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Big Bearish Play in Industrial SPDR ETF Put Options

Posted on the 22 March 2011 by Phil's Stock World @philstockworld

 Today’s tickers: XLI, PKX, JAG & GKK

XLI - Industrial Select Sector SPDR Fund – A massive put spread on the XLI, an exchange-traded fund that tracks the performance of the Industrial Select Sector of the S&P 500 Index, appears to be the work of a bearish strategist positioning for the price of the underlying fund to pull back. Shares in the ETF are currently down 0.65% to stand at $36.52 as of 11:25pm in New York. The large-volume transaction launched the XLI on to our ‘most active by options volume’ market scanner within the first 30 minutes of the session. It looks like the investor purchased around 31,000 puts at the June $36 strike for a premium of $1.47 each, and sold the same number of puts at the lower June $32 strike at a premium of $0.48 apiece. Net premium paid to initiate the spread amounts to $0.99 per contract. Thus, the options player is poised to profit should shares in the XLI drop 4.1% from the current price of $36.52 to breach the effective breakeven point on the spread at $35.01 by June expiration. Maximum potential profits of $3.01 per contract are available to the investor in the event that the XLI’s shares plunge 12.4% in the next few months to trade below $32.00. Shares have closed above $32.00 since November 17, 2010.

PKX - POSCO – The South Korean manufacturer of steel rolled products and plates popped up on our ‘hot by options volume’ market scanner in the first half of the trading session after one options player dabbled in May contract call options. Shares in POSCO are currently down 1.15% to stand at $113.17 just before 12:20pm in New York. It looks like the investor responsible for nearly all of the options activity on the stock today extended bullish sentiment on PKX by rolling a previously established long call stance up to a higher strike price. The world’s third-largest steel maker by output reportedly said it is considering an increase in its output on requests from South Korean customers and the rise in demand for steel supplies in the aftermath of the earthquake in Japan. The trader appears to have originally purchased 2,100 calls at the May $110 strike for a premium between $4.40 and $4.50 each back on December 20, 2010, when the price of the underlying stock stood at around $102.32. The now in-the-money call options sold today for $7.30 a-pop, which suggests the trader could have pocketed profits of $2.80 to $2.90 per contract on the sale. Next, the investor upped bullish sentiment on POSCO, buying a fresh batch of 2,100 calls at the higher May $120 strike at a premium of $3.10 each. The bullish player starts to make money on the new long call stance should POSCO’s shares jump 8.8% over the current price of $113.17 to surpass the effective breakeven point to the upside at $123.10 by expiration day in May. PKX shares last closed above $123.10 back on April 8, 2010.

JAG - Jaguar Mining, Inc. – Bullish strategists populating Jaguar Mining this morning appear to be selling put options on the gold mining company. Shares in JAG increased as much as 1.7% this afternoon to touch an intraday high of $5.34, recovering from losses earlier in the session ahead of its earnings conference call at 10:00am this morning. The mining company reported fourth-quarter earnings after the final bell on Monday. Investors expecting JAG’s shares to at least exceed $5.00 through May expiration appear to have sold some 1,550 puts at the May $5.0 strike for a premium of $0.35 apiece. Put sellers keep the full premium as long as the contracts expire worthless at expiration. The sale of the puts at that strike suggests traders are willing to have shares of the underlying put to them at an effective price of $4.65 each in the event that the puts land in-the-money and are exercised at expiration in May. Options implied volatility on the stock dropped 22.6% as of 1:05pm to 46.82% post earnings release.

GKK - Gramercy Capital Corp. – Shares in Gramercy Capital Corp. fell as much as 2.86% this afternoon to touch down at an intraday low of $4.07. Despite the decline in the price of the underlying stock, it looks like investors are scooping up call options in the front month. Contrarians positioning for a rebound traded more than 5,400 calls at the April $5.0 strike on previously existing open interest of just 764 contracts. Options volume on GKK thus far in the session is massive compared to the 855 lots of overall existing open interest on the stock. The vast majority of the call volume generated at the April $5.0 strike appears to be the work of buyers paying an average premium of $0.15 per contract. Call buyers start to make money if shares in Gramercy Capital jump 26.5% to trade above the average breakeven price of $5.15 by April expiration day. Shares closed above $5.15 as recently as March 4, 2011.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst


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