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Tuesday, May 28, 2024

Option traders expect smaller swings in Emerging Market

Today’s tickers: EEM, FXI, CVTX, GE, TYC, XLF & STLD

EEM iShares MSCI Emerging Market ETF – Investors appear to be anticipating lower volatility in emerging markets, perhaps taking a cue from patterns seen in the U.S. market. Shares have experienced a rally of 3% today to $23.03 and a couple of large-volume trades caught our attention in the January 2010 contract. A sold strangle was established by selling 24,500 calls at the January 35 strike and by selling 24,500 puts at the January 10 strike price for a gross premium of 1.03. As long as shares remain ‘strangled’ by the two strike prices, the 1.03 will be retained by this investor. A sold straddle was also initiated by an investor at the January 22 strike price by selling 24,500 calls and 24,500 puts for a gross premium of 8.30 on the trade. If shares settle at $22 next year at expiration this investor goes home happy with the full premium. However, if shares should swing in either direction through the breakeven points at $30.30 on the upside or at $13.70 on the downside, this trader would be exposed to limitless losses. Option implied volatility has already come off a great deal this week falling from Wednesday’s value of 64% to today’s 56% reading.

FXI iShares FTSE/Xinhua China 25 – Shares of the China index have rallied nearly 3% to $25.83 today. One option trade that caught our eye in the April contract occurred at the 28 strike price and involved about 51,000 calls. It appears likely that the entire lot is tied to stock in some way. Perhaps this investor has sold the underlying shares and in buying call options secures a sharp exit in the event of a share price gain. If this is the case, this investor paid between 90 and 95 cents per contract for the rights to exit the short position by expiration if shares rise by about 8% to $28.

CVTX CV Therapeutics – Stealing some of the Roche-Genentech thunder, biotech firm Gilead Sciences Inc. has said it will acquire biopharmaceutical company CV Therapeutics for $1.4 billion, sending CVTX shares upward by 28% and through the current 52-week high of $16.68 to $20.59. CVTX edged onto our ‘hot by options volume’ market scanner as option traders made their moves. Most notable in the April contract was the fresh interest established at the in-the-money 20 strike price where about 16,000 calls have been traded. Much of the volume seems to have been sold for about 80 cents per contract as investors bank gains on the rising share price.

GE General Electric – The downgrade of its top-level AAA rating to AA+ from Standard & Poor’s today seems to have had little negative impact on GE, as its shares soar another 9% to $9.30. Option investors established bullish positions by purchasing some 33,000 calls at the March 10 strike price at 28 cents per contract. Similar optimism was seen at the 10 strike price in April where about 14,000 calls were bought for 77 cents each. Further along, at the June 12 strike, investors got even more bullish and scooped up 10,000 calls for 56 cents per contract. Shares would need rally 35% from today’s share price in order to reach the breakeven point at $12.56, at which point traders would begin to profit on the calls. Not all option traders took such sunny positions today as evidenced by a bearish put spread initiated in the April contract. One investor appears to have purchased 15,000 out-of-the-money puts at the April 8.0 strike price for 91 cents each, and sold 15,000 puts at the April 5.0 strike for a 17 cent premium. This strategy implies that this trader sees today’s turn of fortune falling by the wayside before expiration next month. The net cost of the spread amounts to 74 cents, and yields a maximum potential profit on the trade of 2.26 if shares fall all the way to $5 by the end of April. Given the current rally, shares would need to reverse downward by at least 21% in order to reach $7.26 – the breakeven point on the downside.

TYC – Tyco International Ltd – Shares of the world’s largest maker of security systems have rallied nearly 3% to $19.01. Perhaps this is a sign of confidence in the decision reached by shareholders of the company today regarding the relocation of its place of incorporation from Bermuda to Switzerland’s Schaffhausen canton. TYC popped onto our ‘hot by options volume’ market scanner after one investor appears to have purchased nearly 10,000 calls at the March 20 strike price for 35 cents per contract. While the bulk of the calls were traded to the middle of the market, it is likely that they were bought because open interest at that strike was just 3,700. Shares will need to rally 7% to a breakeven price of $20.35 in order for this bullish investor to profit on today’s trade.

XLF – Financial Select Sector SPDR – Option traders were seen looking for upside on the financials index as its share price continues to rally today by about 3% to $7.60. One investor initiated a bull call spread in the April contract by purchasing 25,000 calls at the April 8.0 strike price for 55 cents each, while selling 25,000 calls at the April 10 strike for a premium of 12 cents apiece. The net cost to the trader amounts to 43 cents for the spread and yields a maximum possible profit of 1.57 if shares can rally to $10 by expiration next Friday. This investor sees the XLF gaining in the next week, but does not expect it to rise above $10. Profits will begin to amass if shares surpass the breakeven share price of $8.43, rising to a maximum of 1.57 should shares reach the upper strike. Let’s not count chickens here, as the investor still needs to see a near-11% share price gain during expiration week before he can count a single black cent.

STLD – Steel Dynamics Ltd – Faced with a drop off in demand for rolled-steel products, which has caused a halving of steel prices in recent months, Steel Dynamics forecast a first quarter loss. Shares in the country’s fifth largest steel-manufacturer by market capitalization responded with a 20% slide to $6.80. Options activity was actually less bearish than the story sounds as investors chose to sell put options expiring in April, which means they would need to take delivery of shares put to them at a fixed $5.00 share price. Of course that would mean that shares would need to fall by a further 26% and the prospects of that happening induced premium writers to take in the 35 cents available from anyone wanting to bet on weaker conditions yet. Other investors paid a similar premium on call options expiring next Friday at the 7.5 strike price, implying that today’s downdraft won’t last. At the May 10 strike call line, investors also paid a 50 cent premium to secure buying rights on the company.

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