Emerging Markets ETF sees option traders locking into strong rally

By option_review

May 18, 2009

499

Today’s tickers: EEM, VALE, CSCO, ALL, IBN, STT & XLE

EEM– Shares of the emerging markets ETF have jumped 5% today to stand at $31.58. Ignoring the current bullish movement in the underlying share price, one option trader looked to the December contract to initiate a ratio put spread in the expectation that shares may decline by expiration. The investor established the trade by purchasing 5,000 puts at the December 31 strike price for 3.71 each spread against the sale of 10,000 puts at the December 25 strike for a premium of 1.51 apiece. The net cost of the transaction amounts to 69 cents and yields a maximum potential profit of 5.31 to the trader if shares were to fall to $25.00 by expiration. – iShares MSCI Emerging Markets Index ETF

VALE– The metals and mining company has experienced a share price rally of more than 6% to $18.49 amid reports from Vale’s CEO, Roger Angelli, that the company will likely invest $10.5 billion down from the previous estimate of $14 billion due to lower costs and a weaker Brazilian real. Option traders expressed mixed sentiments in the near-term June contract where the majority of option contracts exchanged hands. One investor got long of some 18,000 puts that appear to have been purchased for about 25 cents each at the June 15 strike price. Perhaps he is long the stock and is looking to protect his position from potential erosion of the share price through the breakeven point on the trade at $14.75. The in-the-money June 18 strike price saw 9,000 calls sold for an average premium of 1.17 apiece. It is possible that investors are selling premium on the share price rally and, like the put-buying bear above, see shares giving back gains by expiration. Traders will retain the full premium enjoyed on the sale if the June 18 calls land out-of-the-money by expiration. We note the possibility that approximately 7,500 of the calls sold at the June 18 strike price are part of a covered call by an investor who bought the stock and sold the calls to effectively lower the price paid per share by 1.17. If this is the case, the trader will have the underlying shares called away from him if the calls remain in-the-money and are exercised by expiration. – Companhia Vale do Rio Doce ADS

CSCO – Networking and communications products manufacturer and tech bellwether, Cisco Systems, Inc., has climbed more than 4.5% to $18.78 today. The San Jose, CA-based firm has announced a strategy to apply its core internet routing-and-switching technology to the nation’s “aging electricity grid”. In short, Cisco’s technology would allow businesses and individual consumers to more efficiently manage their power consumption. Perhaps inspired by the news, one option trader looks to have established a bought straddle. Such a strategy implies that the investor sees shares making significant moves by expiration. The straddle was initiated through the purchase of 5,000 calls at the July 19 strike price for a premium of 80 cents each along with the purchase of 5,000 puts at the same strike for 1.24 apiece. The net cost of the transaction amounts to 2.04 and yields breakeven points at $21.04 to the upside and at $16.96 to the downside. The investor is likely expecting a rise in volatility from the current value of 31% along with a shift in the price of the underlying stock through one of the breakeven points. – Cisco Systems, Inc.

ALL– The insurance company jumped onto our ‘most active by options volume’ market scanner after one investor populated the July and October contracts on the stock. Allstate has experienced a more than 2% rally in shares to stand at $24.79. It appears that this individual originally sold short approximately 31,451 calls at the October 35 strike price for a premium of 1.35 apiece when shares were trading as high as $27.78 and volatility neared 67%. Today, the investor closed out the short position by buying back the calls for just 60 cents each because shares are trading lower and volatility has come off to 57%. He reeled in a profit of 75 cents on the trade and is looking to increase his gains by initiating a repeat performance in the nearer-term July contract. The trader reestablished a short call position by selling 31,451 lots at the July 29 strike price for an average premium of 75 cents apiece. He will likely be looking to close out the short position by buying the calls back for a lesser premium than he received for today’s sale. – The Allstate Corporation

IBN– An oversized rally for Indian stocks hot on the heels of a decisive election victory for Prime Minister Manmohan Singh’s Congress Party, helped lift ADR shares at ICICI Bank by 30% to $30.40 in New York trading. The polling results might allow the government to implement plans to increase foreign investment in India. Previously those ambitions were scuppered due to communist politicians getting in the way. Investors used options today as a way to build expectations on a continued rally for the bank’s share price. Using the June contract investors went looking for shares to keep moving higher with the heaviest-trafficked strike at the 35.0 level. Investors bought almost 7,000 call options there, roughly one third of today’s 24,000 overall volume paying between 1.15 and 1.90 to secure buying rights by expiration. Shares have not traded above $30.00 since September and not above $35.00 since early August last year. We saw some evidence that investors expect today’s gains to remain intact as put options at the June 25 and 22 strike were sold. – ICICI Bank Ltd, ADR

STT– Shares of the world’s third-largest custodian bank, which announced plans to offer $1.5 billion in common stock and at least $500 million of debt today, are up nearly 6.5% to $41.00. One option trader who appears skeptical of the present rally got long of downside protection in the near-term June contract. This bearish investor sold 10,000 calls at the June 40 strike price for a premium of 4.10 each as well as shed 10,000 calls at the higher June 45 strike for about 1.90 apiece. The gross premium enjoyed on the short sale of 20,000 calls amounts to 6.00 per contract. It looks as though the investor then utilized a portion of the proceeds in order to fund the purchase of 10,000 puts at the June 38 strike price for about 2.10 each, leaving him a net premium of 3.90. The aggregate picture of the three legs points to bearish movement in the stock over the next four weeks. The investor could be looking for additional gains on the long put position which would amass if shares declined beneath the breakeven point at $35.90 by expiration. Otherwise, he would just hope that shares do not rise above $43.90 because he is exposed to unlimited losses to the upside given his short position at both the June 40 and June 45 strikes. – State Street Corporation

XLE – The energy ETF has rallied 3% to $49.44 today and attracted the attention of a straddle seller who gravitated to the near-term June contract. The investor initiated the sold straddle by shedding 10,000 calls at the June 48 strike price for an average premium of 2.60 apiece combined with the sale of 10,000 puts at the same strike for 1.60 each. The gross premium on the trade amounts to 4.20 and is fully retained by the trader if shares settle at $48.00 by expiration. Should shares move significantly in either direction, this individual faces losses above the breakeven point to the upside at $52.20 or below the breakeven point to the downside at $43.80. Option implied volatility has come off slightly since last Friday’s reading of 35% to the current value of 33%. – Energy Select Sector SPDR

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