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Three-Legged Bearish Tactician Targets iShares Dow Jones U.S. Real Estate Index ETF

 August 27, 2010 04:28 PM

iShares Dow Jones U.S. Real Estate Index ETF (IYR) – A three-legged bearish options combination play on the IYR, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Dow Jones U.S. Real Estate Index – an index created to measure the performance of the real estate sector of the U.S. equity market, indicates one big player is bracing for a pullback in shares of the ETF through the end of 2010. Shares of the fund went the way of the market this afternoon and rallied 1.05% to $50.71 with less than one hour remaining in the trading week. The investor sold roughly 10,000 calls at the December $55 strike at an average premium of $1.35 each, purchased about 10,000 puts at the December $50 strike for an average premium of $3.65 apiece, and shed 10,000 puts at the lower December $43 strike at an average premium of $1.43 a-pop. The net cost of the pessimistic play is reduced to $0.87 per contract. The transaction could be a hedge to protect the value of a large position in IYR shares. But, if the spread represents an outright bearish bet on the ETF, the investor is poised to profit should shares dip below the average breakeven price of $49.13 by December expiration. Maximum available profits in this scenario amount to $6.13 per contract if the fund's shares plummet 15.2% from the current price to trade below $43.00 by expiration day.

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National Semiconductor Corp. (NSM)– Shares in semiconductor manufacturer, National Semiconductor Corp., earlier slipped 2.05% to touch a new 52-week low of $12.41, but the stock came roaring back to life in afternoon trading, rallying as much as 3.2% to an intraday high of $13.08. The significant shifts in the price of the underlying shares inspired investors to purchase both call and put options on the stock today. Options traders may also be gravitating toward NSM options ahead of the firm's first-quarter earnings report scheduled for September 9, 2010. Investors heartened by the turn-around in shares purchased approximately 5,800 calls at the November $13 strike for an average premium of $0.85 apiece. Call buyers make money if National Semiconductor's shares rally another 5.9% over today's high of $13.08 to trade above the average breakeven price of $13.85 by expiration day in November. Meanwhile, investors bracing for potential erosion in NSM shares scooped up put options at the $13 strike price in both the November and February 2011 contracts. Nearer-term pessimists bought roughly 2,700 puts for an average premium of $0.91 each, while long-term bearish players picked up 4,700 puts at an average premium of $1.50 a-pop. Buying interest in both calls and puts at the November $13 strike suggests the likelihood of increased volatility in National Semiconductor Corp. in the next several months to expiration.

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International Game Technology (IGT)– A short straddle enacted on the maker of electronic gaming equipment today suggests one strategist expects the price of the underlying shares to settle at $15.00 by expiration day next month. IGT's shares inched up 0.20% to $15.10 in late afternoon trading. It looks like the straddler sold 12,500 in-the-money calls at the September $15 strike for premium of $0.50 apiece in combination with the sale of 12,500 puts at the same strike for a premium of $0.40 each. Gross premium pocketed on the transaction amounts to $0.90 per contract. The trader responsible for the short straddle keeps the full amount of premium received as long as shares settle at $15.00 at expiration. Premium retained by the investor will dissipate if shares shift away from the strike price in either direction.

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