Short Strangle Strategist Suggests Range-Bound Shares for China Fund
by Option Review - April 16th, 2010 4:12 pm
Today’s tickers: FXI, GFI, MCO, KWK, GME, JDSU & SVU
FXI – iShares FTSE/Xinhua China 25 Index Fund – A large-volume short strangle enacted on the FXI, an exchange-traded fund that tracks the price and yield performance of the FTSE/Xinhua China 25 Index – an index designed to mirror the performance of 25 of the largest and most liquid Chinese companies, implies one big options player expects shares of the underlying fund to train within a specified range through May expiration. Shares of the FXI are down more than 4% to $42.12 as of 12:15 pm (ET). The strangle-player sold 25,000 calls at the May $44 strike for a premium of $0.93 each, and sold 25,000 puts at the lower May $42 strike for $1.09 apiece. Gross premium pocketed on the transaction amounts to $2.02 per contract. The investor responsible for the short strangle keeps the full $2.02 premium received today as long as the FXI’s share price remains with the range of $42.00 to $44.00 through expiration day next month. The short position in both call and put options exposes the trader to losses in the event that shares rally above the upper breakeven price of $46.02, or if shares slip beneath the lower breakeven price of $39.98, ahead of May expiration. Options implied volatility is up 11.4% to 30.82% as of 12:20 pm (ET).
GFI – Gold Fields Ltd. – Shares of the gold mining company are down more than 5.2% to $12.35 today, but bullish options trading on the stock suggests one trader is itching for a rebound in the price of the underlying shares by July expiration. Gold Fields received an upgrade to ‘outperform’ from ‘sector perform’ earlier in the week at RBC Capital. The optimistic individual sold 7,000 calls at the July $15 strike for a premium of $0.20 apiece in order to partially finance the purchase of the same number of in-the-money calls options at the April $12 strike for $0.90 each. The net cost of getting long the near-term in-the-money options amounts to $0.70 per contract. The parameters of this transaction somewhat mimic those of a covered call strategy. This is because the in-the-money calls in the April contract – assuming shares are able to resist slipping beneath $12.00 through the end of the trading session – allow the investor to take ownership of shares of the underlying stock at an effective price…
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DiggIron Condor Nesting in Brazil Index ETF
by Option Review - February 4th, 2010 5:21 pm
Today’s tickers: EWZ, CVX, WFC, GFI, SU, MA, ZION, DAL, AMAG & JWN
EWZ – iShares MSCI Brazil Index ETF – An iron condor options strategy employed in the February contract on the EWZ implies one investor expects the underlying share price of the fund to stagnate ahead of expiration in two weeks. Shares of the exchange-traded fund, which generally correspond to the price and performance of publicly traded securities in the Brazilian market, are down 5% today to $64.37. Today’s decline merely adds salt to the wounds – The Brazil index ETF has taken a severe beating in the past few months, falling 20.5% since attaining a 52-week high of $80.93 back on December 3, 2009. The iron condor, a strategy utilized by option traders anticipating little movement in the underlying share price, is perhaps one investor’s way of indicating the worst is over and a bottom is close at hand. The iron condor’s construction is essentially the combination of two strangles, or alternatively can be thought of as two credit spreads. On the call side, the investor pockets a net credit of $0.09 per contract by selling 10,000 calls at the February $71 strike for $0.13 apiece, spread against the purchase of 10,000 calls at the higher February $74 strike for $0.04 each. As for the puts, the trader receives a net credit of $0.26 per contract on the sale of 10,000 puts at the February $59 strike for $0.44 each, marked against the purchase of 10,000 puts at the lower February $56 strike for $0.18 apiece. Therefore, the combined credit enjoyed on the iron condor amounts to $0.35 per contract. Maximum retention of the $0.35 credit, or total monetary profits of $350,000, is contingent upon the underlying share price at expiration. EWZ shares must trade within a range of $59.00 to $71.00 in order for the investor to walk away with maximum profits. The investor holding the iron condor is exposed to significant losses if his ‘neutral’ prediction is wrong. Maximum loss potential on the transaction of $2.65 per contract is far greater than the $0.35 credit received for undertaking such risk. But, apparently this trader is confident that shares of the underlying stock will move sideways – at least through February expiration. Perhaps this confidence stems from the fact that losses do not amass to the upside unless shares rebound 10.85% to surpass the upper breakeven…
Option Traders Try Their Luck with Out-of-the-Money Calls on MGM Mirage
by Option Review - December 23rd, 2009 4:13 pm
Today’s tickers: MGM, EWC, EWZ, DHI, XLF, GLW, TRA, CF, PHM, GFI & EBAY
MGM – MGM Mirage, Inc. – Shares of casino resort operator, MGM Mirage, rallied 5.25% this afternoon to $9.62. Option traders expecting shares to rally significantly in the next 12 months bought call options in the January 2011 contract. Approximately 20,000 calls were purchased at the January 2011 20 strike for an average premium of 70 cents per contract. Investors break even on the calls if MGM’s shares more than double by expiration. Shares must rally at least 115% to the breakeven price of $20.70 in order for call-buyers to begin to accumulate profits.
