Options Player Snaps Up Doomsday Protection On JPMorgan Chase & Co.
by Option Review - October 25th, 2011 1:56 pm
Today’s tickers: JPM, XLB & SWI
JPM - JPMorgan Chase & Co. – Shares in JPMorgan Chase & Co. are down 1.6% at $34.01 in early-afternoon trade, but the stock is just one among many slipping lower ahead of Wednesday’s meeting of euro-zone officials in Brussels. One strategist’s large stake initiated in Jan. 2012 contract put options on JPM this morning may be a hedge against steep declines in the price of the underlying into next year. It looks like one investor purchased 8,000 puts at the Jan. 2012 $24 strike for a premium of $0.62 each. The investor profits at expiration in the event that JPM’s shares drop 31.25% to breach the effective breakeven point at $23.38. The stock dipped to as low as $27.85 on October 4, and has since rebounded some 22.1% up to the current price of $34.01. The value of the deep out-of-the-money puts may rise sharply if JPMorgan’s shares head back down toward the lows of the month ahead of expiration. The stock hasn’t traded below $23.38 since March 2009.
XLB - Materials Select Sector SPDR ETF – The XLB popped up on our ‘most active by options volume’ market scanner this morning after one investor established a large bearish stance in the front month. Shares in the XLB, an exchange-traded fund that tracks the performance of the Materials Select Sector of the S&P 500 Index, fell 0.55% to $33.98 by 12:40 pm in New York. The fund’s three largest holdings, EI du Pont de Nemours, Monsanto and Freeport McMoRan, are all in the red this afternoon. It looks like the strategist responsible for more than half of total volume in XLB options today purchased the majority of the more than 56,000 puts exchanged at the Nov. $32 strike thus far in the session. It appears the investor snapped up some 53,000 puts at that strike for an average premium of $0.79 each. The put buyer may profit at expiration next month if shares in the fund slide 8.15% to trade beneath the effective breakeven price of $31.21. Shares in the XLB had traded down to a 52-week low of $27.77 as recently as October 4. Options implied volatility on the SPDR fund is up 5.6% at 35.8% in early-afternoon trade.
SWI - SolarWinds, Inc. – One call-seller targeting the software company today sees little chance the stock will make new record highs any time soon. Shares in SolarWinds are…
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DiggVolatility Sellers Attack UltraShort S&P500 Calls
by Option Review - August 8th, 2011 4:07 pm
Today’s tickers: SDS, RIMM, KWK & XLB
SDS - ProShares UltraShort S&P 500 ETF – Roughly 50% of the S&P 500 Index rally from August 2010 through early-May has evaporated, with the market meltdown accelerating on the heels of the downgrade of U.S. debt. The VIX spiked to flash-crash levels today, and exceeded 40.95 earlier in the session as U.S. equities tumbled lower. However, barring a repeat of the flash crash or some other unforeseen piece of negative news, it looks like options strategists are positioning for investor fears to ease in the near term. Heavy out-of-the-money call selling on the SDS, an ETF corresponding to twice the inverse of the daily performance of the S&P 500 Index, was likely initiated by traders selling the spike in volatility. Shares in the SDS shot up 7.9% this afternoon to $26.52, the highest since November 2010. Volatility sellers targeted the August $30 strike most aggressively, selling some 45,000 contracts at that strike against paltry previously existing open interest of 1,651 contracts. Investors short the calls pocketed an average premium of $0.43 apiece, which they keep if shares in the SDS fail to rally above $30.00 at expiration. Traders have time on their side and may be able to buy back the calls, even if the S&P 500 Index continues to slide, at an advantageous price as long as volatility comes off in the next couple of weeks. Call selling spread to the August $31 strike, where nearly 10,200 contracts sold for an average premium of $0.32 each. Sellers dominated up at the August $32 and $33 strikes where some 2,600 and 6,100 calls sold for an average premium of $0.26 and $0.21, respectively. Volatility could come off should President Obama, one of the G7 leaders, the IMF, a central banker, or other government leader throw a few crumbs of optimism the market’s way this week to assuage investor fears. Meanwhile, closer-to-the-money call buying, on the other hand, indicates other strategists expect the S&P 500 Index…
