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Options Strategies Suggest Financial Stocks Headed Lower

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

Today’s tickers: JPM, GS, LVS & VSH

JPM - JPMorgan Chase & Co. – Shares in JPMorgan are on the rise today, trading up 0.90% to stand at $33.71 as of 11:15 am ET, but options trades on the banking institution suggest the rally is likely to be brief. Yesterday we noted the purchase of a sizable bearish put butterfly spread on JPM that may result in maximum potential profits should the stock cede 31% of its value come December expiration. Like-minded pessimists took to JPMorgan options today to position for the price of the underlying to pull back sharply in the months ahead. Near-term bears anticipating share price erosion before the week is out scooped up some 1,800 puts at the August $32 strike for a premium of $0.66 apiece, and purchased another 1,000 puts at the lower August $31 strike at a premium of $0.37 each. Buyers of the weeklies may be positioning for shares in JPM to drop should Bernanke’s words out of Jackson Hole on Friday fail to bolster financials. Traders long the puts profit at expiration if shares in the financial services provider slip beneath effective breakeven prices and fresh multi-year lows of $31.34 and $30.63, respectively.

Meanwhile, activity in longer-dated contracts suggests some investors are favoring the debit put spread strategy. One bearish player purchased the 2,500-lot November $18/$28 strike put spread at an average net premium of $1.26 per contract. The trader profits if shares in JPM tumble 20.7% in the next few months to breach the breakeven price at $26.74 by November expiration day. Maximum potential profits of $8.74 per contract are available to the strategist should the stock plunge 46.6% to $18.00 at expiration. Shares in JPM traded at lows of around $15.00 at the height, or rather depths, of the financial crisis in March 2009. Finally, bearish sentiment on JPMorgan moved to the December contract where another trader picked up the 1,700-lot Dec. $18/$23 put spread at a net cost of $0.50 each. The investor responsible for the transaction could secure profits of up to $4.50 per contract in the event that JPM’s shares plummet nearly 47.0% to trade below $18.00 at expiration in December. The pair of put spreads and Monday’s put ‘fly may prove prudent investments should one or more of the many global and domestic factors holding back financials in 2011 strengthen in the second half of the year.

GS - Goldman Sachs Group, Inc. – Shares in Goldman Sachs are positive, but barely so, standing 0.20% higher on the session at $106.73 in early-afternoon trade. The investment banking company’s shares fell after the close of trading Monday on reports high-level GS employees, including CEO Lloyd Blankfein, hired attorneys in relation to issues raised by the Senate’s Permanent Subcommittee on Investigations. Some options players populating puts expiring at the end of this week are bracing for fresh multi-year lows in the price of Goldman’s shares. One such bear initiated a debit put spread that yields maximum payoff if the stock drops to its lowest since April 1, 2009, by this coming Friday. The investor purchased 1,000 puts at the August $105 strike for a premium of $2.99 each, and sold the same number of puts at the lower August $95 strike at a premium of $0.99 apiece. Net premium paid to initiate the spread amounts to $2.00 per contract, and positions the pessimistic player to profit should shares in GS drop 3.5% in the next several trading sessions to breach the effective breakeven price of $103.00 by expiration. The investor could walk away with maximum potential profits of $8.00 per contract should Goldman’s shares plunge 11.0% from the current price of $106.73 to trade beneath $95.00 at expiration on the same day the Fed Chairman speaks from Jackson Hole, Wyoming.

LVS - Las Vegas Sands Corp. – One bullish options strategist may rake in big profits before the start of the New Year should shares in casino operator, Las Vegas Sands climb nearly 18.0% to top $50.00 by December expiration day. Shares in LVS surged 5.0% to an intraday high of $42.60, while implied volatility on the stock declined 14.8% to 51.67% before 1:00 pm ET. Shares in Las Vegas Sands Corp. currently trade at a 23.0% discount to their 52-week high of $55.47 achieved back on November 5, 2010, but a debit call spread in the December contract sees that discount shrinking substantially by the end of this year. It looks like the trader purchased around 2,000 in-the-money calls at the December $39 strike for a premium of $6.35 apiece, and sold roughly the same number of calls up at the December $50 strike at an average premium of $2.07 each. Net premium paid to initiate the transaction amounts to $4.28 per contract. Thus, the call-spreader stands prepared to profit should shares in Las Vegas Sands increase 1.6% over today’s high of $42.60 to surpass the effective breakeven point at $43.28 by expiration in December. The investor could pocket maximum potential profits of $6.72 per contract in the event that shares in LVS soar 17.4% to exceed $50.00 at expiration day. The stock last traded above $50.00 in February.

VSH - Vishay Intertechnology, Inc. – Technology stocks are leading the market higher today, and electronic components manufacturer Vishay Intertechnology is joining in on the rally. The stock popped up on our scanners this morning due to heavier-than-usual activity in its call options, with shares in the name climbing as much as 5.15% to $10.39 in the first half of the trading session. Call volume swelled in the January 2012 contract, where traders appear to be positioning for shares in VSH to extend gains through the start of next year. Investors picked up around 359 calls at the Jan. 2012 $10 strike for a premium of $1.74 apiece, and purchased another 346 calls up at the Jan. 2012 $15 strike at a premium of $0.35 each. But, trading traffic is heaviest at the Jan. 2012 $12.5 strike where more than 3,200 calls changed hands against previously existing open interest of just 217 contracts. It looks like most of the calls were purchased for an average premium of $0.82 apiece. Call buyers profit at expiration next year if shares in Vishay surge 28.2% to surpass the breakeven price of $13.32. Shares in VSH last traded above $13.32 at the beginning of August. The stock, at its current price of $10.39, trades at a 46.3% discount from its 52-week high of $19.36 set back on May 2.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst

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Options Strategies Suggest Financial Stocks Headed Lower
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