Thursday Options Update: WFC, HIG, CHK, FRE & SLV

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Includes: CHK, FMCC, HIG, SLV, WFC
by: Interactive Brokers

Wells Fargo & Co. (NYSE:WFC) – Shares of the financial services institution have relinquished earlier gains experienced today, and are currently lower by less than 0.5% to $27.96. Bearish investors flooded the nearer-term contracts and positioned themselves for further downward movement in the price of the underlying. The August 30 strike price had some 19,300 calls sold for a premium of 42 cents per contract. Call-shedders accept the 42 cent premium in exchange for bearing the risk that WFC shares rally through the breakeven price to the upside at $30.42, or the point at which potentially unlimited losses begin to accrue. Investors hungry for put options picked up about 5,700 lots at the September 27 strike price for 1.38 apiece. Profits would begin to amass for these individuals given a 9% decline in the stock through the breakeven point at $25.62 by expiration. Finally, a ratio put spread solidified the overall bearish picture on WFC. The October 27 strike price had 10,000 puts purchased for 2.08 apiece while the lower October 24 strike had 20,000 puts shed for 1.10 per contract. The trader responsible for the spread receives a net credit of 12 cents and may add to profits if WFC trades beneath $27.00 by expiration in October. Maximum potential profits of 3.00 per contract or a total of $3,000,000 – excluding the credit already received – will be attained if the stock declines 14% from the current price to $24.00.

Hartford Financial Services Group, Inc. (NYSE:HIG) – The insurance and financial services company has realized a more than 8.5% increase in the value of its shares to stand at the current price of $17.95. Shares rallied after HIG revealed that its discretionary equity issuance plan amassed proceeds of $900 million. Call options were in heavy demand as approximately 17,300 lots were picked up at the August 20 strike price for 42 cents each. Investors expecting the stock to rally even higher by expiration targeted the August 21 strike price where some 2,300 calls were coveted for 39 cents per contract. We note that HIG has not traded higher than $20.00 since October 23, 2008.

Chesapeake Energy Corp. (NYSE:CHK) – The natural gas and oil exploration and production company experienced a 5.5% rally in shares to $24.60 this morning amid in upgrade to ‘outperform’ at Wells Fargo. Shares rose after reports revealed that payment to CHK for its participation in a joint venture with U.S. oil firm, Plains Exploration & Production Co. (NYSE:PXP), will be accelerated by PXP’s plans to sell 15 million new shares. Option traders reacted by scooping up call options in the August and September contracts. The near-term August 25 strike had more than 7,700 calls purchased for an average premium of 63 cents apiece while the more bullish August 26 strike price had 1,200 calls coveted for 33 cents each. Optimism spread to the September 25 strike where another 3,800 calls were picked up for 1.26 per contract. But, uber-bulls looked as high as the September 28 strike to buy 5,000 call options for an average price of 35 cents apiece. Shares of CHK would need to climb at least 15% by expiration in order for call buyers at the September 28 strike to begin to amass profits above the breakeven point at $28.33.

Freddie Mac (FRE) – Shares of Freddie Mac have surged more than 12.5% to 90 cents today amid reports that the White House may relieve its balance sheet of billions of dollars in troubled assets by transferring those assets to a government-backed “bad bank”. Investors positioning for continued upward movement in the price of the underlying shares initiated bullish reversals in the near-term August contract. Approximately 10,000 puts were sold short at the August 1.0 strike price for an average premium of 22 cents per contract and spread against the purchase of 10,000 calls at the same strike for 10 cents. Traders utilizing this strategy receive a net credit of 12 cents. The stock must rally 11% higher to breach $1.00 by expiration in order for traders to add to the 12 cent credit received today.

iShares Silver Trust ETF (NYSEARCA:SLV) – Bearish option plays on the silver exchange-traded fund today suggest the stock is set to decline by expiration in September. Shares of the ETF are currently off slightly by 0.5% to $14.45 dampened by a rally for the dollar today. Investors purchased more than 20,000 puts at the September 14 strike price for an average premium of 50 cents per contract. If these individuals hold long positions in the underlying, the put options provide downside protection if shares fall beneath the breakeven point at $13.50. An additional indication of bearish sentiment was the sale of 1,000 calls at the September 17 strike price for 15 cents apiece. Traders receive 15 cents in exchange for bearing the risk that shares rally higher, exposing them to potentially unlimited losses to the upside. Before that might start to happen, shares would need to climb by 17.6% to reach that strike price.