Today’s tickers: FXI, JPM, POT, GE, DIS, VIX, EWJ, EFA & EWZ
FXI – iShares FTSE/Xinhua China 25 – Shares of the China ETF rose 7.5% to $25.47. One trade worth noting occurred in the May contract and involved one investor selling volatility in the form of a straddle. Option implied volatility has come off from yesterday’s value of 66% to the present value of about 60%. At the May 26 strike price, 3,000 calls were sold for 2.12 apiece while 3,000 puts at the same strike were shed for a premium of 3.0 per contract. The gross premium gained by this trader amounts to 5.12 and is safe in the bank if shares can center at $26 by expiration. The premium begins to erode if shares move toward either breakeven point located at $31.12 on the upside and at $20.88 on the downside. Once either of these points has been breached the premium will have completely given way to the accrual of unlimited losses in either direction.
JPM – JPMorgan Chase & Co. – The financial services firm has experienced a healthy rally in shares, jumping 20% to $19.10. Thanks to the upward movement, implied volatility has come off the stock from yesterday’s reading of 143% to the current value of 120%. One option investor was observed selling volatility in the form of a strangle in the January 2010 contract. At the January 35 strike price 5,000 calls were sold for 1.43 each, while simultaneously 5,000 puts were sold at the January 25 strike for 9.52 apiece. The gross premium pocketed on the trade amounts to 10.95 and is retained in full as long as shares remain ‘strangled’ by the strike prices by expiration. In order for this strategy to work, shares will need to rally an additional 31% from the current price to break through the 25 strike on the downside. The optimal situation for this investor would be that all the contracts traded today land out-of-the-money by expiration next year, which would require the share price to rise within the parameters of the strangle.
POT – Potash Corporation of Saskatchewan, Inc. – Shares of the fertilizer and feed products company have rallied 8% to $74.95 as increases in crude oil and banks give a boost to many commodity related stocks today. But one investor appeared to use the rally as an excuse to take a more sober approach to trading options on the stock. One investor established a credit spread on POT in the April contract. At the April 80 strike price this trader sold 5,000 calls for a premium of 6.0 each, while at the April 100 strike, he purchased 5,000 calls for 1.45 per contract. This strategy nets the investor a credit of 4.55, which is retained in full if shares fail to rise above $80 by expiration. The credit erodes down to zero if shares reach a breakeven share price of $84.55. Additionally, this trader has limited his losses to a maximum of 16.00 dollars should shares blow through $100 next month. The investor has been paid 4.55 for the privilege of writing the spread and for bearing the risk that shares rally above the 80 strike at which point he would need to stand ready to deliver the underlying shares to the buyer.
GE – General Electric – A deep, deep breath of fresh air was inhaled by GE’s investors today. Pressure on the cost of insuring GE’s bonds subsided while the company announced an investor conference call to focus on GE Capital on March 19. Hitherto, management has been criticized for a lack of accounting transparency at the unit which provides a large chunk of profits and revenues. Shares surged 15.8% after the successful sale of $8 billion in notes backed by FDIC, and currently stand at $8.58. Meanwhile in options land, the elevated reading of options implied volatility fell by around one quarter today to stand at 101%. Investors targeted calls in search of an ongoing rebound in the share price. Piquing our curiosity was the purchase of around 2,500 June expiration calls at the 16 strike where premiums reached 17 cents per contract. Most actively traded, however, were calls at the March 9.0 strike where investors added to 93,000 open interest with the purchase of yet another 43,000 calls at a premium of 47 cents today. The surrounding 7.5 and 10.0 strikes were also heavily traded. It’s too early to say whether this storm surrounding GE has blown over. Readers may recall that in the option world at least, negative vibes included the purchase of large amounts of June 2.5 strike puts. In today’s trading those selling rights have traded on volume of around 10,000 contracts while the premium has slipped to 13 cents.
DIS – Walt Disney Company – Shares have rallied 4% to $16.22 despite the downgrade to sell from hold reported today by Pali Research. Option traders were seen buying approximately 9,000 in-the-money calls at the March 15 strike price for an average price of 1.29 apiece. In the April contract, investors are looking for further upside by purchasing about 3,000 calls at the 17.5 strike price for 42 cents each. The April calls will begin to amass profits if shares can rally 10% to the breakeven share price of $17.92. We doubt that today’s vote by major shareholders on the subject of executive pay is driving option activity.