Bearish Plays Pile Up at Salix Pharmaceuticals
by Option Review - February 2nd, 2011 5:56 pm
Today’s tickers: SLXP, UTHR, XLB & XLE
SLXP - Salix Pharmaceuticals, Inc. – Put options are popular at Salix Pharmaceuticals today with shares in the drug maker trading 2.5% lower on the session at $40.38 in early afternoon trade. A delta neutral transaction involving March contract put options tied to activity in SLXP shares indicates one strategist expects the price of the underlying to slip further in the next couple of months. Salix reports fourth-quarter earnings after the final bell on March 7, 2011. The options trader appears to have purchased 280,000 shares in the drug maker at $41.55 each, and purchased 10,000 puts at the March $37 strike for a premium of $2.80 apiece, on a 0.28 delta. The parameters of the transaction are such that the investor could make out well on the position given sufficient moves in the price of SLXP shares in either direction. The long stock leg of the trade will rise in value if shares reverse course and appreciate enough to at least cover the cost of buying the put options. But, it is the substantial stake in long puts that are likely to yield more substantial gains for the trader given continued bearish movement in the price of the stock. The value of the puts will grow quickly enough, under the appropriate circumstances, to more than offset losses realized on the declining value of the shares. The huge jump in demand for Salix put options helped lift the stock’s overall reading of options implied volatility 42.7% to 79.71% just before 1:00pm in New York. It looks like other pessimistic players are purchasing the March $35/$40 put spread for an average premium of $2.05 per contract. Investors initiating debit spreads make money if SLXP shares drop 6.0% from the current price of $40.38 to breach the average breakeven point on the downside at $37.95 by March expiration day.
UTHR - United Therapeutics Corp. – The biotechnology firm popped up on our ‘hot by options volume’ market scanner this morning due…
Options Traders Utilize Materials ETF Puts to Construct Bearish Positions
by Option Review - December 30th, 2010 6:37 pm
Today’s tickers: XLB, XLF, VRGY & STJ
XLB - Materials Select Sector SPDR ETF – Options traders are initiating bearish strategies on the XLB, an exchange-traded fund designed to track the performance of the Materials Select Sector of the S&P 500 Index, with shares of the fund currently trading just 0.05% lower on the day at $38.43 as of 12:25pm. Investors bracing for a pullback in shares of the fund focused their attention on put options expiring in January and February of 2011 right out of the gate this morning. Plain-vanilla put buying took place at the February 2011 $38 strike where more than 7,600 puts changed hands, versus paltry previously existing open interest of 125 contracts. It looks like the majority of the puts, at least 5,100 of the contracts, were purchased at an average premium of $1.09 apiece this morning. Put buyers are poised to profit should the price of the underlying fund fall 3.95% from the current price of $38.43 to breach the average breakeven point to the downside at $36.91 by expiration in February. A nearer-term pessimistic player appears to have purchased a 1,000-lot January 2011 $37/$38 strike put spread for a net premium of $0.27 per contract. The investor makes money if XLB shares decline 1.8% to trade below the effective breakeven price of $37.73 by January expiration day. Maximum potential profits of $0.73 per contract are available to the put player should shares of the fund drop 3.7% to trade below $37.00 before the contracts expire next year. The overall reading of options implied volatility on the ETF is higher by 6.4% this afternoon to arrive at 20.86% as of 12:45pm.
