A Little Cautious Optimism At Arena

Arena Pharmaceuticals, Inc. (ARNA) - The clinical-stage biopharmaceutical company received a downgrade to ‘sell’ at EVA Dimensions this morning, perhaps prompting bearish put buying which we observed in the October contract. However, a contrarian trader took an opposing stance on the stock by utilizing puts at the same strike, albeit in a different manner. Shares have declined less than 0.5% to stand at the current price of $4.87. Plain-vanilla put buying earlier in the session matched the bearish downgrade. Approximately 10,000 puts were purchased at the October 4.0 strike price for an about 95 cents apiece. Traders holding the puts will begin to amass profits if shares of ARNA fall beneath the breakeven price of $3.05. An investor with a glass-half-full outlook on Arena chose to purchase a chunk of 10,000 puts at the same strike for a dollar a-pop. However, these put options were married to shares of the underlying stock because the trader is hoping for shares to appreciate. He has strategically used put options to protect his long stock position in case the value of the shares decreases ahead of expiration.

Financial Select Sector SPDR (XLF) - Shares of the financials ETF have surrendered less than 1% during the trading session to stand at $14.53. A long-term short strangle was positioned in the January 2011 contract by an investor expecting lower price volatility through expiration. It appears that the trader shed 8,000 puts at the January 13 strike price for a premium of 1.80 each and sold 8,000 calls at the higher January 17 strike for 1.40 apiece. The ‘strangler’ receives a gross premium of 3.20 per contract for a total of $2,560,000. He will make off like a bandit with his chunk of change as long as shares remain within the parameters of the strike prices described through expiration. The short put/call positions expose him to potential losses if the price of the XLF breaches the effective breakeven points. Losses begin to accrue if shares rise through $20.20 or fall beneath $9.80 by expiration. We note that this individual does not need to remain short through January in 2011. He may choose to take profits by making a closing purchase for a net price that is less than 3.20, or the premium received on today’s transaction.

iShares MSCI Emerging Markets Index ETF (EEM) - A large-volume put spread was initiated by an investor who foresees declines in the emerging markets fund by expiration in October. Shares of the EEM are off by approximately 1% to $36.16. It appears that 21,500 puts were picked up at the October 35 strike for 1.40 each, and spread against the sale of 21,500 puts at the lower October 31 strike for an average premium of 47 cents per contract. The net cost of the bearish play amounts to 93 cents and yields maximum potential gains of 3.07 if the stock slips to $31.00 by expiration. Profits begin to flow if shares fall 6% from the current level to breach the breakeven point at $34.07.

iShares FTSE/Xinhua China 25 Index Fund (FXI) - Ongoing angst regarding prospects in China have been heightened today given clear signs of excess capacity. An investor expecting further bearish movement in the fund initiated a directional play using an efficient butterfly spread in the October contract. The China exchange-traded fund has surrendered 0.5% today to stand at $40.34. The wings of the butterfly were positioned through the purchase of 10,000 puts at the October 39 strike price for a premium of 1.75 apiece, and the purchase of 10,000 puts at the October 34 strike for 50 cents a-pop. The body of the butterfly was placed at the October 36 strike where 20,000 puts were shed for 82 cents per contract. The net cost of the trade amounts to just 61 cents and yields maximum potential profits of 2.39 if shares of the FXI settle at $36.00 by expiration. By utilizing a butterfly strategy the investor has risked just 61 cents per contract - the maximum potential loss on the trade - but stands to accumulate 2.39. This represents a risk-reward ratio of 4-to-1. Essentially the trader responsible for the spread expects the ETF to fall 11% by expiration in October.

ArvinMeritor Inc. (ARM) - A sold strangle enacted on the global supplier of automotive components may reflect waning investor optimism for the auto-sector going forward. Options activity on ARM today could suggest that investors expect recent share price gains at auto firms to plateau, particularly after the dramatic recoveries experienced by stocks such as Ford (F) and American Axle & Manufacturing Holdings, Inc. (AXL), and following the success of the recent cash-for-clunkers program. Shares of ArvinMeritor are currently down more than 1.5% to stand at $7.82. But, this company has also had a terrific run up since reaching a 52-week low of 32 cents per share on March 11, 2009. Perhaps the strangle-seller feels that gains of 2,343% on the stock since March represents a maximum rally for the time being. The investor was seen selling 7,500 puts at the November 5.0 strike price for an average premium of 38 cents apiece along with 7,500 calls which were sold at the higher November 10 strike for 75 cents premium. The gross premium pocketed on the trade amounts to 1.13 per contract and will be fully retained by the investor as long as shares settle within the confines of the strike prices described. Thus, the investor expects lower volatility in the price of the stock through expiration in November. We note that the short position leaves him vulnerable to losses in the event that shares swing outside of the strike prices. He would begin to experience losses to the upside above the upper breakeven point at $11.13, or losses to the downside beneath the lower breakeven point at $3.87. Option implied volatility on the stock has slipped from 100% at the open to an intra-day low of 95%

Marriott International, Inc. (MAR) - The global operator and franchisor of hotels and lodging facilities appeared on our ‘hot by options volume’ market scanner this afternoon after bearish activity was observed in the January 2010 contract. Shares are currently trading 1% lower to $24.73. An investor, likely bracing for continued downward movement, initiated a ratio put spread on Marriott. He purchased 6,000 puts at the just out-of-the-money January 24 strike price for a premium of 2.60 apiece and simultaneously shed 12,000 puts at the lower January 19 strike for 95 cents per contract. The trader shelled out a net 70 cents for the transaction and is hoping to profit beneath a breakeven price of $23.30. Maximum potential profits of 4.30 per contract will pad this investor’s pockets if shares decline 23% to $19.00 by expiration in January. The more than 20,000 contracts traded on Marriott today represent approximately 23% of the existing open interest on the stock of 88,468 lots.

Myriad Genetics, Inc. (MYGN) - Shares of the healthcare company engaged in the development of novel molecular diagnostics products surged more than 16% to $30.10 after reporting greater-than-expected profits for the fourth quarter. Bullish options action commenced with the sound of the opening bell as investors looked to get long near-term call options on the stock. Approximately 3,000 calls were coveted at the now in-the-money September 30 strike price for an average premium of 1.33 per contract. Call-buyers stand ready to accrue profits if the stock continues to rally through the breakeven point at $31.33 by expiration. Additional bullish sentiment was seen at the September 25 strike where 1,500 puts were shed for 15 cents each. Traders here are happy to take in 15 cents premium in exchange for bearing the risk that the stock declines through $25.00. If this were to happen by expiration, investors would have shares of the underlying put to them at an effective price of $24.85 apiece. Option implied volatility imploded following earnings, dropping down from 65% to the current reading of 46%.

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