Financial Select Sector SPDR Fund (XLF) – Massive prints in XLF put options cropped up ahead of President Obama’s speech on plans to cut the budget deficit and amid heightened concerns regarding the European debt crisis over the weekend. Shares in the XLF, an exchange-traded fund that tracks the performance of the Financial Select Sector of the S&P 500 Index, fell 3.1% to $12.50 by 11:15 am ET as the President wrapped up his speech by reiterating the need for a balanced approach to the deficit issue. Large trades in December contract puts this morning suggest some strategists expect financials to worsen through the end of the year.
One bearish play, which yields maximum benefits if shares in the ETF drop more than 25% by December expiration, is one of the largest initiated on the XLF so far today. It looks like the investor responsible for the put spread purchased 75,000 puts at the Dec. $11 strike for a premium of $0.57 each, and sold the same number of puts at the lower Dec. $9.0 strike at a premium of $0.23 apiece. Net premium paid on the transaction amounts to $0.34 per contract. The trader profits on the spread if shares in the fund fall 14.7% to breach the effective breakeven price of $10.66 at expiration in December. Maximum potential profits of $1.66 per contract are available on the position should the price of the underlying plunge 28% to trade below $9.00 at expiration. Shares in the XLF last traded below $9.00 back in April 2009. Put options on the XLF are changing hands more than 10 times for each single call option in action as of 11:30 am in New York. The put to call ratio on the fund is currently at its highest since June 2010.
Estee Lauder Companies, Inc. (EL) – Call sellers targeting the manufacturer and marketer of beauty products this morning appear to see little chance that shares in Estee Lauder Companies will rally with conviction ahead of October expiration. Shares in the New York, New York-based company with premium brands including La Mer and Bobbi Brown fell 0.45% to $101.26 by 11:50 am ET. It looks like investors sold roughly 1,600 calls at the October $105 strike to pocket an average premium of $2.15 each against open interest of 505 contracts. Investors selling the options may be writing the calls against long stock positions, or selling the contracts outright in the expectation that the calls will expire worthless next month. Traders keep the full amount of premium as long as EL’s shares fail to rise above $105.00 come expiration day. Shares in Estee Lauder last traded above $105.00on August 2. Premium received on the sale of the options provides limited protection to the upside for investors who may be naked short the calls. Losses start to accumulate on outright short positions if Estee Lauder’s shares rally 5.8% to exceed the effective breakeven price of $107.15 at expiration in October.
Rent-A-Center, Inc. (RCII) – Options volume generated on Rent-A-Center, Inc. jumped to more than five times that of overall open interest on the stock after some 11,800 calls changed hands in the December contract. Shares in the provider of household durable goods to customers on a rent-to-own basis fell 1.6% to $28.53 just after 12:00 pm on the East Coast. It looks like one strategist may be behind the sale of roughly 11,400 calls at the Dec. $35 strike for an average premium of $0.36 each, executed in the first hour of the trading session. The trader responsible for the jump in options activity on the stock may be writing the calls against an existing long position in Rent-A-Center’s shares, or could be selling the calls outright. The investor walks away with the full $0.36 per contract in premium at expiration as long as shares in RCII are trading below $35.00 in December. Shares in Rent-A-Center last traded above $35.00 back in April. The company is schedule to report third-quarter earnings after the final bell on October 24.
Cypress Semiconductor Corp. (CY) – Put buyers converged on Cypress Semiconductor Corp. today, with shares in the chip maker trading as much as 3.25% lower during the first half of the session at an intraday low of $16.95. Demand for October contract puts may be on the rise ahead of the company’s third-quarter earnings report on October 20. Options implied volatility on the stock is off its highest levels of the session, but remains elevated in early-afternoon trade, up 10.5% at 61.2% as of 12:40 pm in New York. Trading traffic in Cypress puts is heaviest at the October $17 strike, where more than 6,400 contracts changed hands against previously existing open interest of just 54 positions. It looks like almost all of the options were purchased at a premium of $1.15 a-pop. Investors may be snapping up the contracts to hedge long positions in CY shares, or could be buying the puts outright to position to potentially profit should shares in the semiconductor company extend losses in the weeks remaining to expiration. Put buyers make money if shares in Cypress Semiconductor decline at least 6.5% off today’s low of $16.95 to breach the effective breakeven point on the downside at $15.85 at expiration next month.