XLF - Financial Select Sector SPDR ETF – The XLF jumped to the top of our ‘most active by options volume’ market scanner within…
Herbalife Optimist Secures Insurance Policy Ahead of Earnings
by Option Review - October 21st, 2010 4:04 pm
Today’s tickers: HLF, REE, XLB, BIDU, DAL, RSH & MOT
HLF - Herbalife, Ltd. – It looks like one cautiously optimistic options trader initiated a delta neutral hedge on the maker of weight management, nutritional supplement and personal care products this afternoon ahead of the firm’s third-quarter earnings announcement scheduled for release after the close on November 1, 2010. Herbalife’s shares are currently down 1.25% to stand at $63.20 as of 3:45 p.m. in New York trading. The investor appears to have picked up 58,000 Herbalife shares at a price of $63.76 each as well as 2,000 calls on a 0.29 delta for a premium of $1.45 per contract. The long stance taken in HLF shares suggests the trader is bullish on the stock and expecting shares to climb higher. But, the put options serve as downside protection in case the investor’s inclinations fail to align with the performance of the stock going forward. The put options will be well worth the added premium if earnings are disappointing and shares head lower ahead of November expiration day.
REE - Rare Element Resources, Ltd. – The Canada-based company that was the target of bullish options trading just 24 hours ago has transformed into a hub of bearish activity. Shares in Rare Element Resources, which own the Bear Lodge mine in Wyoming, fell as much as 27.05% from yesterday’s high of $13.71 to an intraday low of $10.00. Despite the substantial decline today the current price of the stock is still up roughly 260% since August 20, 2010, when shares were around $2.80 each. Pessimistic players took to the options field on REE to place bearish bets on the stock. Investors expecting shares to continue lower picked up put options and sold call options in the November and December contracts. Traders picked up…
Contrarian Player Plants Bull Call Spread on Seed Maker Monsanto Co.
by Option Review - September 29th, 2010 6:23 pm
Today’s tickers: MON, EWZ, XLB, HPQ, V, BCSI & SLB
MON - Monsanto Co. – Shares of the maker of genetically modified seeds seemed to be recovering at the start of the current session following Tuesday’s horrendous performance wherein the stock fell as much as 9.80% from an intraday high of $52.64 to a low of $47.50. MON’s shares managed to rebound 4.50% off Tuesday’s low of $47.50 to briefly touch an intraday high of $49.62, although the rally proved to be short-lived and shares are down 1.00% at $48.25 as of 3:15 pm ET. Though MON was unable to keep hold of earlier gains, one contrarian player is optimistic that Monsanto’s shares will reverse course and head back up by November expiration. The investor purchased a call spread, buying 5,000 calls at the November $55 strike at a premium of $0.85 each, and selling the same number of calls at the higher November $60 strike for a premium of $0.27 apiece. Net premium paid to establish the transaction amounts to $0.58 per contract. Thus, the investor is ready to make money should Monsanto’s shares surge 15.20% over the current price of $48.25 to surpass the effective breakeven point on the spread at $55.58 by November expiration. Maximum potential profits of $4.42 per contract are available to the bullish player if MON’s shares jump 24.35% to trade above $60.00 by expiration day.
