Call Spreads Suggest Recovery for CIT

A sizable call spread, possibly put on by a well-capitalized individual or an institution, caught my attention today, as it seems to imply a slow-but-sure road to recovery for CIT Group (CIT Quote - Cramer on CIT - Stock Picks), the provider of commercial and real estate financing.

Shares in CIT Group are down more than 60% this year, even after a 51% move up off of their July 15 lows. That rebound outpaces gains seen in other S&P financials, after CIT has mercilessly lagged earlier in the year.

The long 1-by-2 call spread activity in the January '09 contract involved a trader buying one $10 strike call for $2.10 and selling two 15-strike calls for 70 cents, resulting in a net debit of 70 cents per trade. Essentially the trader is looking for continued upside past the $10.70 level in the first of the year, but is confident that the share price won't breach $15.

That's because half the position at this strike in a 1-by-2 call spread is uncovered short, leaving the trader vulnerable to exercise (and unlimited losses) in the event of a share price rally. The volume appears to have involved about 19,000 lots at the lower strike and about 38,000 lots at the upper strike, making the size of the trade noteworthy in its own respect -- the volume here represented 16 times the normal level of activity seen in CIT Group shares.

An options investor is making a bet on steel producer and recycler Commercial Metals (CMC Quote - Cramer on CMC - Stock Picks). Shares are down $14 since the 52-week high reached in late June.

The option activity today, which pushed overall volume to nearly 6 times the normal level, appeared in a 6,000-lot long call spread in the December contract between strikes 30 and 40 for a debit of about $1.59, a position that requires at least a 22% recovery from current levels to break even, and could even imply a test of that 52-week high by year-end.

Shares in Masco Corp. (MAS Quote - Cramer on MAS - Stock Picks), the owner of various kitchen and plumbing products, are up 5% today to $18.87, one day after similar gains for a number of leading homebuilder stocks. As is the case with CIT Group, shares have rebounded sharply from recent lows, but are still down 12% year to date.

A comparison of its option implied volatility (47%) to its far-higher historical record of volatility (54%) indicates that option traders have relaxed much of the risk expectation for Masco shares in the coming month. While many option traders have not abandoned defensive protections in homebuilders in later-2008 contracts (despite respectable gains for these stocks since mid-July), today's action in Masco shows one trader staking a bet on continued moderate upside for Masco by mid-January.

It looks here as though the trader positioned long of the January 20/25 call spread, a position that would carry a debit of $1.35 -- but may have shaved 35 cents off the price of the position by selling 12.50 puts.

The resulting trade would leave the trader looking for a break above $21, a 10% gain from current levels. But the position caps upside at $25. The volume here sent overall activity in Masco Corp to 3 times the normal level.