IB Options Brief: Jefferies Group, Inc. (JEF)

Posted September 22nd, 2011 by Caitlin Duffy in Unusual Activity

Bearish Bets On Jefferies Spot-On As Shares Extend Losses

JEF ñ Jefferies Group, Inc.

Disappointing third-quarter results released earlier in the week initially failed to take the wind out of Jefferies Groupís sails, as evidenced by a more than 2.5% rally in its shares by lunchtime on Tuesday. We observed bearish put buying taking place on the stock in the midst of Tuesdayís rally, and noted that one strategist was positioning for the stock to surrender those gains and then some by October expiration. Lo and behold, shares in the investment bank reversed course by the close of trade on Tuesday, and have continued to slide in the days since.

The stock has fallen 15.0% in the past 48 hours alone, while losses since the start of 2011 are now up around 55.0%. One post-earnings report put buyer purchased roughly 3,100 of the October $14 strike puts on Tuesday for an average premium of $0.75 each. These contracts currently command an asking price of $2.80 each. The decline in open interest in the Oct. $14 put to 1,706 by Thursday suggests some profit taking may have occurred yesterday when shares in Jefferies Group shaved 5.4% off their opening price of $13.58. The investor may have received as much as $1.35 per contract by selling-to-close part of the original position on Wednesday. Overnight gains on the sale could have amounted to roughly 80.0%.

Fresh bearish positioning in Jefferies put options this morning may mean the worst is yet to come. Investors expecting declines in the price of the underlying to extend through November expiration snapped up more than 3,100 puts at the Nov. $10 strike for an average premium of $0.53 each. Put buyers at this strike profit at expiration if shares in JEF drop 22.2% from the current shares price of $12.17 to breach the average breakeven point on the downside at $9.47. But, the investor clearly does not necessarily need to hold the position to expiration. Profits may be ripe for the taking should shares in JEF continue their downward trajectory and/or implied volatility extend its reach higher, to fuel gains in put premium. Options implied volatility at present stands 20.05% higher on the session at 67.5% as of 1:35 pm in New York trade.

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