EWZ - iShares MSCI Brazil Index ETF – Investors are placing near-term bearish bets on the Brazil fund this afternoon by selling calls to finance the purchase of put spreads in the October contract. The large pessimistic plays could be the work of traders hedging long positions or the mark of outright bearish bettors expecting the price of the underlying fund to slip lower ahead of expiration next month. Shares of the EWZ, an exchange-traded fund designed to replicate the price and yield performance of publicly traded securities in the aggregate in the Brazilian market – as measured by the MSCI Brazil Index, rallied…
Bullish Strategists at Work Ahead of Arena Pharmaceuticals’ Earnings Report
by Option Review - August 3rd, 2010 5:03 pm
Today’s tickers: ARNA, GENZ, HL, CY, JCP, FR & XLB
ARNA – Arena Pharmaceuticals, Inc. – Options on the biotechnology company are active ahead of the firm’s second-quarter earnings report slated for release after the closing bell this afternoon. Shares rallied as much as 5.15% earlier in the session to an intraday high of $7.54, but are currently trading a lesser 1.95% higher on the day at $7.31 as of 3:35 pm ET. One optimistic investor hoping to see Arena’s shares appreciate ahead of October expiration enacted a bullish risk reversal. The trader appears to have sold roughly 9,000 puts at the October $7.0 strike for an average premium of $2.40 each in order to buy the same number of calls at the October $12.5 strike for an average premium of $0.60 apiece. The investor reels in a net credit of $1.80 per contract on the risk reversal, and keeps the full amount received on the transaction as long as Arena’s shares exceed $7.00 through October expiration. Additional, and potentially unlimited profits, start to accumulate for the trader if Arena’s shares surge 71% to exceed $12.50 by expiration day in October. The credit $1.80 credit pocketed by the investor provides limited protection against losses should Arena’s shares nosedive ahead of expiration. The trader starts to lose money if the price of the underlying stock falls 28.9% to trade beneath the effective breakeven price of $5.20 by expiration day. Options implied volatility on Arena Pharmaceuticals is up 5.5% to 197.15% ahead of earnings.
GENZ – Genzyme Corp. – The biopharmaceutical company, which is currently knee-deep in merger negotiations with Sanofi-Aventis, attracted bullish options investors during the trading session. It looks like one trader initiated a plain-vanilla debit call spread in the January 2011 contract to prepare for the sharp increase in the price of Genzyme’s shares that’s likely to occur if Sanofi-Aventis winds up purchasing – or at least confirming plans to purchase – the drug maker before January 2011 expiration. Genzyme’s shares inched up 0.25% this afternoon to $70.52 as of 3:15 pm ET. The options player picked up approximately 6,000 calls at the January 2011 $70 strike for an average premium of $4.42 each, and sold the same number of calls at the higher January 2011 $75 strike for an average premium of $1.72 apiece. The net cost of putting on the bullish transaction amounts to $2.70 per…
Testy Tuesday – Bottom Busting or Big Bounce?
by Phil - June 29th, 2010 8:27 am
Wheeee, what a ride!
Finally all our very boring sitting around at 75% cash makes us feel smart as the market makes what we hope is that final blow-off bottom to re-test our lows. I already sent out an Alert to Members this morning so a lot of this is old news to them but nothing has changed since 4:30 so here’s a quick reprise – What we are mainly seeing in the futures this morning is 2 major factors that are driving the markets lower:
1) Japan, where too strong Yen (88.6), -0.1% industrial output, -1.7% exports, rising unemployment (just 5.2%) AND lower houshold spending (-0.7%) numbers sent the Nikkei down 1.25% today to 9,570. If you think about it though, pretty much all of that is a strong Yen issue because it lowers demand for the exports (making them more expensive) and then factories slow down and people get laid off and household spending drops from that PLUS the fact that it’s now cheaper for them to buy imports so they can buy the same stuff at lower prices.
So, overall, nothing people shouldn’t have expected but ugly to read about.
2) China, where the Shanghai fell 4.27% today to 2,427, which is a lot because they are a 10% limit down market on individual stocks so you can bet the selling isn’t done if the AVERAGE was down 4.27%. The Hang Seng was ugly too, falling 2.3% to 20,248. What sent China off a cliff was kind of silly. The Conference Board, which is a NY-based research firm had reported that Chinese economic indicators rose 1.7% in April – something at the time (June 15th) we thought sounded a bit high. Well, funny thing is it turns out the people at the Conference Board must have been high on something because it turns out they made a "calculation error" and the correct number was just 0.3%.