VIX – CBOE Volatility Index – Today’s sizeable rally has logically toppled Wall Street’s fear gauge, which has slipped 9% to 45.17. However, investors appeared to take advantage of rising put premiums by selling put options that they clearly anticipate won’t be reached ahead of expiration of the March future in one week’s time. Investors sold around 5,000 contracts conveying rights to sell the VIX at a fixed reading of 35 by next Tuesday for premiums of around 20 cents per contract. The delta at the strike predicts a 6% likelihood that the VIX will read lower than this strike price at the time. The activity is noteworthy today since this is the first significant rebound seen off the market low and we should be able to take a cue as to its sustainability depending on the demand for protection from option contracts. With the market 300 Dow-points higher, volatility isn’t caving in as one might expect. Elsewhere call demand dominated where investors traded 2,000 March calls at 1.10 and over 3,000 calls at the 65 strike for a premium of 25 cents, down from yesterday’s 60 cent premium.
EWJ – iShares Japan – Fuelled by rising equity market optimism today, one investor used options to play out an inexpensive way of getting long the Japanese market. The investor bought calls expiring in April and sold puts to help finance the position using two blocks of 15,000 contracts. Notable in this position is the low expense to enter the trade. The calls cost 10 cents offset by proceeds of a nickel from the puts. With shares up 5.7% today at $7.26 this investor now wants to see the Japanese market rise by 10.8% to reach the $8.05 breakeven price. We should also mention that this strategy might be a hedge from a concerned investor short the Japanese market looking for an inexpensive way of protecting against a reversal in risk appetite.
EFA – iShares Trust MSCI EAFE Index Fund – Shares of the European, Australian, and Far Eastern index have rallied more than 7% to $33.94. EFA jumped onto our ‘most active by options volume’ after a couple of investors initiated large positions in the April contract. Although both of these traders selected the same strike price in April, they appear to have varying opinions on what the future holds for the ETF. First we noted a sold straddle at the April 32 strike price where one bullish investor sold 15,000 calls for 2.70 each, and simultaneously sold another 15,000 puts for 1.45 apiece. The gross premium brought in on this trade amounts to 4.15 and yields breakeven points at $36.15 on the upside and $27.85 on the downside, beyond which losses accrue. The full premium is retained if shares remain at $32 by expiration. The other investor’s trade implies a more cautious and less optimistic view. At the April 32 strike price this individual sold 7,500 calls for 2.70 each, and purchased 7,500 puts for 1.45 per contract. Thus, this trader is taking a 1.25 credit on the trade by selling the calls, and picking up downside protection should today’s rally reverse to the downside by expiration. This more pessimistic trader pockets the 1.25, but must stand prepared to deliver shares should the calls land in-the-money and get called away. Once again this investor could be using options to protect against a core position, this time long of shares, which could be called away.
EWZ – iShares MSCI Brazil Index Fund – With equity market gains fueled by rising commodity prices, the Brazilian ETF has enjoyed a 6.75% rally today to $35.25. We observed interesting but highly contrasted strategies enacted on EWZ. One investor is grooving with today’s increase in share price and established a call spread in the March contract by purchasing 12,500 calls at the March 36 strike price for 1.25 each, while selling 12,500 calls at the March 39 strike for a premium of 35 cents apiece. This optimistic investor paid 90 cents for the spread and stands to make a maximum profit of 2.10 if shares can continue to rally all the way up to $39 by expiration. Shares would need to experience a rise of 10% from today’s price in order for maximum gains to come to fruition. Contrary to the bullishness seen in the March contract, one investor established a butterfly spread centered at the April 31 strike price, bearish in so far that its central point would require a market decline. While shares traded to the middle of the market, we believe that this trader purchased each of the wings and sold the body. At the April 31 strike price, 60,000 puts (the body) sold for 1.70 apiece, while at the April 28 strike, 30,000 puts (wing 1) were purchased for 1.00 each, and an additional 30,000 puts (wing 2) were bought at the April 34 strike price for 2.75 per contract. The net cost of the trade amounts to 35 cents (1*1.00 + 1*2.75 – 2*1.70 = 0.35) and would yield the maximum profit of 2.65 if shares were to fall to $31 by expiration. Perhaps this investor is dubious of today’s rally and finds optimism at this point in time to be premature. Thus, this trader benefits the most if EWZ declines by about 14% from the current price to $31 next month.
