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Chinese ETF sees more call option action

Today’s tickers: FXI, XL, AIG, WYE, EEM, JAVA, GIS, BK, SLM & C

FXI iShares FTSE/Xinhua China 25 – Shares are up by approximately 1.5% to stand at $27.96. The Chinese ETF appeared on our ‘most active by options volume’ market scanner after one investor purchased 40,000 in-the-money calls at the March 27 strike price for an average price of 55 cents per contract. The investor snagged the chunk of calls at a low premium earlier today relative to the current premium on the calls of 1.35. It looks like this trader offset the cost of the purchase by selling 40,000 calls at the April 30 strike price for a premium of 63 cents. Thus, he pockets a credit of 8 cents on the trade. As long as shares remain above $27 by Friday, this investor will have the right to collect 4,000,000 shares of the underlying stock at the strike price. But, by selling the calls in April this trader has capped upside gains at a maximum of 3.0 if shares happen to rally to $30 by expiration. The sale effectively provides him with an exit strategy in April.

XL XL Capital Limited – Shares of the property and casualty insurance firm have rallied 7.5% to $4.43 on the heels of AIG’s surge today. One investor looking for further upside gains purchased 6,400 calls at the March 5.0 strike price for 13 cents apiece. If shares can continue to rebound in this fashion and rise by 12% from its current price, then this trader would begin to profit at the breakeven share price of $5.13.

AIG American International Group – Outrage at $165 million in bonuses paid out to employees of the firm’s financial products division while taking in TARP funds at the same time apparently could not detract from AIG’s share price, which is soaring upwards by 40% to $1.35. While government appointed CEO Edward M. Liddy is getting reamed out at the Congressional hearings today, options investors have been busy trading calls across multiple contracts. Traders were heavily favoring the call side and skewed the call-to-put ratio to more than 4.5 calls to every put in action today. At the April 3.0 strike price, optimists picked up 3,700 calls for 10 cents each. Despite the huge rally today, shares would need to continue upwards by another 129% in order to reach the breakeven point at $3.10 by the end of next month. Investors were also getting bullish by purchasing calls as high up as the 7.5 strike price in the January 2010 contract where about 2,200 calls were purchased for 15 cents apiece. These contracts would require a 455% rise in shares in order to land in-the-money by expiration next year. Investors saw in the case of Citigroup’s rebound from its low of 97 cents that it does not take much to get the pendulum going, and thus, traders appear to be positioning themselves for AIG’s share price to rally – and rally hard.

WYE Wyeth – The pharmaceutical company’s shares have declined slightly by less than 1% to $42.69 and appeared on our ‘hot by options volume’ market scanner after one investor dabbled with trades at in-the-money strikes in the March and April contracts. At the in-the-money March 40 strike price, this trader appears to be taking profits by selling 7,615 calls for a premium of 2.69 each. At the April 42.5 strike price – now in-the-money by fewer than 20 cents – we believe this investor is selling volatility by shedding 7,615 calls for 1.15 each and 7,615 puts for a premium of 90 cents per contract. Wyeth agreed to be acquired by pharm-giant Pfizer Inc. for approximately $50 per share in a deal valued at $68 billion at the end of January, and it could conclude by the fall using sizeable debt from Pfizer for financing. The possibility that the deal might not occur along with other technical rationale account for Wyeth’s current share price trades below the target price. What this investor might be saying is that, although the deal price is higher and set to close in the fall, Wyeth won’t necessarily trade any higher by April’s option expiration and even if it does it won’t be above the boundaries established by the premium achieved today. The investor appears to have netted a gross premium of 2.05 on the sale of the straddle. The full 2.05 premium will be retained if share settle at $42.50 by expiration next month. It is important to note that this premium provides a buffer against potential losses up to the breakeven points at $44.55 on the upside and $40.45 on the downside.

EEM iShares MSCI Emerging Market ETF – Shares of the emerging market ETF are off by 1.5% to $23.49 but edged onto our ‘most active by options volume’ market scanner after one investor took a bullish stance in the January 2010 contract. At the January 22 strike price 13,500 in-the-money calls were purchased for 4.62 each while 13,500 calls were simultaneously sold at the January 28 strike for a premium of 2.10 apiece. The net cost amounts to 2.52 for the call spread and yields a breakeven share price of $24.52 at which point the investor begins to amass profits. The maximum profit of 3.48 would be realized if shares can rally by 19% to reach $28 – the upper strike price – by expiration next year.

JAVA Sun Microsystems – When investors are armed with some kind of price sensitive information, one might conclude that it’s once way traffic. However, the trading pattern for options on much-talked about Sun Microsystems immediately after the bell was incredible. The WSJ suggested in an article earlier today that IBM was in discussions to buy Sun in order to increase its Internet presence. While the Journal noted that no deal might even occur, it did offer a $6.5 billion price tag, which values Sun at more than double Tuesday’s closing price of $4.97. So investors lucky enough to own the stock can perhaps sit back and watch its shares gravitate towards a deal price of $10.00 per share. When option traders get their paws on this kind of information, suddenly the landscape changes. Hence one trader rushed to sell 30 call options expiring in April with a 10.0 strike for a penny, while just five seconds later one bullish investor scrambled to secure buying rights for a 75 cent premium. As the morning wore on the fierce debate raged on as to first, whether a deal will be done and second, what the price will be. Those 10 strike calls are rapidly changing hands at around 30 cents per contract with an equal number of nay sayers fighting the bulls. Option traders are generally a savvy lot and are quick to buy calls that could surge in price if underlying prices rise. They are quick to sell options that they expect will expire worthless, which makes anything above a deal price worthless. April 4.0 and July 5.0 strike puts are generally on offer this morning as investors expect that even if Sun doesn’t get taken in by IBM, its prospects are brighter and that some other suitor might come sniffing around. The April 8.0 strike calls were the single most popular destination for option traders where 7,000 contracts changed hands within the first 45 minutes of trading. Option implied volatility rose today to 88% as prices heat up.

GIS General Mills Inc. – Worthy of a company reporting earnings today, options implied volatility slipped to reflect the typical sigh of relief post earnings. EPS at 85 cents per share fell short of the 88 cent expectation while the company cited higher input costs and a strong dollar for the weakness. