Seeking Downside Protection For Wal-Mart Shares

Tuesday, June 09, 2009

Wal-Mart Stores:Wal-Mart's successes contrast starkly against the more bruised-and-battered retailers struggling through one of the worst recessions in modern times. The company's annual meeting revealed that the firm has benefited greatly from the economic downturn by increasing market share and amassing new customers. Despite the bullish news regarding the firm's growth, shares are currently off slightly by 1% to $50.50 today.

One might expect to see optimistic WMT option investors populating the stock. However, we observed a long-term bearish play in the January 2010 contract. It appears that the trader has sold 15,000 January 65 calls for a premium of 40 cents apiece in order to partially finance the purchase of 15,000 protective put options at the January 45 strike for a premium of $2.19 each. The net cost of the pessimistic-play amounts to $1.79 and begins to yield profits to the downside beginning at the breakeven share price of $43.21. This investor apparently feels the need to protect himself against a more than 14% decline in the stock over the next eight months time.

United States Steel:The steel producer's shares have declined more than 5.5% to $34.20. Options activity of interest on the stock involves the short sale of 15,000 puts at the October 27.5 strike price for a rich premium of $2.97 per contract. The investor who initiated the short sale receives the $2.97 premium and bears the risk that shares of the underlying are put to him by expiration. He will pocket the premium without further obligations at expiration in the event that shares of the steel magnate remain higher than $27.50. Shares would need to fall approximately 20% from the current price in order for the put options to land in-the-money. Elsewhere, a bearish investor was seen writing 1,600 calls short at the July 39 strike price for a premium of $1.60 apiece. The trader will retain the full premium if shares fail to recover up through $39 by expiration next month.

McDonald's Corp.:Shares of the McMuffin-maker have slipped more than 2% to $58.52 today despite reports that McDonald's global same-store sales increased 5.1% in May. The MCD ticker symbol edged onto our ‘most active by options volume' market scanner after a chunk of put options traded in the December contract. It appears that one investor has sold 10,000 puts short at the December 50 strike price for which he received $2 per contract. He enjoys the $2 in premium for writing the puts today and stands ready to have shares put to him at an effective price of $48 apiece should the puts land in-the-money by expiration. The stock would need to decline by about 15% from the current price for the puts to land in-the-money.
Palm, Inc. :It would appear that it wasn't just Palm's new Pre that went on sale over the weekend. The selling has expanded to the company's share price so it would seem with a double-digit decline to $11.64 at around lunchtime. Last week our market scanners sensed investors banking on a not so successful launch given the proliferation of put trading on the stock. In the event the lines outside of Sprint stores was not nearly as newsworthy as those associated with Apple and AT&T stores at the time of the launch of the iPhone. Analysts might be raving about the on-target volume of sales, but when the average store has only 30 phones to sell, one can see the market's disappointment when customers are turned away without a box of goodies. Option implied volatility came off around 10% to 105% after the weekend launch.

Sprint Nextel:The only notable option activity in carrier, Sprint after the Palm Pre went on sale was what appeared to be the closing leg of a previously bullish call spread. Some weeks ago we noted heavy August expiration activity between the 4.0 and 6.0 strike prices where sizeable bullish activity saw investors reduce the cost of taking long positions on the stock by selling equal amounts of higher strike calls against owning the lower strike. We also noted plenty of profit-taking on such positions of late.



Courtesy: Forbes.Com