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Bearish Bets On Jefferies Spot-On As Shares Extend Losses

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

Today’s tickers: JEF, MS & EXEL

JEF - Jefferies Group, Inc. – Disappointing third-quarter results released earlier in the week initially failed to take the wind out of Jefferies Group’s sails, as evidenced by a more than 2.5% rally in its shares by lunchtime on Tuesday. We observed bearish put buying taking place on the stock in the midst of Tuesday’s rally, and noted that one strategist was positioning for the stock to surrender those gains and then some by October expiration. Lo and behold, shares in the investment bank reversed course by the close of trade on Tuesday, and have continued to slide in the days since.

The stock has fallen 15.0% in the past 48 hours alone, while losses since the start of 2011 are now up around 55.0%. One post-earnings report put buyer purchased roughly 3,100 of the October $14 strike puts on Tuesday for an average premium of $0.75 each. These contracts currently command an asking price of $2.80 each. The decline in open interest in the Oct. $14 put to 1,706 by Thursday suggests some profit taking may have occurred yesterday when shares in Jefferies Group shaved 5.4% off their opening price of $13.58. The investor may have received as much as $1.35 per contract by selling-to-close part of the original position on Wednesday. Overnight gains on the sale could have amounted to roughly 80.0%.

Fresh bearish positioning in Jefferies put options this morning may mean the worst is yet to come. Investors expecting declines in the price of the underlying to extend through November expiration snapped up more than 3,100 puts at the Nov. $10 strike for an average premium of $0.53 each. Put buyers at this strike profit at expiration if shares in JEF drop 22.2% from the current shares price of $12.17 to breach the average breakeven point on the downside at $9.47. But, the investor clearly does not necessarily need to hold the position to expiration. Profits may be ripe for the taking should shares in JEF continue their downward trajectory and/or implied volatility extend its reach higher, to fuel gains in put premium. Options implied volatility at present stands 20.05% higher on the session at 67.5% as of 1:35 pm in New York trade.

MS - Morgan Stanley – Pain endured by Morgan Stanley shareholders, who have seen the stock drop nearly 60% since February, may intensify by the looks of put activity in the front month this morning. Shares in the financial services firm fell 7.00% to $12.85 by 11:50 am ET as the growing laundry list of macro- and company-specific concerns saw investors head for the exits. Bearish players eagerly snapped up downside protection and placed outright bearish bets on MS despite the heftier price tag on the options. The sharp pullback in shares coupled with leaping implied volatility on the stock propped up put premiums across the board.

The October $10 strike put is the most active, attracting volume in excess of 13,000 contracts by lunchtime, against previously existing open interest of 4,851 positions. It looks like the majority of the put options were purchased for an average premium of $0.35 apiece. Investors buying the contracts at $0.35 each, on average, paid at least 60% more for the contracts today than traders buying the options for as much as $0.22 on Wednesday. Put players eyeing closer-to-the-money contracts picked up around 1,200 Oct. $12 strike put options for an average premium of $0.78 each earlier in the session. These puts now tout an asking price of $1.00 per contract. Options implied volatility on the stock overall, stands 20.6% higher on the session at 87.31% as of 12:10 pm in New York.

EXEL - Exelixis, Inc. – The biotechnology company’s shares are bucking the trend today, with the stock currently up 4.5% in early-afternoon trade to stand at $6.30. Exelixis popped up on our ‘hot by options volume’ market scanner after one strategist sunk his teeth into November contract calls. The investor appears to have purchased the Nov. $5.0/$7.0 bull call spread 4,000 times at a net premium of $1.01 per contract, in order to position for limited bullish movement in the price of the underlying. The strategy prepares the trader to profit should shares in EXEL exceed the effective breakeven price of $6.01 at expiration in November. Maximum potential profits of $0.99 per contract are available to the call-spreader in the event that shares in Exelixis surge 11.1% to trade above $7.00 at expiration day. The call options selected expire two weeks after the biotech company reports third-quarter earnings on November 3.

Caitlin Duffy
Equity Options Analyst

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