Today’s tickers: HPQ, ELX, FXI, IYR, MOS, WFC, ABX & VIX
HPQ – Shares of the global technology company have surrendered more than 2% to arrive at the current price of $43.85. Gloomy predictions by one bearish investor were rewarded during the session as he apparently made a closing purchase of a short call position in the September contract. It appears that the trader originally shed about 4,500 calls at the September 47 strike price for a premium of 65 cents each back on August 12, 2009. Today he closed out the short position by buying the calls back for just 12 cents per contract. The trader’s pessimistic foresight yielded net profits of approximately 52 cents for a total payoff of $238,500. – Hewlett-Packard Co. –
ELX – The telecommunications firm appeared on our ‘hot by options volume’ market scanner after bullish activity was detected in the January 2010 contract. Shares of ELX have resisted the overall bearish market momentum today by rising a modest 0.5% to $9.72. A bullish risk reversal was established through the sale of 5,000 puts at the January 7.5 strike for 30 cents each spread against the purchase of 5,000 calls at the higher January 12.5 strike for 35 cents apiece. The net cost of the transaction amounts to just one nickel per contract and positions the trader to benefit from further bullish movement in the price of the underlying. Shares of Emulex must rally approximately 29% higher by expiration in order for the investor to break even at a price of $12.55. – Emulex Corp. –
FXI – A bearish reversal play was enacted on the China ETF this afternoon amid a 2% decline in shares to $38.46. The investor responsible for the reversal may simply be looking to amass profits to the downside. Alternatively, the trader could hold a long position in the underlying stock, in which case he has taken a protective stance. The transaction involved the sale of 15,000 calls at the November 39 strike price for 3.00 apiece spread against the purchase of 15,000 in-the-money put options at the same strike for 3.20 each. The sale of the calls significantly reduced the cost of getting long the puts. The reversal cost the investor just 20 cents per contract and allows him to accrue profits beneath the breakeven price of $38.80. Given the current price of the FXI, the trader has already amassed profits of about 34 cents or $510,000. – iShares FTSE/Xinhua China 25 Index Fund –
IYR – A big bearish put play in the October contract pushed the real estate exchange-traded fund higher on our ‘most active by options volume’ market scanner this morning as shares edged 2.5% lower to stand at $39.41. The investor responsible for the transaction is likely using options to protect a long position in the underlying. It appears the trader purchased 31,000 puts at the October 38 strike price for a premium of 1.75 apiece spread against the sale of 31,000 puts at the lower October 33 strike for approximately 48 cents. The net cost of the debit spread amounts to 1.27 per contract. It seems the investor is not convinced that the real estate sector is ready to rally just yet. Therefore, he has purchased downside protection that will kick in if shares of the IYR decline beneath the breakeven price of $36.73 by expiration. The parameters of the spread indicate that the underlying stock position is protected even if the IYR falls 16% from the current price to $33.00. – iShares Dow Jones U.S. Real Estate Index ETF –
MOS – Mosaic’s options trading activity is curious today. Its shares are bucking the weak market and strong dollar, typically negative for commodity prices. However, the 1.5% share price gain to $49.24 comes on the heels of a seven-day decline from $55.00. It also seems that observers of fertilizer producers are lowering their expectations at a time when farm incomes look assured to be depressed on account of weakness in commodity prices, while bumper crops hardly augur well for increased demand. But we can’t help but note the bullish tone to option contracts today. Both the October 55 and 65 call strikes were well trafficked and both appear to have been sought after. It might have made sense in this environment to expect net sellers of call options if the share price is expected to remain stagnant, but that doesn’t appear the case. In both strikes more than half of the volume traded to the asking price. One scenario that might support the daily activity is the potential for industry consolidation. Mosaic’s market capitalization of $21.8 billion compares to $25.8 billion at rival Potash of Saskatchewan. We also note that implied option volatility grew this morning on Mosaic further indicating increased assurance that its share price was set to somehow shift rather than stagnate. – Mosaic Co. –
WFC – A battering for banking stocks appears to be back on the agenda today. Put activity in Wells Fargo compounds a 3% price decline to $26.67. We noted heavy put volume two weeks ago just as the share price reached its best level since January. In mid-morning trade around 25,000 put options expiring in October traded with premiums rising from 75 cents to 95 cents. Within an hour those puts were changing hands at 1.20. The now at-the-money 26 strike has also shot up from 1.25 to 1.85 as pressure on the stock emerges. In a sign of deteriorating prospects for the company, option traders sent implied volatility sharply higher to 56% – some 22% above yesterday’s gauge of fear. – Wells Fargo & Co. –
ABX – The Canadian gold producer bucked the downward trend experienced by the broader equities market today by climbing approximately 0.5% to $34.82. A large bullish call spread caught our attention as one investor was seen positioning for further gains in the stock – despite dollar strength, typically gold-bearish. It appears that the trader purchased 17,000 calls at the October 37.5 strike price for a premium of 88 cents apiece and simultaneously sold 17,000 calls at the higher October 41 strike for 20 cents. The net cost of the optimistic strategy amounts to 68 cents, thus yielding maximum potential profits of 2.82 per contract. Shares would need to rally nearly 18% to $41.00 in order for the trader to realize the maximum available profits of $4,794,000. – Barrick Gold Corp. –
VIX – Our early edition wouldn’t be complete without pointing to the 8% rise in the fear gauge to 28.08 today. Its rise seems paltry considering the sudden break in sentiment today especially across certain financial names. While the overall tone has certainly steadied recently, which is why the Vix has remained beneath an index reading of 30 for about two months, there’s an awkward confluence of bearish factors rising in importance. The cash-for-clunkers program has allegedly brought forward demand from the future and was essentially a consumer giveaway. Analysts don’t expect a repeat performance anytime soon. That takes away from a bigger picture back-to-work argument and the market awaits the latest employment report this Friday. Earnings have been good, but again, many point out that this could be a one-trick pony. Asian markets have been grinding lower for fear that Chinese stimulus can’t replace external demand eternally. There was notable activity in the September contract today with 32.5 and 35 strikes being bid higher on heavy call option volume. That argues for further stock market weakness. Don’t they say that September is typically a bad month for stocks? – CBOE Volatility index –
