EJ – E-House China Holdings Limited – Shares in the provider of real estate services in China are soaring on Thursday, up nearly 10% to a new 52-week high of $14.19 after the stock was raised to Conviction Buy from Buy at Goldman Sachs.
Options volume on the stock is more than three times the average daily level, with overall volume above 5,100 contracts versus the average reading of around 1,400 contracts. Roughly half of today’s volume is concentrated in far out of the money put options expiring in May 2014. It looks like more than 2,200 of the May $6.0 strike puts were purchased within minutes of the opening bell this morning at a premium of $0.25 each. Positioning in these far out of the money put options may be an outright bearish bet on the stock or perhaps disaster insurance to hedge a long position in the underlying shares.
The puts may be profitable at expiration next year in the event that shares in the name decline more than 60% to breach the effective breakeven price of $5.75 at expiration. Of course, shares need not halve in order for the value of the long put position to increase in value between now and May expiration. Shares in EJ last traded below $5.75 back in August.
LULU – Lululemon Athletica, Inc. – Investors in yoga and athletic apparel maker Lululemon Athletica are taking it on the chin-balance today, with shares in the name dropping as much as 11.4% to $60.55 during morning trading, the lowest level since the end of June. The stock plunged after the company forecast fourth-quarter earnings below the average of analysts’ estimates.
Yesterday, shares in the retailer were moving lower ahead of the third-quarter earnings release, and activity in the 13 Dec ’13 weekly put options during morning trading suggested at least one strategist was positioning for a substantial drop in the price of the underlying shares by the end of the week. The 13 Dec ’13 $64/$68.5 bear put spread traded roughly 5,000 times in prints of varying size. It looks like much of the total size of the spread was purchased at a net premium of $1.90 each. The position established a breakeven share price of $66.60, with maximum potential profits of $2.60 per contract in the event that shares dropped to $64.00 by expiration at the end of the week.
Shares in LULU subsequently smashed through the $64.00 level after the third-quarter earnings release and conference call, with shares currently hovering down 11% on the session at $60.85 as of 11:40 a.m. EST. Overall options volume on the stock today is well above LULU’s average daily reading, with around 41,000 contracts traded thus far in the session versus average daily options volume of around 16,000 contracts.
