Tuesday Options Brief: XRT, JEF, OII & TRGT

 |  Includes: CBIO, LUK, OII, XRT
by: Interactive Brokers

SPDR S&P Retail ETF (NYSEARCA:XRT) Massive prints in XRT put options launched the ETF near the top of our ‘most active by options volume’ market scanner today. The put butterfly spread initiated on the SPDR S&P Retail ETF in the first half of the session yields maximum benefits to its owner in the event that the price of the underlying fund slide more than 8.0% in the next few weeks. Shares in the XRT currently trade 1.9% lower on the session at $51.56 as of 1:10 pm in New York. The bearish transaction on the retail-sector fund involved the purchase of 35,765 puts at the Nov. $51 strike, the sale of 71,530 puts at the Nov. $47 strike, and the purchase of 35,765 puts at the Nov. $43 strike, all for a net premium of $0.53 per contract. The investor responsible for the transaction greatly reduced the cost of positioning for limited bearish movement in the price of XRT shares through expiration. For example, investors looking to buy puts outright at the Nov. $51 strike must currently shell out $1.79 per contract. The put ‘fly spread prepares the trader to profit should shares in the XRT decline 2.1% to breach the upper breakeven price of $50.47. Maximum potential profits of $3.47 per contract are available to the strategist if the price of the underlying fund falls 8.8% to settle at $47.00 at expiration day in a few weeks. The investor risks losing a maximum of $0.53 per contract, or the amount of premium paid to initiate the position, buts stands ready to gain more than six times that amount if the fund slips to $47.00 at expiration. Shares in the XRT opened the October 5, 2011, trading session at $47.00.

Jefferies Group, Inc. (JEF)Bearish options trades on global securities and investment banking firm, Jefferies Group on Monday seem to have paid off handsomely for at least one investor on Tuesday. Shares in JEF dropped 8.8% to $12.09 by midday on the East Coast. It looks like one trader snapped up around 1,000 puts at the Nov. $12 strike yesterday for an average premium of $0.25 apiece. Today, it appears 1,000 of the put options sold for $1.00 each, six minutes into the trading day. If it’s the case that the buyer of the contracts and the seller are one and the same, overnight profits on the position amount to $0.75 per contract. Buyers of put options at surrounding strikes this week are also holding far more valuable contracts as the price of the underlying continues to slide, while implied volatility is net up 14.8% at 42.5% in early-afternoon trade.

Oceaneering International, Inc. (NYSE:OII)Shares in Oceaneering International, a provider of services and products to the offshore oil and gas industry, slipped 3.4% lower to $40.41 this afternoon. Despite declines in the price of the underlying throughout the first two session of the trading week, options activity in the front month indicates one investor sees the shares trading above $40.00 through expiration day this month. It appears the trader sold 2,500 puts at the Nov. $40 strike to pocket premium of $1.20 per contract. The investor walks away with premium in hand as long as shares top $40.00 at expiration. Risk inherent in the sale of the puts is that shares settle below $40.00 and the options land in-the-money at expiration. The trader may have 250,000 shares of the underlying put to him at an effective price of $38.80 each, after factoring in premium received on the sale of the options. Losses start to accrue on the downside if shares edge below the breakeven point at $38.80. Implied volatility on the stock is up 12.0% at 47.0% as of 12:45 pm EDT.

Targacept, Inc. (TRGT)The biopharmaceutical company appeared on our ‘hot by options volume’ market scanner this morning after one strategist initiated a three-legged bullish options position in the December contract. The trade today is the second in less than a week that looks for shares in Targacept to rally sharply in the near term. Last week’s bullish player likely purchased a 5,000-lot Nov. $22.5/$35 call spread. Today, with shares in the name currently trading 0.10% lower at $17.58, the TRGT-optimist employed a different strategy. It appears the investor initiated a three-legged spread, selling 3,000 puts at the Dec. $10 strike for a premium of $1.45 each, in order to partially finance the purchase of the 3,000-lot Dec. $20/$30 call spread at a net premium of $2.95 apiece. Total premium outlay for the three-way spread amounts to $1.50 per contract, thus positioning the investor to profit should Targacept’s shares surge 22.3% to surpass the effective breakeven point on the upside at $21.50 by December expiration. Maximum potential profits of $8.50 per contract pad the investor’s wallet in the event that TRGT shares jump 70.6% to top $30.00 at expiration next month.