Today’s tickers: XLF, V, JNJ, RIMM, GE, HBC, IYT & EXPD
XLF – Financial Select Sector SPDR – A bullish butterfly was established using June call options despite a 6.5% decline in shares of the financial index to $7.08. At the June 12 strike price, one investor appears to have sold 50,000 calls for a premium of 17 cents apiece representing the ‘body’ of the butterfly. 25,000 calls were bought at both 10 and 14 strikes for 43 and 8 cents each. The volume at these equidistant strikes represents the wings of the butterfly. This investor paid a net cost of 18 cents for the trade, and stands to make a maximum profit of 1.82 if shares can rally and remain at $12.00 by expiration. The maximum loss would only amount to 18 cents, thus the reward to risk ratio of 10:1 is highly favorable for the investor. The effective breakeven points on the trade are located at $10.18 on the lower strike and at $13.82 on the upper strike price. Shares of the XLF would need to surge upward by at least 43% in the next 4 months in order for this investor to breakeven. The bullishness seen with the butterfly strategy is also reflected by another trade seen in the same month, where an investor sold 21,000 puts at the June 8.0 strike price for 1.86 each. Despite the dismal new lows experienced by financials today, these bullish traders are looking for optimism in just a few short months.
V – Visa, Inc.– Shares of the retail electronic payments network have fallen more than 4% to $54.26. In the face of a market meltdown one trader established a very interesting position on Visa today. At the April 55 strike price, 9,500 calls were purchased for 3.90 apiece. Further along, 9,500 calls were sold for a rich premium of 10.00 each at the January 55 strike in 2010. The net credit to the trader amounts to 6.10. The share price has just fallen below $55.00 today driving the April calls out-of-the-money for the time being. Perhaps this trader took advantage of the decline today to purchase the near-term calls at a reduced price, allowing him to retain more of the credit on the sale of the January calls. We speculate that this investor faces two scenarios with today’s calendar spread. If shares rally through $55.00 by April expiration then he can call the underlying shares away at that time. Under this scenario the investor will essentially have a ready-made covered call established on the shares, while retaining the credit on the sale of the January contracts. On the other hand, if shares do not rally above $55.00 by expiration in April, the trader would be left with a risky short position in January and would need to either buy back the calls or buy shares in Visa, which by definition would create an even juicier buy-write. The risk of this scenario is that shares rally after April’s expiration date making the calls more expensive in January and eroding the credit made on today’s trade.
JNJ – Johnson & Johnson – Shares of the consumer products, pharmaceutical, and medical devices company have slipped by 3% to $48.34 today, reaching a new 52-week low. Option trades on the stock today reflect investors with starkly contrasted viewpoints in the July contract. On the one hand, a highly pessimistic trader purchased 5,000 puts at the July 30 strike price, paying 35 cents per contract for downside protection. Shares would need to decline an additional 38% from today’s price in order for these puts to land in-the-money by expiration. A more optimistic investor initiated a call spread in the July contract by purchasing 3,750 calls at the July 50 strike price for 3.40 apiece, and selling 3,750 calls at the July 60 strike for a 50 cent premium. The net cost to the trader amounts to 2.90 for the trade, and yields a breakeven share price of $52.90, at which point the investor will begin to amass profits. The maximum profit possible amounts to 7.10 and would occur if shares were to rally to $60 by expiration. Implied volatility on JNJ has surged to 40% today from last week’s reading of approximately 28%.
RIMM – Research In Motion Limited – The maker of BlackBerry has fallen nearly 7% to $37.21, edging closer to its 52-week low of $35.09. RIMM caught our eye today after a few large-volume trades went through in the March and January contracts. At the March 40 strike price, over 8,200 calls were purchased for 1.96 apiece. It is likely that this trader hopes for a near-term rally on the stock, as shares would need to reach a breakeven price of $41.96 in order for the investor to profit from the trade by expiration. At the March 55 strike price, one investor purchased 13,000 deep-in-the-money puts for the hefty price of 17.36 each. Similarly, 13,500 deep-in-the-money puts were scooped up at the January 55 strike in 2010, for an even more expensive price of 21.65 apiece. The puts were all purchased simultaneously, and therefore it is likely that the same investor is responsible for both trades. Option implied volatility has jumped to 84.5% today, up from last week’s reading of 73%.
