Bullish Vibes Radiate From Energy Fund

By option_review

July 1, 2009

370

Today’s tickers: XLE, USU, XLP, MYGN, NYX & ELN

XLE – Investors were observed making bullish plays on the energy ETF today amid a modest share price rally of less than 1% to $48.17. The August 49 strike price had more than 10,000 calls purchased for an average premium of 2.09 per contract. Traders long of the calls are hoping to see shares of the XLE increase 6% to breach the breakeven point at $51.09 by expiration. Elsewhere, investors shed 10,000 puts at the January 2010 45 strike price for 3.65 apiece. It would seem that the put-sellers expect shares of the energy fund to remain higher than $45.00 at the start of 2010. The full premium received today for writing the puts is retained as long as the puts land out-of-the-money by expiration. Investors short the contracts bear the risk of having shares put to them at an effective price of $41.35. – Energy Select Sector SPDR

USU – The supplier of low enriched uranium (LEU) for commercial nuclear power plants was launched onto our ‘most active by options volume’ market scanner after a massive bearish play was initiated on the stock. Shares of USU are currently off by less than .5% to $5.30. An investor looking to extend downside protection on the stock through expiration in October appears to have sold 47,500 puts at the July 5.0 strike price for a premium of 40 cents apiece. The trader then purchased 47,500 puts at the October 5.0 strike for 1.00 per contract. The net cost of the spread amounts to 60 cents or a total of $2,850,000. It is unclear whether the investor was long 47,500 puts prior to today’s transaction. If he were originally long the puts, the trade today would merely represent an extension of downside protection through expiration in October. However, if the trader has sold 47,500 puts short in the July contract to fund the purchase of the October puts, he bears the risk of having shares of the underlying put to him at an effective price of $4.60 by expiration. Downside protection on the October 5.0 strike puts kicks in beneath the breakeven share price of $4.40. – USEC, Inc.

XLP – Shares of the consumer staples ETF have rallied approximately 2% to $23.45. The fund caught our eye after some 7,500 puts were purchased in the January 2010 contract at the 19 strike price for 35 cents apiece. At first glance the transaction looks bearish as well as contrarian in the face of today’s rally. However, we believe the transaction is the work of a bullish investor who has simultaneously picked up shares of the underlying in combination with protective put options. The trader is hoping for continued upward movement in the price of XLP. But, in case shares reverse direction, he has extended downside protection through expiration in January. Downside protection would kick in beneath the breakeven point at $18.65. – Consumer Staples Select Sector SPDR

MYGN– The biotechnology company’s shares have plummeted more than 26.5% today to $26.12 amid a downgrade to ‘market perform’ from ‘outperform’ by analysts at Oppenheimer & Co. The maker of tests used to detect inherited breast cancer announced that its molecular diagnostic sales for fiscal year 2009 came in at $330 million. Sales for the year were below previously forecast estimates due, in part, to rising unemployment. The massive decline in the stock today has pushed the price per share closer to the 52-week low of $22.42 attained exactly one year ago on July 1, 2008. Option traders were seen bracing for continued bearish movement in the stock through expiration in November. Investors long July 25 strike puts were likely responsible for the calendar roll involving the sale of approximately 1,000 lots at that strike for a premium of 1.40 apiece spread against the purchase of 1,000 puts at the November 25 strike price for 2.76 per contract. The net cost of the transaction amounts to 1.36 and provides downside protection beginning at the breakeven point of $23.64. Elsewhere, bearish investors who do not foresee shares rallying any time soon, sold more than 1,000 calls at the August 30 strike price for 1.19 apiece. The full premium will be retained by call-writers as long as the contracts land out-of-the-money at expiration. MYGN appeared at the top of our ‘top option implied volatility % gainers’ market scanner as the volatility reading on the stock surged 25.92% to 55.04% today. – Myriad Genetics, Inc.

NYX – The parent company of NYSE Group, Euronext, and their combined subsidiaries, has enjoyed a more than 1.5% rally in shares to $27.73. The rise in shares follows the news that the NYSE has finished installing the Super Display Book system over the past three months. The new system, which has replaced the 25-year-old SuperDOT trading system, has cut the time needed to process trades by 95%. The NYSE, the world’s largest bourse by value of listed companies, explained that investors can now execute trades in 5 milliseconds down from 105 milliseconds. One investor anticipating a significant rally in NYX over the next year and a half established a call spread in the January 2011 contract. The trader purchased 5,000 calls at the January 30 strike price for a premium of 5.40 apiece spread against the sale of 5,000 calls at the higher January 45 strike for 1.90 each. The net cost of enacting the bullish stance amounts to 3.50 and yields maximum potential profits to the individual of 11.50 if shares can climb to $45.00 by expiration. Nearly one year has elapsed since shares of NYX were trading higher than $45.00. The option trader observed today believes it will take at least one more year for the stock to return to such great heights. – NYSE Euronext, Inc.

ELN – In contrast to the bearish reversal observed on the Irish biotechnology company yesterday afternoon, traders today appear bullish amid a rally of nearly 7% in shares of the underlying to $6.81. Investors frolicking in the July and August contracts on ELN were seen scooping up call options in anticipation of continued bullish movement in the stock. The July 7.0 strike price had 1,000 calls purchased for an average premium of 40 cents apiece. More telling of optimistic sentiment were the 10,000 calls picked up at the August 7.0 strike price for approximately 75 cents per contract. Perhaps the gloom and doom of yesterday has been overshadowed by the positive news that Elan is set to receive 7% of the upfront and milestone payments allocated to Acorda Therapeutics by Biogen Idec Inc for its role in manufacturing experimental multiple sclerosis drug, Fampridine-SR. The rights to the drug have been purchased from Acorda by Biogen for an up-front payment of $110 million. – Elan Corporation PLC

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