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Butterflies, Straddles And Spreads, Oh My!
By: Andrew Wilkinson   Wednesday, July 14, 2010 6:57 PM
Credit-spreaders pocket an average net credit of $1.11 per contract, and keep the full amount as long as PNRA shares exceed $75.00 through expiration day. Investors are vulnerable to losses should the price of the underlying stock fall 4.75% from the current price to breach the average breakeven point to the downside at $73.89. Maximum potential losses of $3.89 per contract accumulate for these investors should Panera's shares plunge 9.8% to trade below $70.00 by August expiration.

Ivanhoe Mines, Ltd. (NYSE: IVN) – Shares of the international mineral exploration and development company are currently up 4.00% to arrive at $17.11 as of 11:15 am (ET). Ivanhoe's share price increased as much as 22.15% so far this week, having rallied up from Monday's intraday low of $14.22, to today's intraday high of $17.37. Shares surged on Tuesday after the company said it plans to abandon an accord that restricts its ability to bring new investors into its $4.6 billion mining project in Mongolia. Bullish options investors positioning for continued appreciation in the price of the underlying stock dominated trading activity on Ivanhoe this morning. Traders purchased at least 5,200 now in-the-money calls at the July $17 strike for an average premium of $0.31 per contract. Call buyers make money if Ivanhoe Mines' shares trade above the average breakeven price of $17.31 ahead of expiration in two days.

Lorillard Inc. (NYSE: LO) – The largest U.S. manufacturer of menthol cigarettes popped up on our ‘hot by options volume' market scanner in the first half of the trading day after investors initiated near-term bearish strategies on the stock. Lorillard's shares are currently down 0.35% at $74.38 as of 11:40 am (ET). Options players expecting further bearish movement in the price of LO's shares picked up approximately 3,500 puts at the July $72.5 strike for an average premium of $0.23 per contract. Investors long the puts make money if shares fall another 2.8% to breach the average breakeven price at $72.27 by expiration on Friday.

The Dow Chemical Co. (NYSE: DOW) – Shares of the manufacturer of chemicals and plastic materials rallied 1.3% this morning to $27.06 despite reports that Goldman Sachs cut the U.S. chemicals sector to ‘neutral' from ‘attractive', and slashed their share price target on DOW to $35.00 from $40.00. Goldman still has a ‘conviction buy' rating on Dow Chemical Co. One options investor wary of potential near-term erosion in the price of the underlying shares appears to have purchased a put spread in the August contract. The trader purchased roughly 3,000 puts at the August $26 strike for a premium of $1.22 apiece, and sold about the same number of puts at the lower August $24 strike for an average premium of $0.60 each. Net premium paid to establish the bearish spread amounts to $0.62 per contract. The investor starts to make money if the chemical maker's shares slip beneath the effective breakeven price of $25.38 ahead of expiration. The put player is prepared to accrue maximum potential profits of $1.38 per contract should DOW's shares decline 11.30% from the current price of $27.06 to trade below $24.00 by expiration day next month.

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