Option Traders Playing a Merger of Brazil Banks

An article appearing on Bloomberg's newswire last Friday suggested that Brazilian banks could be in for a new spate of consolidation as the valuation spread between the country's largest banks and smallest banks continues to widen amid turbulence for the country's stocks.

With that in mind, we were particularly interested to observe a long, front-month straddle play this morning in Banco Itau (ITU - commentary - Cramer's Take), a $13 billion-capitalized bank, which earlier this month announced a takeover of sector peer Unibanco (UBB - commentary - Cramer's Take). The strategy shows an expectation of more near-term share-price swings for the holding company, even with today's 7.6% gain for shares to $9.74.

In this directionally neutral but volatility bullish strategy, the trader appears to have entered a fresh 5,000-lot position at the December $10 line, paying $3.25 (one-third of the current share price!) and looking for a break either above $13.25 or below $6.75 by December 19. Implied volatility in Banco Itau options has normalized somewhat since news of the takeover, and now, at 142%, it measures about 9 percentage points below the historic record of deviation on the underlying stock. The girth of this trade sent option volume to 8 times the normal level of activity in Banco Itau.

In another interesting opening position in the front month, a bearish put-ratio backspread in children's clothing maker Carter's (CRI - commentary - Cramer's Take) showed up via our TradeAlerts data feed this morning. The stock is up 7.8% to $16.44 as stocks rally in relief mode today, but an increase in options trading volume to 5 times the normal level showed a trader selling one December $15 put for every two $12.50 puts bought. The trade here allowed the initiator to take a 40-cent net credit on the transaction in a bet that pays off if shares remain either above $15 or crater into single digits between now and December 19.

---

At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is the Portfolio Manager for TheStreet.com?s Options Alerts Portfolio newsletter and an equity options analyst for RealMoney Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.