Continental Butterflies

Today’s tickers: CAL, POT, EEM, RMBS, NVDA & FXI

CAL – Shares of the U.S. air carrier are lower by approximately 1% today to $9.19 amid total declines of 12% on the stock since the opening bell on Monday morning. One option trader was observed make a bullish play on CAL, hoping to see clearer skies in the airline’s future. The investor established a long butterfly spread in the September contract by selling 10,000 calls at the September 12.5 strike price [body] for a premium of 65 cents. The body of the spread was combined with the purchase of 5,000 calls at the September 10 strike for 1.40 apiece [wing 1] as well as the purchase of 5,000 calls at the September 14 strike price for 37 cents per contract [wing 2]. The transaction cost the trader a net 47 cents (1*1.40 [wing 1] + 1*0.37 [wing 2] – 2*0.65 [body] = 0.47). Maximum potential profits of 2.03 will be realized by this individual if shares of CAL can rally 36% to $12.50 by expiration. A long butterfly spread was an excellent choice by the bullish investor responsible for the trade. The application of the spread effectively lowered the breakeven point to $10.47 instead of the breakeven point of $13.15 which would have resulted from pure bullish call buying at the central 12.5 strike price. – Continental Airlines, Inc.

POT – The feed products company has experienced a share price decline of 2.5% to $114.90. Taking advantage of the price erosion was one investor who sold a chunk of put options in the July contract. This individual was observed selling approximately 15,000 puts at the July 80 strike price for an average premium of 65 cents apiece. The aggregate premium enjoyed on the trade amounts to $975,000. He will retain the full premium assuming the price of POT remains higher than $80.00 by expiration next month. Inherent in the short sale is the obligation of the writer to have shares put to him at expiration if indeed shares plummet more than $34.00 or 30% in the next month. – Potash Corp. of Saskatchewan, Inc.

EEM– It appears that an option investor was drawn into looking for downside protection in emerging markets today judging by the sizeable September expiration strategy seen in this morning’s trade. Shares are currently trading at $33.71 for a 1.5% loss today. Meanwhile this investor placed a ratio put spread, which would see maximum profits or protection kick-in should EEM decline further by 20%. The spread trade involved the purchase for 2.00 of 32,500 put options at the 31 strike against the sale for 75 cents of 65,000 put options at the 26 strike. The purpose of collecting the premium at the lower strike here helps to significantly reduce the net premium and therefore raises the breakeven share price to the investor. The long only puts at 2.00 would require shares to fall to $29.00 at expiration before protection kicks in. However, the proceeds from the sale of twice as many puts at 75 cents reduces the premium by 75% in this case and in the process raises the breakeven to $30.50. Profits now kick-in should shares decline 9.5% rather than 14%. – iShares MSCI Emerging Markets

RMBS – The memory-chip maker’s shares have surged more than 16% today to $17.52 following news that a tentative agreement between the firm and the European Union (EU) has been reached. RMBS has been involved in an EU antitrust probe for the past two years for alleged cutting of its patent royalty rates for some of its products. The settlement reveals that RMBS will not pay a fine and the EU will not find the firm liable for any wrongdoing. In return, the California-based Rambus, must cease charging royalties on technology from the 1990s and must charge current royalties at a rate of 1.5% or higher. Option traders latched onto the bullish movement in the stock by getting long of calls in the June and July contracts. The in-the-money June 17 strike price had 1,400 calls bought for a premium of 85 cents apiece while the higher June 18 strike had 1,000 calls scooped up for 47 cents. Optimism spread to the July 19 strike price where another 1,700 calls were purchased for 87 cents a pop. Profits will accrue on the July 19 calls given an approximate 13% increase in shares to the breakeven point at $19.87 by expiration. – Rambus Inc.

NVDA – The visual computing technologies company appeared on our ‘most active by options volume’ market scanner today amid a more than 2.5% decline in shares to $11.28. Option traders took advantage of higher put premiums on the share price erosion by selling put options across multiple expiries. The nearer-term July contract saw some 2,200 puts shed at the July 11 strike price for an average premium of 65 cents apiece while the higher July 12 strike price had 4,500 puts sell for 1.23 each. Skipping ahead to the September 10 strike price, another 1,800 puts sold afforded investors an average premium of 75 cents per contract. Finally, put selling was observed as high up as the in-the-money September 12.5 strike where 2,700 puts traded for 2.04 a pop. The beauty of selling puts in this case is that the investors receive the premium on the sale and stand ready to have shares of the underlying stock put to them by expiration. The September 10 strike puts, for example, would allow today’s short sellers to have shares put to them at an effective price of $9.25 each if the puts land in-the-money by expiration. Investors would be happy to buy into NVDA at $9.25 as the stock’s three month low of $8.38 is less than one dollar below that level. Option implied volatility on the stock has come off from 63% at the start of today to the current reading of 55%. – NVIDIA Corporation

FXI – A large combination option order traded earlier on the PHLX involving shares in the Chinese exchange traded fund and call options expiring in both July and November. The trader bought stock, which is currently down on the session by 1.8% at $39.40, and sold 15,000 November call options at the 40 strike. The final leg involved the sale of thrice the amount of July expiration calls at the 47 strike. Because of the ratio nature inherent within the structure of this trade, the trader benefits in the event that shares settle at $40.00 or below come November. Alternatively a significant upswing well above the 47 strike would at some point produce profits. The investor is most likely looking for stagnation within this trade. – iShares FTSE Xinhua China