Today’s tickers: INTC, GA, EWZ, VIX, PALM, HGSI, CREE, CYD, BAC, CAL, XLB & CREE
INTC – Intel Corp. – Investors populating the March contract on chipmaker, Intel Corp., expect shares to rebound by expiration. Shares are trading slightly lower by 0.10% to $21.03 with about one hour remaining before the closing bell. Bullish traders utilized a couple of different option strategies. Some investors sold 2,400 puts at the March $20 strike to receive an average premium of $0.45 per contract. Put-sellers keep the $0.45 premium if Intel’s shares trading above $20.00 through expiration. The short sale of puts suggests investors are happy to have shares of the underlying put to them at an effective price of $19.55, should the contracts land in-the-money. Additional bullish action took place at the higher March $22 strike where 20,400 calls were purchased for an average premium of $0.36 apiece. Investors long the calls begin to accumulate profits to the upside if shares of INTC rally 6.3% over the current price to surpass the breakeven point at $22.36 by expiration day in March.
GA – Giant Interactive Group, Inc. – Online game development company, Giant Interactive, attracted significant option volume in late afternoon trading today. Options traded on the stock amassed to 52,350 contracts by 3:00 pm (EDT), which is more than twice that of existing open interest on GA of 25,314 lots. Shares are trading flat at $7.48 with one hour remaining in the session. While some investors are putting on risk reversals, it looks like the bulk of the trading volume represents short straddle plays. Short-straddlers sold the bulk of some 30,000 calls exchanged at the July $7.5 strike for an average premium of $0.51 apiece, and shed the majority of the 26,000 puts traded at the same strike for roughly $0.62 each. Investors selling the straddles receive an average gross premium of $1.13 per contract, and keep the full premium if shares settle at $7.50 by expiration. Shares are a scant two pennies off the central strike price of $7.50. Traders employing the short straddle strategy also benefit from declines in option implied volatility because of the downward pull such shifts in volatility have on put and call premium. Investors may profit ahead of expiration if they buy back the short straddles for less than they received on today’s sale. Option implied volatility is lower by about 3.5% to 24.44%.
EWZ – iShares MSCI Brazil Index ETF – A massive bearish butterfly put spread unfurled its wings on the EWZ fund. Shares of the Brazil exchange-traded fund, which mirrors the performance of publicly traded securities in the Brazilian market (as measured by the MSCI Brazil index), fell 3.25% this afternoon to $72.20. The butterfly spread suggests at least one trader is expecting a serious pullback in shares of the fund by expiration in March. The pessimistic trader purchased 20,000 puts at the March $70 strike for an average premium of $2.93 each [wing 1], and bought another 20,000 puts at the lower March $50 strike for about $0.17 apiece [wing 2]. The body of the butterfly, located at the central March $60 strike, is comprised of 40,000 puts purchased for a premium of $0.70 each. The net cost of the massive play, which is also the maximum loss potential faced by the trader, amounts to $1.70 per contract. Perhaps the investor responsible for the butterfly is long an equivalent number of shares of the underlying stock. Assuming this to be true, the spread serves as an insurance policy on the underlying position in case EWZ-shares decline beneath the upper breakeven price of $68.30 by expiration. The investor is protected should shares decline to $60.00 in the next couple of months. Option implied volatility is up sharply by 14.70% over Tuesday’s closing reading of 27.27% to today’s intraday high of 31.28%.
VIX – CBOE VIX Index – Curious: On its eleventh trading day of the year, the S&P 500 index topped and tailed the year-to-date range. Yesterday the broad market index traded at a new high, while this morning it traded below the weakest point of all of 2010 – so far. As a slew of component companies report earnings investors are becoming increasingly risk averse in the face of a series of moves aimed at reining on skyrocketing lending in China. The dollar is the winner today as investors rush headlong into its safety amidst ongoing fiscal woes threatening to explode within the Eurozone. That brings us neatly back to Wall Street’s fear gauge – the VIX. It’s run up 10.7% today in response to an S&P index decline of 1.6% as investors bid up option premium. Yet the reality is that at a VIX index reading of less than 20, there seems to be remarkably little panic priced into the market. A 10% or more correction should surprise few investors growing wary of the bullish stretching back to March 2009. One option investor appeared to play an uptick in the volatility reading before April expiration with a 35/40 call spread, which ought to benefit from a removal of market complacency. Using around 14,000 calls at each strike the investor paid a net premium of 45 cents to get long of implied volatility this morning – using the proceeds of the upper strike price to almost halve the cost of protecting a position.
PALM – Palm, Inc. – Mobile device maker, Palm Inc., suffered a 3.75% decline in the value of its shares today to $12.92. One investor targeted the May contract on the stock in order to establish a three-legged bearish combination play. It looks like the trader sold out-of-the-money call options to partially finance the purchase of a put spread. The investor sold 5,000 calls at the May $16 strike for an average premium of $0.92 apiece. Next, the trader purchased 5,000 puts at the May $12 strike for a premium of $1.80 each, spread against the sale of 5,000 puts at the lower May $9.0 strike for $0.73 apiece. The net cost of the transaction is reduced to just $0.15 per contract. Assuming the investor holds no underlying stock position, the trade yields maximum potential profits of $2.85 per contract if PALM’s shares fall to $9.00 by expiration in May. Profits amass if shares fall another 8.25% from the current price to breach the breakeven point at $11.85.
