Bears in the Butterfly Garden

Today’s tickers: MS, EXPE, FCX, VIX, XRT, GPS, XLP & WFC MS – A massive, albeit lopsided, butterfly spread was established on MS today amid a more than 3.5% decline in shares to $25.19. The highly bearish play was initiated by an individual who expects to profit from significant declines in the price of the underlying by expiration in October. The butterfly spread defied typical parameters seen in the strategy. The body of the spread involved the sale of 20,000 puts at the October 21 strike price for 1.45 apiece. But, the lower wing, which would typically have half as many contracts as the body, also had 20,000 puts which were purchased for 79 cents each. Finally, the conventional upper wing at the October 25 strike had 10,000 puts bought for 3.19 per contract. The bottom-heavy wing with twice as many puts as the upper wing suggests that the trader is prepared for shares to slip beneath $18.00 by expiration. If shares slipped beneath the lower strike price, the trader, who is still net long 10,000 put options, would see the value of the puts appreciate. Perhaps this investor is banking on a renewal of financial calamities by the fall. – Morgan Stanley EXPE – Bearish sentiment on the online travel company was apparent after one trader spawned a butterfly in the October contract. This individual probably doubts that the demand for travel and vacation accommodations is heading anywhere but south given rising unemployment statistics. Shares of EXPE have slipped along with the broader market today by 1.5% to $13.59. The butterfly spread was initiated through the sale of 22,000 puts at the October 10 strike price for a premium of 47 cents apiece. The body was flanked by the purchase of two wings. The higher October 15 strike had 11,000 puts purchased for 2.56 per contract and the lower October 7.5 strike also had 11,000 puts picked up for 18 cents apiece. We would like to point out that unlike traditional butterfly spreads, which have equidistant strikes, this butterfly was born with lopsided wings as the lower strike is just 2.5 below the central exercise price rather than 5 points. The investor has realized a net cost of 1.80 and will begin to amass profits beneath the breakeven point at $13.20. Maximum potential profits of 3.20 would be attained if shares of EXPE drop to $10.00 by expiration in the fall. The…