GE – General Electric – Implied volatility on GE has increased today from 110% to 124% as shares dropped like a stone to $7.61. In the middle of Friday trading the company reneged on its promise to maintain its dividend, citing the benefits of capital preservation. The market spent the rest of the afternoon digesting the news and investors even tried to push the stock higher feeling that this might even be read as a position of strength. After a weekend full of bleak economic and corporate news, investors are in no mood for buying the silver lining argument today. There was good two-way options activity in the puts reserving rights to sell shares at a fixed $7.50 before March expiration, where investors traded 13,000 contracts at an average premium of 70 cents. Buyers would start to feel protection at a breakeven price of $6.80. One investor sounded a more optimistic recovery note by selling the March/April calendar spread at the 10.0 strike. By selling 10,000 calls in March and buying the same amount in the April contract the investor is staking a claim in a rally in the stock over the next 46 days. The purpose of selling the March calls is to erode the total spread premium to 74 cents.
HBC – HSBC ADR – It doesn’t matter how well respected any individual name is, a call for cash from investors is taken as a sign of weakness. The deeply discounted price at which existing shareholders are being asked to write checks in exchange for more stock, is fast turning out to be a short sellers target. Shares have fallen 20% today to $27.73, with rights to buy offered at a 48% discount to Friday’s closing price. Investors have targeted the April 25.0 strike puts today where some 26,000 puts have been traded at a 3.50 premium across a variety of exchanges and tied to stock at a share price of $28.30. The news of 6,100 job losses mainly at its U.S.-based consumer lending divisions has sent implied volatility surging by 20% to stand at 92%. Some of today’s option activity on the puts maybe due to perceived arbitrage opportunities, which might arise as a result of the corporate action, with option traders scurrying to lock-in premium and shares based upon the rights issue.
IYT – iShares DJ US Transport Index – Investors are in no mood to wait and see if Dow Theory is currently at play or not. You need to simply stick your head out of any window to see the dire economic picture without needing industrials and transports to confirm just how bad things are. Option volume on the transport ETF generated some interest today and given that only 25,000 contracts currently express existing open interest we sat up and paid attention. With shares 5.7% lower at $42.26 it appears that an investor may have taken profit on a put spread or on two established bear plays. We can see that March puts at the 45.0 line, which were sold today at a 3.30 premium were originally bought for a 1.0 premium. Some 4,000 puts at the 50 strike traded today at 7.10 were initiated some weeks ago at a premium of 3.0. So the investor either legged into a put spread for 2.0 points, selling it today at 3.80 or simply sold out of both bear positions. In the June contract an investor then established a fresh bear position as the share price reached an all-time low. This time he used the 35 and 40 strikes, which traded to the mid-market prices of 1.90 and 3.60 respectively. While this looks like a put spread, this investor could equally be making both outright purchases here, looking for continued downside for transport stocks.
EXPD – Expeditors International Washington Inc. – As one of the components of the transport index, shares of EXPD also saw interesting options volume, which we’re unclear of the investor’s motivation. Shares in the logistics company are lower by 6.5% at $25.75, while the options action took place in the May contract using 20.0 strike puts and 35 strike calls. The trade is marked as a strangle on time and sales, but the volume is unequal at both strike prices, which causes our confusion. The trade involved 4,000 puts and twice as many call options and if this is a strangle combination, the investor may have sold for a total premium of 1.31 inferring that he wants the share price to remain between a range of $18.69 and $36.31 at expiration. The implied volatility on the company’s options today reads 61%.
