General Electric butterfly predicts slump in share price

Today’s tickers: : GE, STT, NTRS, BAC & XLF GE – General Electric – One option trader is looking for General Electric to practically lose half of its value by the time February’s option’s expiration comes about. With shares currently trading down 5.3% at $13.21 an investor appears to have placed a butterfly combination in which three neighboring strikes were traded. In this case the butterfly has a ‘body’ at the 7.5 strike price, which marks the central point of the trade was bought, which means that the trader bought put options at the surrounding strikes, known as the wings, at 5.0 and 10.0. The investor simultaneously sells twice as many puts at the 7.5 strike. This particular butterfly involved 14,000 contracts at each of the wings with 28,000 puts sold at the body for overall volume of 56,000 lots. The net cost of the trade is just 19 cents but its success requires that GE’s share price lands anywhere between $5.19 and $9.81 at expiration. The investor wins most should shares settle at $7.50 at expiration in which case the winnings are 2.31 per contract. A butterfly buyer often wants a share price to stand still at a specific point (the central strike price) but this is a particularly bearish trade since in order to achieve this its shares must first decline by 43%. Implied options volatility at GE is 15% higher today at 84% while traders had put 161,000 options to work before 11:15am. STT – State Street Corp. – One of the world’s largest institutional money managers, disclosed dismal fourth-quarter profits, down 71% to $65 million from the previous year’s net income of $223 million. Predicting flat results for 2009, the Boston based company, hired by the government as a custodian to aid in the recovery of the markets, saw their share price dive more than 52% to approximately $17.64. With a share price decline like this right out of the gate it’s harder for option traders to leave their footprint since they too are reacting to a new catalyst. Most of today’s option volume has been on the call side but we’re just guessing here that many of those trade tickets will have the word’s ‘opening sale’ stamped on them. In the February contract, there was practically no existing open interest at any of the six option strikes between the 17.5 and 35 strike lines. Today each has several thousand…