Rising Risk Aversion Prompts Crude Oil Bears to Target USO Put Options
by Andrew Wilkinson - February 25th, 2010 4:06 pm
Today’s tickers: USO, SU, DTV, AIG, CCE, PMCS & TRLG
USO - United States Oil Fund LP – Despite a stronger dollar so far during 2010 the price of crude oil has rebounded smartly and spent some time this week trading above $80 per barrel. Today’s sudden bout of risk aversion knocking equity prices running for cover has created fears of lower oil prices ahead according to options activity today. Investors targeted downside protection as they snapped up more than 10,000 put options reserving rights to sell shares in the fund that mimics the price of crude before expiration in March. Investors chose the fixed strike price of $36.00 to lock into selling rights compared to the fund’s share price of $37.67 – down 3.4% already today. Investors forced the premium of the put options from 45 cents to as high as 59 cents throughout the morning. It appears that today’s activity is fresh investor activity since it exceeds the number of open positions as of the close of business on Wednesday, while the volume also represents more than 20% of overall options volume today.
SU - Suncor Energy, Inc. – Despite the nearby bearish overture for the fortunes of crude oil prices, a decent-sized bullish options transaction was established on the Canadian energy company. Undeterred by a 3% decline in Suncor Energy’s share price to $28.24, one investor initiated a debit call spread in the June contract to position for a sharp rebound in Suncor’s share price by expiration in four months. The trader purchased 10,500 calls at the June $31 strike for a premium of $1.26 apiece, and sold the same number of calls at the higher June $36 strike for a premium of $0.30 each. The net cost of the spread amounts to $0.96 per contract. Maximum available profits of $4.04 per contract accumulate for the bullish trader if Suncor’s shares rally approximately 27.5% from the current value of the stock to $36.00 by June expiration. We note that shares traded as high as $38.22 on January 6, 2010.
DTV - The DIRECTV Group, Inc. – Covered-call selling is the theme of the day in Directv options trading as it appears investors are picking up shares of the underlying stock while simultaneously shedding out-of-the-money calls in the June contract. Shares of the provider of subscription television services slipped 0.90% during the session to $33.30. Approximately 25,300 calls were sold at the June $35…
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Iron Condor Nesting in Brazil Index ETF
by Andrew Wilkinson - 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 price of…
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VIX Draws Large Bearish Put Play
by Andrew Wilkinson - February 2nd, 2010 5:28 pm
Today’s tickers: VIX, MS, BAC, UNG, SU, RL, GIGM, FCX, CVS, SPF & DOW
VIX – CBOE Volatility Index – A massive bearish put position initiated on the VIX today is a bullish sign for the S&P 500 index. The VIX fell more than 6% during the current session to stand at 21.21 as the past two day’s uptick in equities serve to dissipate some of the fear and uncertainty felt by investors during the prior trading week. One investor anticipating further downside movement for the VIX picked up roughly 103,000 puts at the March 20 strike for an average premium of $0.70 per contract. The put options position the investor to accrue profits beneath a VIX reading of 19.30 through expiration. It appears the investor expects the so-called fear-gauge to head in the direction of the index’s 52-week low of approximately 17.49 attained on January 19, 2010. But, the VIX must fall another 9% from the current reading in order for the investor to breakeven by expiration. Furthermore, today’s reading is still 21.25% greater than the 52-week low described previously.
MS – Morgan Stanley – Global financial services firm, Morgan Stanley, attracted the attention of bullish options investors in afternoon trading. Shares are currently trading 1.00% higher at $27.83 with roughly one hour remaining in the trading day. A bull call spread stuck out like a sore thumb in the scantily populated March contract on the stock today. One investor purchased 5,000 calls at the March $28 strike for a premium of $1.35 each, and sold the same number of calls at the higher March $31 strike for an average premium of $0.34 apiece. The trader paid a net premium of $1.01 per contract for the spread, but stands to accrue maximum potential profits of $1.99 per contract should Morgan Stanley’s shares rally up to $31.00 ahead of expiration day. The call-spreader breaks even on the transaction as long as MS’s shares rise 4.25% from the current price to $29.01 before the options expire.
