Sponsored By:

CIT Group (CIT)

August 15, 2008

Dear Fellow Options Trader,

On Wednesday, Moody's (MCO) noted that CIT Group (CIT) has made important strides in improving its operating flexibility and building liquidity.

One issue Moody's noted was that CIT sold its underperforming home lending business in July for total proceeds of $1.8 billion. Analysts said the sale will reduce CIT's earnings volatility and position the firm to generate capital in future periods.

We note a very large ratio call spread trading in its January 2009 options, where some institutional player bought the CIT Jan 10 Calls (CITAB) for $2.10 --19,000 contracts' worth -- and sold the CIT Jan 15 Calls (CITAC) for 70 cents some 38,0000 times. Thus, the net paid to do this 1 x 2 spread was 70 cents ($2.10 - $1.40).

Without knowing what the buyer's position is, I can only stroke my soothsayer beard and project the intentions of such a spread.

If the buyer of the spread already has a long position in CIT, then they just created a double-their-money zone between $10 and $15 (the two strike prices in this option trade). In fact, if CIT pins right at $15 on that third Friday in January (expiration Friday), then the buyer would see their $10 calls go to $5 and their short calls expire worthless.

Thus, that would mean a profit of $9.5 million ($5 gain x 100 shares per option x 19,000 contracts) on an investment of $1.33 million (70 cents x 100 shares per option x 19,000).

To follow this very large trader into CIT -- a stock that was trading above $30 in February, but today sits at $9.30 -- I recommend buying those CIT Jan 10 Calls (CITAB) for $2 and selling the CIT Jan 12.50 Calls (CITAV) for $1.20 against them for a net investment of 80 cents.

Because we're doing this as a bull-call spread, we are buying the $10 calls and selling the $12.50 calls against them in a 1-to-1 ratio (i.e., if you buy one contract, then you sell one contract).

Our breakeven would be at $10.80, which is the strike price of the long option plus the money we pay to enter the spread ($10 + 80 cents), and we'd make over 200% on our investment if CIT is trading at $12.50 on that third Friday in January.

Let's add a stop-loss at 40 cents for this spread if CIT heads south.

The prices that you pay/collect for the individual "legs" of the spread don't matter, as long as you don't pay more than 80 cents to execute the trade.

Good luck and good trading!


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader