OPTIONS REPORT: Trader Is Guarded On Industrials

14th Jul 2010 20:30

By Brendan Conway Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Ahead of General Electric Co.'s closely watched Friday report, one big trader appeared ready in case industrial stocks move lower during earnings season. GE is the most heavily weighted component of the SPDR Industrial Select Sector exchange-traded fund, or XLI. Early in the session, the investor picked up 10,000 August $29 puts on the ETF and appeared to sell an even larger number of the exchange-traded fund's August $27 contracts, according to Trade Alert. A put conveys the right to sell shares and normally implies bearish sentiment. This guarded trade was either a "roll" that shifts a pre-existing position or a "ratio spread" that makes money with a slide in the XLI by expiration on Aug. 20. In either case, the move was protective or bearish in nature. It took place on a day that the ETF edged 2 cents lower, or 0.1%, to $28.97. Industrial stocks have reflected recent sessions' earnings optimism as well as stocks' bounce off their early July lows, with the XLI gaining more than 7% over the last week and a half. This trader, though, isn't ruling out trouble this earnings season, with a number of big companies due to show quarterly results soon. The ETF in question includes bellwethers like United Parcel Service Inc., 3M Co., and Caterpillar Inc. All three are due to report earnings next week. There were also notable trades crossing the tape Wednesday suggesting rosier scenarios for Panera Bread Co., which reports earnings on July 27, and for Ivanhoe Mines Ltd. In cafe and bakery chain Panera, trading surged to six times the usual volume as investors descended on August $70 and $75 put contracts. Selling the higher contracts and buying the lower ones for what Interactive Brokers said was a net credit of $1.11, one big investor appeared to bet the shares will stay above $75 through Aug. 20 expiration. The shares rose 60 cents, or 0.8%, to $78.30 recently. The trade gives the investor breathing room of about 5% before the trade starts to lose money, during a period that includes quarterly earnings. Investors also made moves premised on quick gains in Canadian mining company Ivanhoe Mines Ltd., which has been sparring with industry giant Rio Tinto PLC over a covenant that governs Rio's investment in Ivanhoe. On a day that the shares rose 44 cents, or 2.7%, to $16.90, trading was heavy in $17 call contracts that expire Friday. A call conveys the right to buy shares. At the afternoon premium of 55 cents, the contracts make money if Ivanhoe shares manage to top $17.55 by expiration, a gain of about 4% over current levels. Ivanhoe shares have already enjoyed a rise of about 23% in the last week or so amid the two companies' moves and countermoves. -By Brendan Conway, Dow Jones Newswires; (212) 416-2670; [email protected] (END) Dow Jones Newswires July 14, 2010 15:30 ET (19:30 GMT)