Tuesday Options Brief: CCL, XLF, IRM & WAC

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Includes: CCL, IRM, WAC, XLF
by: Interactive Brokers

Carnival Corp. (NYSE:CCL)Shares in the cruise company sank 8.3% this afternoon to touch an intraday low of $41.90, but it looks like some options traders expect Carnival Corp. to encounter fairer seas ahead of July expiration. More than 3,400 calls changed hands at the July $47 strike in the first half of the trading session, which is more than twice the number of contracts of open interest at that strike. It looks like the majority of the contracts, or some 2,600 of the calls, were purchased for an average premium of $1.89 apiece. Contrarians positioning for a rebound are prepared to make money should shares in CCL surge 15.0% off today’s low of $42.50 to surpass the average breakeven price of $48.89 ahead of July expiration. Carnival last traded up at a 52-week high of $48.14 back on January 6, 2011. The firm is one month away from reporting earnings for the first quarter before the market opens for trading on March 22, 2011. The sharp decline in shares today and the rise in demand for calls on the stock helped lift the overall reading of options implied volatility on Carnival 23.1% to 31.32% by 1:30pm in New York trading.

Financial Select Sector SPDR ETF (NYSEARCA:XLF) Three large blocks of XLF put options changed hands within the first 20 minutes of the trading session, and appear to be the foundation for a sizable bearish put butterfly spread. Shares in the XLF, an exchange-traded fund designed to track the performance of the Financial Select Sector of the S&P 500 Index, declined as much as 2.9% during the session thus far to touch an intraday low of $16.68. The put ‘fly yields maximum benefit for one investor if shares in the fund continue to slide down to $16.00 ahead of March expiration. It looks like the trader responsible for the spread picked up 20,000 now in-the-money puts at the March $17 strike for a premium of $0.49 per contract, sold 40,000 puts at the lower March $16 strike at a premium of $0.14 apiece and purchased 20,000 puts at the March $15 strike for a premium of $0.06 each. The net cost of putting on the spread amounts to $0.27 per contract. The investor starts to accumulate profits as shares in the financials ETF edge below the effective breakeven price of $16.73. The trader could walk away with maximum potential profits of $0.73 per contract if shares in the XLF fall another 4.1% off today’s low of $16.68 to settle at $16.00 at expiration next month.

Iron Mountain, Inc. (NYSE:IRM) Put options on the information management firm are popular this morning with shares in Iron Mountain sliding 1.95% to an intraday low of $26.60. Near-term bears traded more than 2,200 in-the-money put options at the March $27.5 strike on paltry previously existing open interest of just 10 contracts. It looks like most of the puts exchanged at that strike were purchased for an average premium of $1.53 a-pop. Investors long the puts are poised to profit in the event that Iron Mountain’s shares fall another 2.4% off today’s low of $26.60 to breach the average breakeven point on the downside at $25.97 by expiration day next month. Pessimistic players also purchased some 560 puts at the lower March $25 strike for an average premium of $0.48 per contract. Traders long the lower-strike puts profit if IRM shares drop 7.8% to trade below the average breakeven price of $24.52 before the puts expire in March. Demand for puts on Iron Mountain pushed up options implied volatility in the name 11.3% higher to 37.73% in early afternoon trade.

Walter Investment Management Corp. (NYSEMKT:WAC)Investors are piling into put options on the mortgage real estate investment trust today with shares in Walter trading 2.5% lower at $18.60 just after 1:15pm in New York. Shares in WAC reached a new 52-week high of $19.70 on Friday, marking a more than 19.0% rise in the stock since mid-November. Put buyers populating the front month, however, are positioning for the price of the underlying shares to shift further off of recent highs. More than 3,200 put options changed hands at the March $17.5 strike this morning on previously existing open interest of 1,000 contracts. Bears expecting shares to extend losses drove much of the volume, buying around 2,900 of the puts for an average premium of $0.17 apiece. Investors long the puts profit if shares in Walter plunge 6.8% from today’s low of $18.60 to trade below the average breakeven price of $17.33 within the time remaining to March expiration. The spike in demand for puts on the stock lifted Walter’s overall reading of options implied volatility 18.8% to 24.59% just before 1:30pm.