Wary Gold Investor Sees Limit To Price Gains

Today’s tickers: LEA, GLD, ALTH, MS, FXI, XHB, EEM & BNI

GLD – An investor was seen taking advantage of dollar weakness today by selling into the gold rally. Shares of the GLD are currently higher by less than 1% to $93.80. It appears that this individual expects to see healthier economic recovery and a subsequent decline in the demand for gold as a hedge through expiration in August. The trader sold short 8,500 calls at the August 100 strike price for a premium of 2.35 each in order to finance the purchase of 8,500 puts at the August 90 strike for 2.65 per contract. The transaction cost the investor 30 cents and yields a breakeven point to the downside at $89.70. Such a trade indicates medium-term bearish sentiment on gold and optimism for economic recovery. If investor-fear regarding possible catastrophic economic collapse can be assuaged over the next few months, we are likely to see a proportional decline in the demand for gold, as well. The trader also implies that the price of gold will not breach $1,000.00 by expiration. His short call position at the August 100 strike price leaves him exposed to potentially unlimited losses if shares were to rally sharply. – SPDR Gold Trust ETF

LEA – The designer and manufacturer of seating and electric automotive components has experienced a significant surge in shares, up more than 33% today to reach an intra-day high of $1.62. Apparently, interest in the severely bruised, broken, and beaten-down stock was ignited after a recommendation to get long of call options was released. Retail investors were likely first on the scene making small odd-lot plays and driving up call volume. By lunch-time some 24,000 calls had exchanged hands at the July 2.5 strike price for an average premium of 23 cents apiece. More savvy investors flocked to LEA after picking up the scent of fresh profits ready to be reined in. Thus, an insignificant gathering of traders buying call options quickly evolved into a feeding frenzy of investors buying and selling roughly equal numbers of calls. Investor churning increased the premium on the July 2.5 strike calls which now tote an asking price of 35 cents. Interest in LEA spread to the September 2.5 strike where approximately 11,500 calls were traded for an average premium of 50 cents per contract. Today’s activity generated option volume of more than 48,000 lots where previously just 26,600 lots of open interest existed. It appears that professional traders have got wind of the trade and appear to have sold into today’s rising levels of implied volatility at both September 2.5 and January 5.0 calls. – Lear Corporation

ALTH – Shares of the biopharmaceutical company engaged in developing drugs for the treatment of cancer, have climbed more than 2% to $7.56. At least one option trader is hoping for continued upward movement in the price of the underlying and was seen initiating a bull call spread on the stock today. The transaction involved the purchase of 3,750 calls at the now in-the-money October 7.5 strike price for a premium of 1.80 apiece spread against the sale of 3,750 calls at the higher October 10 strike for 80 cents each. The investor paid 1.00 per contract to establish the position. He stands to reel in maximum potential profits of 1.50 if shares of ALTH can rally up to $10.00 by expiration. The 7,500 call options involved in the spread represent more than 30% of the existing open interest on the stock of approximately 23,000 contracts. – Allos Therapeutics, Inc.

MS – The global financial services firm was included among the list of banks approved to repay TARP funds today and its shares have dipped slightly by more than 1.5% to $30.89. MS jumped up on our ‘most active by options volume’ market scanner after investors took bearish action in the July contract. Traders bracing for potential erosion in Morgan Stanley’s share price got long of approximately 25,000 puts at the July 27 strike price for an average premium of 90 cents apiece. These protective puts will begin to yield profits to the downside if shares fall 15% through the breakeven point at $26.10 by expiration. A separate transaction in the October contract was initiated by a trader looking for muted movement in the stock over the next four months. This individual established a sold strangle by shedding 2,000 puts at the October 25 strike price for a premium of 1.73 and then simultaneously selling 2,000 calls at the October 34 strike for 2.47 a pop. The short strangle yields a gross premium of 4.20 to the investor who retains the full amount if shares of MS settle within the strike prices described above. The trader faces losses if shares swing in either direction to breach the breakeven point to the upside at $38.20 or the breakeven point to the downside at $20.80 by expiration. – Morgan Stanley

FXI – Shares of the China fund have slipped slightly lower today by approximately 2% to $37.75. Expecting little improvement in the price of the underlying shares over the next six months, a few traders were observed selling straddles in the November contract. Some 19,000 puts were sold at the November 38 strike price for a premium of 4.83 each in combination with the sale of 19,000 calls at the same strike for an average of 4.02 apiece. The gross premium pocketed by straddle-sellers amounts to 8.85. Investors will retain the full premium on the trade if FXI shares settle at $38.00 by expiration. Otherwise, the premium will erode down to zero and give way to losses in the event that shares swing in either direction away from the $38.00 level. Traders begin to amass losses at the breakeven point to the upside of $46.85 or starting at the breakeven point to the downside at $29.15. The transaction looks relatively safe because shares of the ETF have stayed above $29.22 since April 1, 2009, and have remained below $46.48 since July 22, 2008. – iShares FTSE/Xinhua China 25 Index Fund

XHB– The homebuilders ETF edged onto our ‘most active by options volume’ market scanner this morning after one option trader was observed taking profits in the September contract. Shares of the fund are currently higher by less than 1% to $12.50. It appears that the trader originally sold short at least 19,000 calls at the September 15 strike price for an average premium of 1.10 apiece between May 6th and May 8th of 2009. Today he has banked profits of around 60 cents per contract as he looks to have closed out the short position by buying back 19,000 calls for 50 cents each. We note that the chunk of calls traded today is just a portion of the 45,000 lots of existing open interest at the September 15 strike. The remaining call options may belong to the same trader or could represent the work of a different investor entirely. – SPDR Homebuilders ETF

EEM– Shares of the emerging markets fund are lower by less than 1% to $33.01. One investor caught our attention by selling a chunk of 40,000 puts short at the July 26 strike price for a premium of 27 cents per contract. The transaction provides the trader with approximately $1,080,000 in premium. Barring a collapse of more than 21% in the share price this investor will maintain the wad of cash in his bill fold, remaining above $26.00 by expiration next month. The short position indicates that this individual would be happy to have shares put to him at an effective price of $25.73 in the event that the puts land in-the-money and the options are exercised. – iShares MSCI Emerging Markets Index ETF

BNI– The rail transportation company’s shares have declined approximately 1.5% to $75.75 amid a downgrade to ‘neutral’ by an analyst at Goldman Sachs. Option traders took mainly bearish stances on the stock through expiration in January 2010. Some 2,100 puts were scooped up at the January 75 strike price for a hefty premium of 9.44 apiece. Across the tracks on the call side, about 8,300 calls were sold short at the January 80 strike for 7.50 per contract. The investor may be taking either a long-term bullish or a long-term bearish stance on BNI by selling the calls today. If he is bearish on the stock he is hoping the options remain out-of-the-money by expiration. Shares would need to remain below $80.00 for him to retain the full premium on the trade. The potentially unlimited losses inherent in the sale of naked calls would begin to amass at the breakeven point to the upside at $87.50. Conversely, it is possible that the trader is bullish on BNI. If this is the case, the investor is long the stock and has engaged in covered call selling. Writing the calls at the January 80 strike price provides an exit strategy in the event that the calls land in-the-money and the underlying shares are called away from him by expiration. BNI was last trading higher than $81.00 on November 12, 2008. – Burlington Northern Santa Fe Corp.