Today’s tickers: GSI, BRCM, MAS, TGT, GE, AMZN & XOM
GSI – General Steel Holdings Inc. – It appears that a trader may have used the options market to seek protection against a possible long stock position in GSI, a manufacturer of hot rolled carbon and silicon steel sheets today. The trade involves short calls expiring in September and long puts expiring in June. With shares trading at $3.00 today this option strategy combined with stock would offer capital appreciation of 66% should shares rise to the call strike, where gains would be capped from the offsetting short call. But the strategy would also offer limited downside risk to a long stock play with the net premium of 15 cents creating a breakeven point of $2.35. That exposes the investor to a maximum loss on the stock of 21.6%. Some 6,400 June puts were bought at the 2.5 strike price for 70 cents, while 6,400 calls appear to have achieved a premium of 55 cents using the September contract. Without an underlying stock position the investor wants shares to fall beneath the $2.35 breakeven and so is subsidizing the put cost. However, the fact that the September calls were sold leaves the investor exposed to a maturity gap of three months, which is why we speculate that the investor is actually pinning hopes on a rebound in the stock much later this year.
BRCM – Broadcom Corp.-CL A – The Irvine, CA based chip-designer reported fourth quarter losses and announced that sales projected through the end of March will likely fail to meet analysts’ expectations. The company faced a downgrade today while its share price suffered falling 9% to $15.86. BRCM approached the top of our ‘hot by options volume’ market scanner and revealed some interesting trades. At the February 13 strike 4,980 puts were purchased for 10 cents each. At the February 15 strike 4,450 puts were sold for a premium of 45 cents while about 1,100 were bought at that same strike for 40 cents apiece. The March contract at the 15 strike price was where the big news is today with 17,000 puts changing hands with approximately 10,700 puts sold for 85 cents each while a buyer paid 95 cents for 4,400 lots. In the May puts at the 16 strike, 6,000 lots were sold for 1.82. While most of the option activity today was on the put side there was some action on the call side. At the February 16 strike about 2,000 calls were sold for an average price of 90 cents, while at the 17 strike nearly 1,600 calls were sold for 41 cents apiece. Much of today’s premium writing is likely accounted for by the 10% demise in implied volatility post earnings.
MAS – Masco Corp. – One of North America’s largest manufacturers of brand-name consumer products for home improvement and new construction, Masco popped up on our ‘hot by options volume’ market scanner today as investors created bearish strategies. Puts at the February 7.5 strike were bought some 10,800 times for an average price of around 53 cents. July calls at the 10 strike saw heavy selling of 4,500 calls at a VWAP of 57 cents. Shares and investor confidence in the stock seem to have declined given the terrible state of the housing market. MAS shares are down by over 5% today to $7.92 and are nearing the company’s 52-week low of $6.59. If shares continue to decline, those 7.50 strike put buyers in February will profit if the price falls below the breakeven of $6.97.
TGT – Target Inc. – Government figures showed a disastrous quarter for the consumer hurting broad economic growth earlier. Challenged by job cuts, weakening home values and constricting access to credit the consumer is being starved of oxygen. In options trading in retailer Target today, one investor half-strangled a combination to produce an intriguing trade hoping for some stimulus-provided respite aimed at helping resuscitate the consumer and therefore, shares in Target. With shares down 2.3% at $31.92 this morning the investor bought 15,000 calls in the April contract at the 45 strike for a premium of 54 cents. Simultaneously the investor sold 7,500 puts at the April 22.5 strike at 87 cents. To reach the put strike shares would need to decline by 30% yet to reach the upper call strike the shares would need to rise 40%. So the difference in premiums, which nets the investor 33 cents today, is accentuated by the difference in implied volatility at each strike. The put carries a 79% implied volatility reading while that at the call line reads 59%.
GE – General Electric – Shares in GE are lower by 4% at $12.00 today while its 13% increase in implied volatility to 77% is reason enough for the option activity to land on our market scanner today. In the March contract an investor appears to be looking for further limited downside movement judging by the 12,820 contract put spread initiated at the 10 and 7.5 strikes. That amount of puts were purchased for 60 cents at the upper strike while limiting the bet on the downside saw this investor take a per contract credit of 20 cents at the 7.5 strike. The net 40 cent cost implies a combination strategy that would kick-in should GE’s share price decline to $10.10 at expiration. Elsewhere the real driver of today’s increase in implied volatility might be found at the March 12.5 strike where investors paid a combined premium of 2.46 to buy straddles. This combination involves the simultaneous purchase of both calls and puts with an investor expecting shares to move through expiration by more than the combined value of the premium paid. In this case the investor wants shares to rebound above $14.96 or slump beneath $10.04.
AMZN – Amazon.com Inc. – Shares have surged 17% today to $58.85 after higher than expected fourth quarter earnings were released for the e-marketplace. Amazon had strong holiday sales and has forecasted promising results for the first quarter. Sales in North America increased by 18% while its international sales experienced growth of 31%. Options traders wasted no time initiating positions today with nearly 100,000 contracts in play by 11am. At the February contract the trend points to call buying and put selling. At the February 60 strike 4,000 contracts were purchased at an average premium of 2.57. But, at the February 65 strike some 1,200 call contracts were sold for a premium of 1.01 indicating that some investors see a cap on the rally at around $65. Over 5,000 puts were sold at the February 50 strike for around 80 cents and approximately 3,000 puts sold at the 55 strike price for 1.91. Option implied volatility has dropped by 20% post earnings and stands at 62% today.
XOM – Exxon Mobil Corp. – Despite a drop in revenue of 26% in the fourth quarter, declines in the price of crude oil, and the worsening economic recession, XOM made record profits for 2008 of $45.2 billion. The Texas-based company appeared on our ‘most active by options volume’ market scanner as investors take their positions following the record breaking news. In the February contract 4,000 calls at the 80 strike appear to have been purchased for 1.39. XOM shares are currently at $78.02 and would need to surpass $81.39 in order for the calls to be profitable. At the February 85 strike around 1,700 calls were bought at a lower 25 cents premium. However, the delta on the contracts yields only a 10% chance that they will land in-the-money by expiration. This reading is low thanks to the fact that implied volatility on the stock is 33% and so a boost in volatility would drive up delta and so the likelihood of landing in-the-money. Many puts were sold in February at the 70, 75, and 80 strikes. 2,500 puts were sold for 50 cents at the 70 strike, while 9,000 were sold for around 1.50 each at the 75 strike price. At the February 80 strike investors sold 7,000 puts and buyers paid a premium of 3.70 for 2,000 contracts.