There is a third factor in play and, earlier this morning I thought it was too silly to be considered but, apparently, you can panic retail investors over pretty much anything. On Thursday, there are $547.5Bn worth of bank-loans from last year’s special liquidity program that are due to roll over and there are rumors circulating that the ECB won’t renew the facility at all. The ECB has, in fact, already promised to replace it with rolling 3-month loans at the…
Testy Tuesday – Waiting For the Fed
by Phil - June 22nd, 2010 8:33 am
Wheee, that was fun!
In yesterday’s 9:40 Alert to Members I said: "I have to go with my gut initially and stick to our plan, which is roll up the USO and DIA short plays (rolling the open puts to higher strikes)." We took two brand new short plays – one a TZA complex insurance spread that pays 100% for every nickel TZA is over $6.05 at July expiration (up to $8) and one ordinary DIA put that doubled up for the day and we took that money and ran, of course. That’s two weeks in a row we nailed it on our Monday Alerts and, as I said last week – no need to play further, just go on vaca and come back next week!
We went into the close more or less neutral other than our oil shorts, which we stuck with although we’ll keep tight stops on them if oil holds $77.50 and the market starts recovering. We got exactly the bounces off resistance we were looking for and today we find out if they were bullish pullbacks or the top of our predicted bounce zones (listed on the charts):
So holding the bounce lines we predicted way back in the crash is going to be critical. We don’t mind a bit of consolidation under those 50 dmas (red lines) while the 20 dmas (blue lines) catch up but if we fail those blue lines it will certainly be time to pull in our bullish horns and put on our bear costume. What makes investing tricky in this kind of market is that, as we were reminded in May (twice) and June (once, so far), these markets are INSANE and we can drop 500 Dow points at the drop of a hat so we MUST have our disaster hedges on at all times in order to take any bullish long-term positions and we, unfortunately, still can’t reconcile committing more than 25% of our cash to long-term positions at this time.
Staying mainly in cash is kind of annoying but also prudent. We end up day-trading a lot and I just put up a very important post on managing short-term trades that’s a must read for Members. The nice thing about having a ton of cash is we can do "stupid option tricks" – plays that are margin intensive but relatively safe like selling XLF July $14 puts for…
Toppy Tuesday – Can We Get More Bullish?
by Phil - March 23rd, 2010 7:38 am
Here’s a fun chart to consider:
This is the S&P 500 Bullish Percent Index, which is a measure of the percent of stocks in the index that are currently trading with Point and Figure buy signals. Bullish Percent Levels higher than 70% are considered overbought and below 30% is considered oversold. We hit a high of 88 in September of last year and haven’t been below 50 since last March’s crash. Notice a move down to just 64 cost the S&P close to 10% in February so, believe me - you don’t even want to think about what will happen if we hit 30!
Note these tops can last for a couple of weeks and that fits in fine with our reasoning for cashing out last week and moving to the sidelines to watch this nonsense unfold, as funds scramble to put up the best possible Q1 numbers between now and next Wednesday, in the hopes of getting investor capital off the sidelines and back where they can charge some fees.
A funny thing about funds that most people don’t consider is that, in a cyclical market, the WORST funds to put money into are often the ones that just posted the best performance because their strategy is often stretched. Logically, you should be looking at the worst performing funds and trying to find one that backed something (like natural gas last Q) that you feel may be recovering. Of course, that’s not human nature and funds will do ANYTHING to get themselves on the top of those lists to attract the investment bucks in Q2.
Taking a look at our sector spider charts, we see the amazing run we’ve had since Feb 8th and, like our index charts, we want to be aware of those blue lines (20 dma) as a sign of short-term weakness, which means we’re very concerned with XLB (with builders reporting this week), XLE (oil must hold $80) and XLU (possibly hopeless due to consumers being unable to pay bills).
Think of the sectors as a bunch of little tug-boats, pulling the large S&P barge. One or two of them my not be pulling in the same direction as the group and that would have little effect on the broader index but, as more and more of the little indexes begin to line up and pull in the same direction – the index begins to turn and, once you have a majority pulling in one direction, the remaining stragglers…
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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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