BAC – Bank of America Corp. – Optimistic sentiment on Bank of America appeared in the August contract today amidst a 0.65% improvement in shares of the underlying stock to $15.52. One bullish trader initiated a call spread to position for upward movement in BAC’s shares by expiration. The investor purchased 4,000 calls at the August $16 strike for an average premium of $1.52 apiece, spread against the sale of 4,000…
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Valero Upgrade Prompts Call Buying
by Andrew Wilkinson - October 15th, 2009 6:56 pm
Today’s tickers: VLO, SU, EEM, MRVL, PWR, IMAX & AMED
VLO - Valero Energy Corp. – New ratings coverage of ‘equal weight’ by analysts at Morgan Stanley today sent option traders into a call buying frenzy on the oil refining company. Shares of VLO are currently soaring 6.5% higher to stand at $20.03. Call-volume surged at the October 20 strike where more than 16,100 contracts were purchased for an average premium of 8 pennies apiece. The October 20 strike is now in-the-money by 3 cents, allowing investors to exercise their right to buy shares of the underlying stock for an effective price of $20.08 each. Traders may also decide to accumulate short term gains if shares rally through the breakeven point at $20.08 ahead of expiration tomorrow.
SU - Suncor Energy, Inc. – A couple of bullish calendar rolls caught our attention this afternoon on Suncor Energy. Shares of the Canada-based energy firm slipped nearly 1% lower to stand at $38.99. The first of the two calendar rolls involved 2,000 calls at the December 32 strike which were originally purchased for 3.50 apiece on September 9, 2009, and sold today for 7.50. Net profits on the sale amount to 4.00 per contract. The trader expanded the size of the new call position at the January 47.5 strike by buying 3,000 lots for about 75 cents apiece. The larger of the two transactions involved a larger number of call options. Approximately 11,000 calls were originally bought for a maximum of 2.30 each on September 8, 2009. Today the position was closed by the investor who sold the calls for 5.05 per contract. Net profits on the transaction amount to an average 2.75 per contract. Again, the calls were rolled to the January contract but this time the investor paid 1.85 to buy 18,000 calls at the January 42.5 strike. Profit-taking aside, the investor or investors responsible for the calendar rolls are expecting shares of SU to rise by expiration in January.
EEM - iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets fund fell 0.5% this afternoon to $41.32. We observed bullish transactions take place on the stock despite the decline in shares. One investor banked gains by rolling a bullish call position forward in the December contract. It appears the trader originally purchased 10,000 calls at the now December 42 strike for 1.08 apiece on October 7, 2009. Today he closed out…
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Canadian Energy Bulls Seek Call Options in Suncor
by Andrew Wilkinson - July 17th, 2009 4:24 pm
Today’s tickers: SU, EEM, IBM, AXP, MOS, GE, YHOO & MMM
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Blackstone bulls line up
by Andrew Wilkinson - March 23rd, 2009 5:46 pm
Today’s tickers: BX, GCI, AA, LVS, XLF, JPM, C, AGN, RHT, SU & SWY
BX The Blackstone Group L.P. – The broader market experienced gains after fresh information from the Treasury Department was released regarding its plan to utilize private and public funds to relieve banks of bad credit and toxic assets. Shares of BX soared on the news by 23% to $7.77 because it is has now been widely reported that hedge funds and private-equity firms are likely to reap substantial gains from the public-private partnership. Blackstone jumped to the top of our ‘hot by options volume’ market scanner after one investor established a sold straddle in the May contract. At the May 7.5 strike price 10,000 calls were sold for 1.60 each while 10,000 puts were also sold for 1.10 each. The gross premium pocketed on the trade amounts to 2.70 and is fully retained if shares settle at $7.50 by expiration. Call volume has far outweighed put volume with a ratio of 2.4 calls to each put traded. We observed pure call buying in the April contract where traders picked up lots as high up as the 10 strike for a premium of 33 cents each. One investor paid a net cost of 40 cents in order to roll 4,350 in-the-money calls at the June 2.5 strike price forward to the same low strike expiring in January 2010. Optimistic traders also picked up 3,000 calls at the January 10 strike price for 1.86 each. Option implied volatility peaked at 120% today, but has since come off to the current reading of 105%.
GCI Gannett Co., Inc. – Shares of the international news and information company are up by more than 7% to stand at $2.30. GCI appeared on our ‘hot by options volume’ market scanner after one trader utilized options in search of gains on the rising stock. We believe that this investor likely purchased 1,000,000 shares of the underlying stock and simultaneously sold 10,000 calls at the April 2.5 strike price for a 15 cent premium. By selling the option contracts the trader effectively reduced the price of the shares to $2.00 each because the stock was trading at $2.15 at the time of the trade. Should the 2.5 calls land in-the-money by expiration this investor will have sustained gains of 23% if the shares get called away from him at the end of the month.
AA Alcoa Inc. – The…
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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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