Thursday Options Update: XLF, USO, DNDN, RDC, FL, CRM, SKS

by: Interactive Brokers

Rebecca Engmann Darst contributed to this report.

Financial Select Sector SPDR (XLF) – Shares in the Financial Select Sector SPDR read 1.7% lower at $19.98 at present. With just shy of 200,000 lots trading over the noon hour, we’re observing traders take large-sized positions in the front month that don’t necessarily align seamlessly with the unmitigated downside we’re seeing in the underlying share price. One trader appears to have sold a September put spread between the 17 and 19 strikes for a 49-cent credit, wagering on shares remaining above that upper strike by September expiration. We also saw evidence of a trader selling the 18/23 strangle in a 5500-lot position that carries with it a credit of 66, setting clear foul lines for the share price over the coming month that this trader doesn’t believe the fund will violate.

United States Oil Fund (USO) – Shares in the United States Oil Fund rose 4.3% to $98.04 as crude oil rallied on “Cold War Redux” concerns and a pullback for the US dollar. Option traders responded with shrewd positioning in the fund, whose implied volatility at 44.4% is elevated against the 38.8% historic reading. One trader entered a 4,000 lot position in September 110 calls for $1.00 – the direction of this trade is not clear but the volume involved represented some two-thirds of the open interest at this strike. This contract was trading as high as $14 in mid-July and has plummeted mightily in value since that time. One contrarian opted for a long put spread in the October contract between strikes 85 and 96, paying a $4.45 debit for a position that first breaks even at $91.55, implying some return of recent gains, but yielding a maximum profit of about $6.55 per contract. Another trader opted to take premium, rather than pay it out, by selling a strangle between strikes 90 and 110 in the January contract, taking in about $13 in premium in the expectation that the fund’s shares will remain hemmed between those strike prices by January expiration. This price outlook suggests neither a bounce back to the $119-level highs nor a sharp correction anywhere near the $52 52-week low by the first of the year.

Dendreon (DNDN) – Earlier today we observed a 12% increase in implied volatility that led the excitable Dendreon briefly to our leader board of volatility gainers. The implied volatility reading currently reads 91.3% against a 56.7% historic reading, suggesting 61% additional potential price risk being factored into the options over the next month – but fairly typical of the added risk premium in Dendreon. An increase in option trading volume looked like early defensive positioning ahead of the company’s November 7 earnings. Here it looks like a trader sold 5,000 lots of January 2.50 calls for $3.30 per contract, and bought  5,000 November 2.50 puts for 30 cents apiece, taking a $3 credit on the transaction – more of which the trader will retain if implied volatility drives the value of the November put higher in connection with the earnings catalyst, while the value of the January 2.50 calls is left to erode.   

Rowan Companies (RDC) -  Shares in contract drilling firm Rowan Companies are showing a 1% uptick to $37.53 at present – still about $10 off the June 30 high. One option trader expects staid action in the share price heading into the first of the hour, selling a 3,000-lot call spread in the January contract between strikes 35 and 45 for a $3.80 credit that represents the maximum profit this trader can receive if Rowan shares remain below $35 at January expiration. The activity here sent overall options volume to 2.5 times the normal level.

Foot Locker (FL) – Shares in Foot Locker are showing flatfooted price action with a .20% gain to $15.01. Meanwhile, an increase in option trading volume to 4 times the normal level showed evidence of at-the-money straddle positioning in the front month. A buyer of the straddle pays about $2 by today’s premiums, looking for a break above $17 or below $13 as of September’s expiration. The upper breakeven would put Foot Locker shares within a nickel toss of its 52-week high. Option traders already hold more than twice the number of calls as puts in the athletic wear chain. (CRM) – Today’s disappointing sales growth figures from took the market by surprise, sending shares 16% lower to $54.81, and the fact that implied volatility at 46.6% continues to show a slight elevation above the 42.4% historic reading suggests that the full brunt of the move may not yet be priced into the stock. Options are trading at 4 times the normal level, as traders shed positions in front-month calls at strikes of 60 and above, but positioning long and short of October 60 calls in excess of open interest.

Saks Inc. (SKS) – Shares in department store chain Saks Inc. popped 6% higher to $10.51 after the chairman of Iceland’s Baugur Group indicated continued interest in acquiring the U.S.-based retail chain. Option volume rose to nearly 4 times the normal level, activity centered in fresh-positioning in September 12.50, possibly connected with traders selling January 12.50 calls in anticipation of a near-term spike in call-side volatility that tends to be consistent with takeover rumors. 

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