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AT&T, Inc. (NYSE:T) The cost of buying AT&T put options that expire at the end of the week exploded after the U.S. Justice Department filed suit to block the telecommunications company’s proposed $39 billion acquisition of Deutsche Telekom’s T-Mobile USA, Inc., on grounds the deal would hamper competition in the wireless market. Shares in Dallas, Texas-based AT&T fell as much as 5.5% on the news to $28.00, while options implied volatility jumped 30.0% to 27.97%. Frenzied options trading ensued on AT&T during a news conference held to explain the lawsuit. Nearly 200,000 option contracts have changed hands on the stock as of 1:25 pm in New York. Put options are more active, with around 1.5 puts trading on AT&T for each single call option in play this afternoon.

Trading traffic in the weeklies suggests investors are scrambling for near-term downside protection and asking questions later. Puts granting the right to sell shares in the wireless provider at $29.00 were purchased roughly 1,000 times for just $0.08 apiece around one hour into the trading session, but news of the lawsuit saw premium required to buy those puts sky-rocket to $1.02 in under 60 minutes. All told, more than 7,100 of the September ’02 $29 strike puts changed hands against open interest of 1,432 contracts thus far today. It looks like the majority of the contracts were purchased for an average premium of $0.25 apiece. Investors piled into puts at the Sept. ’02 $28 strike, as well, driving volume up past 9,600 contracts by lunchtime. On the flip-side, traders expecting the stock to rebound somewhat before the week is out, picked up nearly 3,000 calls at the Sept. ’02 $29 strike at an average premium of $0.16 each, and another 1,000 calls at the $30 strike for $0.06 apiece. Purchasing the calls at a steep discount may pay off by Friday expiration if AT&T can bolster confidence in its shares despite the lawsuit. Shares are off their lows of the session, as the company has already said it plans to “vigorously contest” the suit.

The largest of all trades initiated in AT&T options in the wake of the U.S. government’s move to block the T-Mobile acquisition is a ratio put spread. The strategy yields maximum profits to the trader given limited bearish movement in AT&T’s shares, and greatly reduces the cost of taking a view on the situation. It looks like the investor purchased around 10,000 puts at the December $27 strike for an average premium of $1.16 each, and sold some 20,000 puts at the lower December $24 strike at an average premium of $0.50 apiece. The net cost of the transaction amounts to just $0.16 per contract, and positions the investor to profit should shares in AT&T dip beneath the breakeven price of $26.84. Maximum potential profits of $2.84 per contract are available to the trader should shares settle at $24.00 at expiration in December. The ratio put spreader loses the $0.16 per contract if, perhaps, the merger ultimately goes through and AT&T’s shares trade at or above $27.00. If the trader is long the stock, this may be a reasonable price to pay to secure downside protection in the face of mounting uncertainty.

LyondellBasell Industries NV (NYSE:LYB) Analysts at Barclays Capital initiated a positive view on the U.S. Chemicals Sector, and rated chemical company LyondellBasell Industries new ‘Overweight’ with a share price target of $43.00 earlier this week. Meanwhile, in options-land, large prints in LYB calls this morning suggest at least one strategist is willing to put money on the view that shares in the chemical maker are likely to increase. A bullish call spread initiated within the first 15 minutes of the opening bell yields maximum possible profits to one trader if shares in LYB rally to $43.00 by the end of the year, or more specifically, by December expiration day. Shares in the Rotterdam-based chemical company are up 2.0% at $34.74 as of 11:05 am ET, but earlier increased as much as 2.9% to secure an intraday high of $35.05. The options trader positioned for shares to extend gains by purchasing 5,000 calls at the December $35 strike for a premium of $4.55 apiece, and selling the same number of calls up at the December $43 strike at a premium of $1.50 each. Net premium paid to initiate the spread amounts to $3.05 per contract, thus preparing the investor to profit should LYB’s shares surge 9.5% over the current price of $34.74 to surpass the effective breakeven point at $38.05 by expiration day. The bullish player stands ready to pocket maximum potential profits of $4.95 per contract in the event that shares jump 23.8% to top $43.00 at expiration in December. Shares in LyondellBasell last traded above $43.00 back on June 1.

Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) Bearish trading patterns in options covering the XLY, an exchange-traded fund that tracks the performance of the Consumer Discretionary Select Sector of the S&P 500 Index, indicates some investors see shares in the fund falling in the next couple of months. We noted like-minded pessimists picking up put options on the ETF during Tuesday’s session, as some 14,000 puts changed hands at the October $30 strike yesterday morning. Bears dabbling in the October contract today appear to be selling calls and buying puts on the XLY. Shares in the ETF are currently up 1.4% to arrive at $37.85 as of 12:55 pm ET. Investors prepping for a pullback in the price of the underlying purchased around 3,400 puts at the October $35 strike for an average premium of $0.80 each. The put buyer or buyers profit if shares in the XLY drop 9.6% to breach the effective breakeven point at $34.20 by October expiration. Bearish sentiment crossed over to the calls, where at least 1,200 of the October $39 strike contracts were sold for an average premium of $0.96 apiece. Call sellers keep the full amount of premium received on the transaction as long as the XLY’s shares fail to rally above $39.00 at expiration. Put buyers risk losing only what they paid to secure their options, but call sellers, if naked short the contracts, face uncapped losses above an upper breakeven price of $39.96.

NRG Energy, Inc. (NYSE:NRG) Bullish activity in long-dated NRG Energy, Inc. options suggests one or more traders are positioning for shares in the wholesale power generation company to hit a new 52-week high by March 2012 expiration. Shares in the name today increased 3.0% to stand at $23.29 as of 11:20 am on the East Coast. Options traders exchanged more than 6,500 calls at the March 2012 $26 strike against previously existing open interest of just 139 contracts. It looks like most of the calls were purchased outright at an average premium of $1.13 apiece. Call buyers profit if shares in NRG Energy rally 16.5% to exceed the average breakeven price of $27.13 by expiration day next year. The price of the underlying stock last traded above $27.13 back in October 2009.

Source: Wednesday Options Brief: T, LYB, XLY & NRG