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Contrarian Strategists Dominate XLF Options

Posted on the 23 June 2011 by Phil's Stock World @philstockworld

 

Today’s tickers: XLF, COH, OXY & SH

Higher than estimated initial jobless claims of 429,000 compounded a revision higher to prior data in a sign the economic recovery remains anemic. Lowered growth forecasts and some earlier words of caution from central bankers Trichet and Bernanke reminded investors of what many already knew to be true: strong headwinds such as the European debt crisis, stubbornly high U.S. unemployment, and data showing manufacturing is slowing in the U.S. and Europe – just to name a few – represent serious threats to growth. Even the pace of China’s manufacturing appears to be slowing, possibly rising at its slowest pace in nearly a year, as weaker demand translates into fewer export orders amid the central bank’s efforts to combat inflation with interest rate hikes and higher reserve requirements. Add to all of that the International Energy Agency’s most recent announcement and it’s no wonder global markets are on the decline. The opening bell in U.S. trading on Thursday saw the VIX spike well above 10%, crossing the psychological 20-level for the 5th time in the past 7 trading sessions, as renewed fears drove sellers to the marketplace.

XLF - Financial Select Sector SPDR ETF – Contrarian strategists are out in numbers today while other market participants watching the broad-market decline accelerating are opting to head for the hills. Financials are not the worst performing sector today, but shares in the XLF, an exchange-traded fund that tracks the performance of the Financials sector of the S&P 500 Index, did decline as much as 2.2% this morning to $14.67. Options volume on the financials ETF jumped after a massive bullish transaction was initiated in the September contract. It looks like one or more traders purchased a call butterfly spread, buying a total of 27,000 calls at the September $15 strike, selling 54,000 calls at the September $16 strike, and picking up 27,000 call options up at the September $17 strike, all for an average net premium outlay of $0.21 per contract. The transaction suggests financials may be due for a sharp rebound ahead of expiration in three months time. The butterfly spread positions investors to make money should shares in the XLF rally 3.4% over the fund’s current price of $14.71 to surpass the average breakeven price of $15.21 at expiration. Maximum potential profits of $0.79 per contract are available on the spread if the price of the underlying fund soars 8.8% in the next few months to settle at $16.00 at expiration day in September. The position could result in the full loss of the $0.21 premium paid per contract if shares fail to rally above $15.00 or spike above $17.00.

COH - Coach, Inc. – Bearish options traders made their way to luxury goods retailer Coach right out of the gate this morning to position for shares in the maker of premium-priced handbags, clothing and accessories to decline ahead of July expiration. Shares in Coach are down 1.25% to stand at $59.84 as of 11:50am in New York. Coach’s shares realized huge gains in late Spring despite rising commodity prices and predictions for an impending market-breather. Consumers with discretionary income on hand seemed willing to open their wallets for premium brands, helping COH shares surge 30% from mid-March up to $64.00 on May 31. Since then mounting concern regarding feeble economic growth on the horizon took some of the wind out of Coach’s sails. Luxury goods could be one of the first expenses consumers cross off their shopping lists if the economy worsens, and it looks like some options traders are positioning for shares in Coach to potentially suffer the consequences. Near-term bearish investors exchanged more than 6,000 puts at the July $57.5 strike against previously existing open interest of 1,115 contracts. Nearly all of the puts appear to have been purchased for an average premium of $0.80 a-pop. Put buyers profit if shares in Coach drop 5.25% in the next three weeks to breach the average breakeven point on the downside at $56.70 by expiration day next month. The demand for options on COH helped lift the stock’s overall reading of options implied volatility 9.8% to 30.25% in early-afternoon trade.

OXY - Occidental Petroleum Corp. – Oil and energy stocks fell after the International Energy Agency (IEA) announced it will release 60 million barrels of oil into world markets, half of which will come from the U.S., in the coming months to combat rising gasoline prices and supply disruptions stemming from unrest in Libya. Shares in Occidental fell as much as 4.1% at the start of the session to an intraday low of $96.75. It seems some traders confident that OXY’s shares aren’t headed for collapse this year are taking advantage of the dip in the price of the underlying as well as the rise in implied volatility today by selling out-of-the-money put options on the stock. It looks like investors sold some 2,400 puts at the November $80 strike to pocket an average premium of $2.71 per contract. Put sellers keep the full amount of premium received on the sale as long as Occidental’s shares exceed $80.00 through expiration day in November. Traders short the puts benefit from time erosion of option premium as well as subsiding levels of implied volatility. Both of these factors could reduce the amount of premium required to buy back the short puts should investors choose to take profits or close out the position ahead of expiration. The sale of the puts also suggests traders are willing to have shares in OXY put to them at an effective price of $77.29 a share in the event that the puts land in-the-money at expiration day. Occidental’s shares would need to fall 17.3% from today’s lowest price in order for the put options to land in-the-money. Options implied volatility on the stock is up 6.3%, off its highs of the days, to arrive at 31.01% as of 1:30pm in New York.

SH - ProShares Short S&P500 – The S&P 500 Index is heading lower over the next several weeks according to some options traders buying calls on the ProShares Short S&P500, an exchange-traded fund that corresponds to the inverse of the daily performance of the S&P 500. Shares in the ETF are up 1.45% to arrive at $42.61 as of 12:15pm on the East Coast. Volume in options traded on the ETF thus far in the session centers almost exclusively in the front-month, with out-of-the-money call buying attracting the most interest today. It looks like bears scooped up some 490 calls at the July $43 strike for an average premium of $0.65 each, and purchased around 1,300 calls up at the July $44 strike at an average premium of $0.32 apiece. Trading traffic is heaviest up at the July $45 strike where more than 5,000 calls changed hands against open interest of 894 contracts. Investors appear to have purchased nearly all of the higher-strike call options for an average premium of $0.20 a-pop. Call buyers at this strike are prepared to profit should the price of the underlying fund surge 6.1% to exceed the average breakeven price of $45.20 at expiration in July. Shares in the SH have traded below $45.20 since the end of 2010.

 

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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