Friday Options Update: FXI, NUE, BBT, NTAP

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Includes: BBT, FXI, NTAP, NUE
by: Interactive Brokers

iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI) – Bearish options activity was observed on the China exchange-traded fund this morning amid a nearly 2.5% decline in shares to $40.78. Investors expecting further declines initiated bearish reversal plays on the ETF in the September contract. Approximately 10,000 calls were shed at the September 44 strike price for 80 cents apiece in order to partially finance the purchase of 10,000 put options at the now in-the-money September 41 strike for an average premium of 1.96 each. The net cost of the reversal amounts to 1.16. Thus, profits will begin to amass to the downside if shares fall beneath the breakeven point at $39.84 by expiration. Additional plain-vanilla put buying in the amount of 5,000 lots was seen at the September 41 strike for 1.96 per contract. Investors who did not fund their purchase of puts by selling calls will not start to profit unless the FXI declines at least 4% from the current price through the lower breakeven point at $39.04. Increase investor uncertainty regarding the future price of the fund is reflected by the 11% rise in option implied volatility today to a high of 41%.

Nucor Corp. (NYSE:NUE) – The manufacturer of steel and steel products edged onto our ‘most active by options volume’ market scanner this morning after call activity was observed in the January 2010 contract. Shares of NUE have suffered a 2.5% decline to stand at $46.48. The bullish ratio call spread established by one investor suggests a recovery in the stock up to its current 52-week high of $53.46 or above by expiration. The spread involved the purchase of approximately 5,000 calls at the January 50 strike price for a premium of 3.70 apiece against the sale of 10,000 calls at the higher January 55 strike for 2.07 per contract. The trader receives a net credit on the transaction of about 44 cents and may bank additional gains if NUE rallies 8% higher to surpass the $50.00 level by expiration. Maximum potential profits of 5.00 (excluding the credit received) will be attained by the investor if shares surged to $55.00. The risk undertaken by the trader in this situation is that he is holding a short position in 5,000 calls. Potentially unlimited losses would begin to amass on the call options if the stock blows through the breakeven point to the upside at $60.44 by January’s expiration day.

BB&T Corp. (NYSE:BBT) – Shares of the financial holding company have surged 8.5% to $28.00 after news surfaced that the firm may take over offices and deposits of Alabama’s second-largest bank, Colonial BancGroup Inc. Regulators are closing Colonial today in what has become the largest U.S. bank failure of 2009. And, according to some reports, the FDIC-backed buyout could also happen by the end of the day. Bullish investors purchase more than 1,000 calls at the now in-the-money August 27 strike price for 63 cents apiece. The higher August 28 strike also had 1,000 calls coveted for an average premium of 30 cents per contract. Finally, the August 29 strike was targeted by investors who purchased 1,000 calls for about 35 cents. Those individuals who took bullish action on the stock early on in the trading session were rewarded with lower call premiums. Currently, the premium paid by call buyers at the August 28 strike price has more than doubled to 85 cents per contract as call volume at that strike has jumped to more than 6,000 lots. Notable put action was also seen at the August 26 strike price where more than 5,000 contracts were exchanged for an average premium of 30 cents.

NetApp Inc. (NASDAQ:NTAP) – An apparently large bearish put play seen around lunchtime in options of data management software company, NetApp, whose shares have declined 1.9% to $23.61 was not quite what it seemed. One investor paid 15 cents to buy December put options at the 14 strike for a meager 15 cents per contract. Such a move might be predictive of a slump in the stock for the remainder of the year by as much as 40%. Panic not, tech bulls is the message that we can convey today. We originally included those puts in play today back in May around the time of NTAP’s acquisition of DDUP. When its shares stood at $17.88 an investor sold the puts at around 1.0 in order to buy calls at the 19 strike costing 2.10. So the unwind of the put play today generates an 85% gain, while the calls are sitting in the rose garden valued today at about 5.40 per contract.