Tuesday Options Brief: JPM, XLB & SWI

Includes: JPM, SWI, XLB
by: Interactive Brokers

JPMorgan Chase & Co. (NYSE:JPM) Shares in JPMorgan Chase & Co. are down 1.6% at $34.01 in early-afternoon trade, but the stock is just one among many slipping lower ahead of Wednesday’s meeting of euro-zone officials in Brussels. One strategist’s large stake initiated in Jan. 2012 contract put options on JPM this morning may be a hedge against steep declines in the price of the underlying into next year. It looks like one investor purchased 8,000 puts at the Jan. 2012 $24 strike for a premium of $0.62 each. The investor profits at expiration in the event that JPM’s shares drop 31.25% to breach the effective breakeven point at $23.38. The stock dipped to as low as $27.85 on October 4, and has since rebounded some 22.1% up to the current price of $34.01. The value of the deep out-of-the-money puts may rise sharply if JPMorgan’s shares head back down toward the lows of the month ahead of expiration. The stock hasn’t traded below $23.38 since March 2009.

Materials Select Sector SPDR ETF (NYSEARCA:XLB)The XLB popped up on our ‘most active by options volume’ market scanner this morning after one investor established a large bearish stance in the front month. Shares in the XLB, an exchange-traded fund that tracks the performance of the Materials Select Sector of the S&P 500 Index, fell 0.55% to $33.98 by 12:40 pm in New York. The fund’s three largest holdings, EI du Pont de Nemours, Monsanto and Freeport McMoRan, are all in the red this afternoon. It looks like the strategist responsible for more than half of total volume in XLB options today purchased the majority of the more than 56,000 puts exchanged at the Nov. $32 strike thus far in the session. It appears the investor snapped up some 53,000 puts at that strike for an average premium of $0.79 each. The put buyer may profit at expiration next month if shares in the fund slide 8.15% to trade beneath the effective breakeven price of $31.21. Shares in the XLB had traded down to a 52-week low of $27.77 as recently as October 4. Options implied volatility on the SPDR fund is up 5.6% at 35.8% in early-afternoon trade.

SolarWinds, Inc. (NYSE:SWI)One call-seller targeting the software company today sees little chance the stock will make new record highs any time soon. Shares in SolarWinds are currently down 1.9% to stand at $24.69 this afternoon. The stock appeared on our ‘hot by options volume’ market scanner due to unusually heavy activity in its November contract calls. It looks like one strategist sold 5,570 calls at the Nov. $27.5 strike for a premium of $0.25 each, against open interest of 1,254 contracts. The single trade is nearly half the size of overall open interest on SWI of 12,408 contracts. The call seller walks away with the $0.25 premium received per contract as long as shares in SolarWinds fail to rally above $27.50 at expiration in November. The stock would need to surge 12.4% to surpass the effective upper breakeven price of $27.75 in order for the investor to lose money on the position. Above $27.75, the strategist faces unlimited losses to the upside if he holds no position in the underlying shares. But, the trader may be long the stock and selling covered calls on SWI, in which case he could potentially have those shares called from him at $27.50 each should the options land in-the-money at expiration day. SolarWinds, Inc. is scheduled to report third-quarter earnings ahead of the opening bell on Thursday.