HGSI – Human Genome Sciences, Inc. – Shares of the biopharmaceutical company are down more than 3% today to $28.89. Action by one option player today suggests shares of HGSI are likely to remain range-bound through expiration in March. The investor initiated a short strangle strategy by selling 6,820 puts at the March $26 strike for a premium of $0.83 apiece, in combination with the sale of 6,820 in-the-money calls at the higher March $33 strike for an average premium of $0.79 each. The strangle results in a gross premium of $1.62 per contract, which the trader keeps if Human Genome’s shares trade within the confines of the strike prices described through expiration day. The short position taken in both calls and puts leaves the investor vulnerable to losses should shares swing dramatically in the next few months. Losses accrue if shares rally above the upper breakeven point at $34.62, or if the stock trades beneath the lower breakeven price of $24.38.
CREE – Cree Inc. – The semiconductor-manufacturer surged 15% to $62.44 this morning and created a new 52-week high along the way as investors drove shares to the highest point since 2000. Naturally, earnings were to blame for the rally. Options trading in the company indicate some expectation that somewhere in the $60-$70 range is probably about right for the stock’s fortunes. We noted put buying at the March $60 strike, possibly to protect a natural holder who wants to lock into today’s windfall gains. The premium on those puts was today slashed by 64% to just $2.60 per contract. While February and March call options were actively traded, option traders appeared to see $70 as a natural brake on the rally. Call option volume of more than 3,000 was largely directed by sellers aiming at the average 54 cent bid. Option implied volatility cratered after earnings losing 28% of its previous reading to stand at 38%.
CYD – China Yuchai International Limited – Shares of the holding company, which has a controlling interest in Chinese diesel engine manufacturer, Yuchai, sank 6% to $17.36 today. Protective positioning in the March contract on CYD implies one investor is bracing for continued bearish movement in the price of the underlying. The trader sold out-of-the-money call options to offset the cost of buying a put spread on the stock. On the put side of the field, the investor purchased 5,900 puts at the March $17.5 strike for a premium of $1.60 each, and sold 5,900 puts at the lower March $15 strike for $0.55 premium apiece. Finally, financing for the spread was provided by the sale of 5,900 calls at the March $20 strike for an average premium of $0.80 each. The net cost of the combination play amounts to $0.25 per contract. If the trader responsible for the transaction holds no position in the underlying stock, maximum potential profits of $2.25 per contract accumulate to the downside in the event that CYD’s shares fall to $15.00 by expiration day.
BAC – Bank of America Corp. – A long-term bullish trader donned blinders to block out the near-term struggles faced by BAC as the largest U.S. lender reported a loss for the most recent quarter on top of a full-year deficit. The added cost of repaying TARP money contributed to the firm’s fourth-quarter loss of $0.60 per share, which underwhelmed analysts expecting BAC to post a narrower loss of approximately $0.53 a share. But, gloom and doom aside, shares are up 0.90% to $16.47 in afternoon trading. The far-term optimist headed to the August contract to purchase roughly 10,000 calls at the August $19 strike for a premium of $0.75 apiece. It looks like the trader spread his purchase against the sale of 10,000 calls out at the January 2011 $20 strike for a premium of $1.08 each in order to pocket a net credit of $0.33 per contract. If BAC shares rally 15.4% to $19.00 by expiration in August, the investor may exercise the calls to take delivery of the underlying shares at an effective price of $18.67 apiece. Once long the stock, the January 2011 $20 strike calls mimic a covered call strategy. Thus, the investor has an exit strategy if BAC’s shares rally above $20.00 by expiration next January. If the shares are called away at $20.00 apiece, the trader exits the position with gains of more than 7% on the rally in shares from $18.67 to $20.00.
CAL – Continental Airlines, Inc. – Option traders employed bearish tactics on Continental Airlines this morning, perhaps to brace for the potentially negative impact the firm’s fourth quarter earnings could have on the price of the underlying, when CAL reports Thursday. Shares edged nearly 1% lower in the first hour of the trading session to stand at $20.27. One investor utilized a put spread on the stock. The transaction involved the purchase of 1,500 puts at the February $20 strike for a premium of $1.13 apiece, marked against the sale of 1,500 puts at the lower February $18 strike for an average premium of $0.48 each. The net cost of the bearish play amounts to $0.65 per contract and protects the investor beneath a breakeven share price of $19.35 through expiration next month.
XLB – Materials Select Sector SPDR ETF – Shares of the XLB, which invests in companies in the materials economic sector, are trading 2% lower to $33.61. Perhaps the decline in shares stems from the lower than expected December Housing Starts number released this morning. According to MarketWatch, U.S. housing starts fell 4% to a seasonally adjusted annual rate of 557,000 in the month of December. Investors populated the front month contract of the XLB with pessimistic plays in the first 60 minutes of the trading day. Call sellers shed 2,700 lots at the February $34 strike for an average premium of $0.75 apiece. Another chunk of 2,740 calls were sold at the higher February $35 strike for roughly $0.35 each. Bears populated the put side of the field as well, buying up 2,000 contracts at the now in-the-money February $35 strike for $1.56 per contract. Put-buyers accrue profits to the downside beneath the breakeven price of $33.44 through expiration day.
CREE – Cree, Inc. – The manufacturer of semiconductor materials and devices experienced a 17% jump in the value of its shares to attain a new 52-week high of $63.57 today. Shares surged after the firm posted fiscal second-quarter earnings of $0.38 per share, which beat average analyst estimates by $0.08 a share. Some investors established bullish plays on the stock, with roughly 1,500 calls purchased at the February $65 strike for a premium of $1.54 per contract. Others sought to lock in gains by picking up 1,800 puts at the February $60 strike for a premium of $1.65 each. The positive earnings report pushed shares up and option implied volatility significantly lower. Volatility contracted 26.75% to 35.44% as of 10:45 am (EDT).
