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Options Intelligence Report: Financial Select Sector SPDR (XLF) & Vivus, Inc. (VVUS)

Bearish Options Player Enacts Massive Ratio Put Spread On Financial Select Sector SPDR

XLF – Financial Select Sector SPDR
With the deadline to finish financial reform negotiations by today, pessimistic options players are franticly establishing bearish positions on the XLF, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index, with shares of the fund down 1.65% to $14.27 as of 12:15 pm (ET). One big bearish trader initiated a massive ratio put spread utilizing a total of 210,000 put options in the August contract.

The investor purchased 70,000 puts at the August $14 strike for a premium of $0.69 apiece, and sold 140,000 puts at the lower August $13 strike for a premium of $0.37 each. The ratio spread yields a net credit of $0.05 per contract to the trader. The put player may be establishing the spread to protect the value of an enormous position in the underlying shares. In this scenario, downside protection kicks in if the XLF’s shares fall 1.9% to trade below $14.00 ahead of August expiration.

The parameters of the spread suggest the investor does not expect shares of the financials ETF to trade much below $13.00 because of the risk inherent in holding twice as many short puts. The trader faces losses if shares of the XLF plunge 16.25% from the current price of $14.27 to trade below the effective lower breakeven point at $11.95 by expiration day. Options investors exchanged more than 468,000 contracts on the fund by 12:30 pm (ET) with more than 15 put options changing hands for each single call options in play thus far today.

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VVUS – Vivus, Inc.
The biopharmaceutical company attracted a number of bearish options investors in the first half of the trading day with the price of its shares lower by 1.45% to $9.54 as of 12:50 pm (ET). The bearish strategies employed on Vivus today are perhaps the work of investors bracing for share price erosion if the firm’s obesity drug, Qnexa, fails to garner approval from the Food and Drug Administration. The FDA is slated to release a preliminary report of its findings on July 13, 2010, ahead of its final decision scheduled for October 28, 2010. One investor purchased a ratio put spread in the July contract, which will yield significant profits if shares of the biopharmaceutical company fall ahead of July expiration. The trader is perhaps hedging the possibility of a less-than stellar preliminary report in July, which would likely send VVUS shares reeling.

The options strategist purchased 2,500 puts at the July $9.0 strike at an average premium of $2.42 each, and sold 5,000 puts at the lower July $5.0 strike for a premium of $0.45 apiece. The net cost of the bearish play amounts to $1.52 per contract, thus positioning the investor to make money if Vivus’s shares decline 21.6% from the current price to breach the average breakeven point on the spread at $7.48 by July expiration day. The trader walks away with maximum potential profits of $2.48 per contract if VVUS shares plummet 58% to settle at $4.00 at expiration.

Another pessimist initiated a longer-term bearish bet on VVUS by purchasing a 2,000-lot plain-vanilla debit put spread at the September $9.0/$4.0 strikes at a net cost of $2.50 per contract. The transaction yields maximum potential profits of $2.50 per contract if shares fall 58% to trade at or below $4.00 by expiration day in September. Options implied volatility on Vivus is up 7.2% to 263.98% as of 1:05 pm (ET).


Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


Posted by Andrew Wilkinson | View more articles by Andrew Wilkinson


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