Shares of Fifth Third Bancorp (FITB: sentiment, chart, options) have rallied more than 4% today, despite revealing a bit of bad news this morning. Specifically, the company said that its home equity portfolio is experiencing "high loss severity," and that it sees continued stress in its commercial construction portfolio throughout 2009. This hasn't stopped options traders from piling into calls, as both the January 2010 10 call and the January 2010 14 call have traded more than 20,000 contracts before noon.
Diving into the data, four blocks, totaling 20,000 contracts, traded on FITB's January 2010 10 call at 10:53 a.m. Eastern time on the NSYE Arca for the ask price of $1.75. These blocks were marked "spread." The second half of this spread took place on FITB's January 2010 14 call, where four blocks, totaling 20,000 contracts, traded at the same time on the same exchange for the bid price of $0.45. This block was also marked "spread." Given this data, it would appear that we are looking at a vertical call spread, more commonly known as a debit spread, on Fifth Third Bancorp. This options strategy is also known as a long call spread, or a bull call spread.
The Anatomy of a Fifth Third Bancorp Vertical Call Spread
Breaking down this potential debit spread position, the trader purchased 20,000 January 2010 10 calls for the ask price of $1.75, resulting in a total debit of $3,500,000 -- (1.75 * 100) * 20,000 = $3,500,000. Minus the sold leg of the debit spread, FITB would need to rally about 20%, from Tuesday's close, to $11.75 per share in order for the position to reach breakeven at expiration. Furthermore, the maximum loss on this position is limited to the initial investment of $3,500,000.
However, the second leg of the debit spread helps to offset the cost of the overall position. Specifically, the trader sold 20,000 January 2010 14 calls for the bid price of $0.45, netting a total credit of $900,000 -- (0.45 * 100) * 20,000 = $900,000. Combining this leg of the trade with the purchased January 2010 10 call lowers the total cost of the entire position to $2,600,000 -- $3,500,000 - $900,000 = $2,600,000.
The addition of the sold January 2010 14 call also lowers breakeven on the trade. To arrive at breakeven, we subtract the credit received from the sold January 2010 14 call from the debit incurred by purchasing the January 2010 10 call. We arrive at a cost of $1.30, or $130 per contract. As a result, the trader now needs FITB to rally roughly 15.4% to $11.30, from yesterday's close, in order to recoup the initial investment on the entire position.
The maximum profit is calculated by subtracting the premium paid from the difference between the two strikes, and is reached if FITB rallies to $14 per share at expiration. In this case, the maximum profit is $2.70 -- (14 - 10) – 1.30 = $2.70 -- or $270 per contract. The maximum loss is equal to the net debit of $1.30, or $130 per contract. Below is a chart for a rough visual representation of the trade's profit/loss scenario:
Implied Volatility
After the vertical call spread has been entered, increasing implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold option and the purchased option. According to IVolatility.com's calculator, implieds for the January 2010 10 call arrive at 65%, while the implied volatility for the January 2010 14 call rests at 59.6%.
Discuss this article:
Post your own comment
More articles:
Chinese search sultan Baidu, Inc. (BIDU: sentiment, chart, options) will step into the earnings spotlight after the closing bell tomorrow, according to Thomson Reuters. While call volume has accelerated ahead of the event, digging deeper into the action indicates that not all of the activity has been bullishly oriented. read more...
Transocean LTD (RIG: sentiment, chart, options) was a popular target in the options pits on Friday, with both call and put volume surpassing the norm. More specifically, the offshore drilling diva saw about 19,000 calls and 19,000 puts cross the tape – nearly doubling its expected single-session volume of fewer than 9,900 calls and 10,000 puts. read more...
Call trading has picked up steam on commodities concern Plains Exploration & Production Company (PXP: sentiment, chart, options), according to data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). During the past two weeks, speculators on the exchanges have bought to open almost four times as many PXP calls as puts, as indicated by the stock's 10-day call/put volume ratio of 3.84, in the optimistically skewed 64th annual percentile. read more...
While most near-term option traders have boarded HSBC Holdings plc's (HBC: sentiment, chart, options) bullish bandwagon, it appears one longer-term speculator may have a fear of commitment, buying both puts and calls to profit from a price swing in either direction. read more...
Best Buy Co., Inc. (BBY: sentiment, chart, options) is drawing some notable put spread activity today, with one neutral-to-bullish speculator zeroing in on the security's February 37 and February 35 strikes. So far today, the retailer's February 37 put has traded volume of 4,678 contracts, while the 35 strike has seen 4,301 contracts change hands. read more...
Defense industry publication Inside Defense on Tuesday said that truck maker Navistar International Corporation (NAV: sentiment, chart, options) could receive a hefty order from the U.S. military for the first time in more than a year. More specifically, the firm is expected to receive orders for at least 1,050 mine-resistant armored trucks, the publication's Web site reported, though representatives from both Navistar and the Pentagon didn't comment. read more...
Internet issue and Street freshman AOL, Inc. (AOL: sentiment, chart, options) is expected to report its fourth-quarter figures before the opening bell tomorrow, according to Thomson Reuters. Ahead of the event, one AOL shareholder is apparently attempting to protect profits by implementing a collar on the stock. read more...
Call speculators have swarmed Marvell Technology Group Ltd. (MRVL: sentiment, chart, options) today, after analysts at Broadpoint Amtech upgraded their view on the semiconductor sector to "overweight" from "neutral weight." In afternoon trading, the security has seen roughly 13,000 calls cross the tape – about 3.5 times its expected single-session volume of fewer than 3,700 calls. read more...
E-Trade Financial Corporation (ETFC: sentiment, chart, options) was a favorite target in the options pits on Friday, after the company revealed its fourth-quarter figures. However, while most bearish traders were employing puts to bet on an extended slide for the shares, some pessimistic option players took the road less traveled by selling long-term calls on the online brokerage behemoth. read more...
Gold prices have plunged nearly 7% since peaking above $1,160 an ounce in mid-January. The malleable metal is now trading just above $1,075 to $1,080 an ounce, an area that has provided a floor for gold prices since November 2009. Given today's options activity on the SPDR Gold Trust (GLD: sentiment, chart, options) exchange-traded fund (ETF), it appears that at least one options trader is betting that the precious metal will rebound from this support level. read more...
Today's Most Popular Stories
working... 
