our ‘most active by options volume’ market scanner today after a large chunk of call options changed hands in the June 2011 contract. It looks like the calls are likely tied to stock as part of a substantial buy-write strategy. Shares of the XRT, an exchange-traded fund designed to replicate the performance of the S&P Retail Select Industry Index, slipped 0.70% lower this afternoon to $44.19 as of 12:50 pm. The investor appears to have purchased 980,000 XRT shares for $44.35 each, marked against the sale of 20,000 June 2011 $45 strike call options for a premium of $3.15 apiece on a 0.49 delta. The transaction is an efficient way to cheapen the cost of getting long the stock to around $41.20 a share and provides an effective exit strategy for the investor if the price of the underlying fund rallies sufficiently ahead of expiration day. The investor may enjoy maximum potential gains of 9.22% on the position if shares exceed $45.00 and the underlying shares are called from him ahead of expiration in June.

Honeywell International, Inc. (NYSE:HON)Shares of the diversified technology and manufacturing firm increased as much as 4.01% at the start of the trading session to hit an intraday- and new 52-week high of $49.50. The firm announced it is changing its pension accounting to a mark-to-market method and revealed a commitment to have its pension plan fully funded by 2015. Additionally, the firm won a $100 million contract with Vietnam airlines for a fleet of 36 new and 22 existing Airbus A321 aircraft. HON’s shares pared much of the earlier gains, but are still up 1.45% at $48.28 as of 12:25 pm in New York trading. Bullish options players positioning for shares to hit new highs by the end of the year dominated trading activity in Honeywell options today. It looks like investors picked up more than 1,400 calls at the November $50 strike for an average premium of $0.22 apiece. Call buyers at this strike make money if Honeywell’s shares exceed the effective breakeven price of $50.22 ahead of expiration on Friday. Optimism spread to the December $50 strike where another 1,400 call options were purchased for an average premium of $0.70 per contract. Investors holding these contracts make money if HON shares surge 5.0% over the current price of $48.28 to surpass the average breakeven point at $50.70 by December expiration. The stock’s overall reading of options implied volatility is up 11.0% at 26.11% in early afternoon trading.