EWC – iShares MSCI Canada Index ETF – The exchange-traded fund, which mirrors the performance of publicly traded securities in the Canadian market, attracted pessimistic option players. The bearish risk reversal established on the fund contrasts with the nearly 1.5% rally in shares of the underlying to $26.30 during the session. It appears one investor sold 12,500 calls at the June 27 strike for a premium of 1.60 each, spread against the purchase of the same number of calls at the lower June 26 strike for two dollars premium apiece. The net cost of the reversal amounts to 40 cents per contract. Profits on the trade – assuming the investor holds no underlying stock position – accrue if shares of the EWC slip beneath the breakeven point to the downside at $25.60 by expiration in June 2010.
EWZ – iShares MSCI Brazil Index ETF – A number of bullish trades on the Brazil exchange-traded fund today suggest shares of the EWZ are set to rally in the first few months of the new year. Shares edged 1.5% higher during the trading day to stand at $73.21. Optimistic traders employed a number of different option strategies in order to position for bullish movement in the price of the underlying stock. One trader initiated a risk reversal in the January contract by selling 6,000 puts at the January 72 strike for 1.80 each, spread against the purchase of 6,000 in-the-money calls at the same strike for 2.70 apiece. The cost of getting long the call options is reduced to 90 cents per contract for the reversal player. Profits on the position amass above the breakeven price of $72.90. Another option bull unfurled the wings of a butterfly spread in the March contract. The trader…
Potash Attracts Option Plays as Shares Increase
by Option Review - October 6th, 2009 4:30 pm
Today’s tickers: POT, EWZ, USO, C, NTRI, GFI, AUY, AA, & WYE
POT - Shares of the Canadian producer of potash rallied more than 5% during the trading session to break through the $90.00-level. The stock tempered this afternoon, however, and stands just 2.5% higher for the day at $87.89. We observed interesting bullish plays take place in the December contract. One investor established a 2,000-lot buy-write strategy, also known as a covered call. The covered call involved the purchase of shares of the underlying stock for approximately $90.74, and the simultaneous sale of 2,000 call options at the December 110 strike for a premium of 1.80 per contract. The cost of buying the stock is reduced by the value of the premium received on the sale of the calls, resulting in an effective price per share of $88.94. Additionally, the short call position serves as an exit strategy for the trader if shares of POT trade above $110.00 by expiration. If the December 110 strike calls land in-the-money, the investor will likely have the underlying shares called from him, and he will be left with net profits of 24% on the rally in the stock. The other strategy employed by POT-lovers this afternoon was a call spread. Investors purchased 5,000 calls at the December 115 strike for 1.25 each, and sold 5,000 calls at the higher December 120 strike for 85 cents premium apiece. – Potash Corp. of Saskatchewan, Inc. –
EWZ - Shares of the Brazil exchange-traded fund are slightly higher this afternoon by less than 0.5% to stand at $69.58. Option traders expecting continued bullish movement in the price of the fund initiated optimistic plays across several contracts. One nearer-term indication of bullish sentiment is a call spread in the November contract. The trade likely involves the purchase of 2,000 calls at the November 71 strike for a premium of 3.23 apiece, spread against the sale of 2,000 calls at the higher November 77 strike for one dollar each. The net cost of the transaction amounts to 2.23 per contract. Thus, maximum potential profits of 3.77 are available in the event that shares of the EWZ rally 11% to $77.00 by expiration next month. Plain-vanilla call buying is another tactic employed by bullish investors today. Some 2,500 calls were purchased at the March 2010 80 strike for a premium of 2.70 each. Finally, 1,000 calls were coveted by…
Qualcomm – Rally in sight, but not just yet
by Option Review - February 28th, 2009 12:32 pm
Today’s tickers: QCOM, GT, IVN, AMGN, C, GFI, HMY, SQNM & GE
QCOM – Qualcomm Inc. – Things might be looking better for Qualcomm – but not just yet according to one large option trade that went through earlier today. An investor sought protection in the April contract for fear that shares would be below $35.00 when the contract expires and turned the cost of the premium into a credit by selling January 2010 expiration puts at the same strike. The strategy assumes that the shares will not break through the strike price as the second quarter begins, in which case the investor gets paid out for every penny below $35.00 the share are at that time. But ahead the investor’s core assumption is that shares will shift ahead of $35.00 when next year begins, rendering the sold put options worthless. Today Qualcomm is trading a shade higher at $33.75.
GT – The Goodyear Tire & Rubber Company – Shares of the manufacturer of tires and rubber products have fallen by 5% to $4.57 today. Perhaps the continued decline stems from the downgrade GT received on Monday to ‘underweight’ from ‘hold’ by a KeyBanc analyst, who cited challenges such as global sales declines, and rising costs related to pension and raw materials. Despite the downgrade and today’s decline in share price, one investor established a bullish play on the stock. At the April 7.5 strike price, 10,000 calls were purchased for 10 cents each. Should there by a rally in shares before expiration, this trader will see premiums grow richer at the 7.5 strike, and could then potentially sell the calls to profit. There is a delta of 0.13 on the trade, thus there is a 13% chance that these calls will land in-the-money by April. The current share price would need to experience an increase of 66% in order to surpass the breakeven point on the trade located at $7.60. Whether the shares can breach the breakeven point or not, this investor can still capitalize on today’s position with even a slight rally in shares by selling premium.
IVN – Ivanhoe Mines Limited – The international mineral exploration and development company’s shares have rallied by 3% to stand at $4.59. IVN caught our attention when it edged onto our ‘hot by options volume’ market scanner. Calls were in demand in the June contract, where over 12,300 calls were purchased…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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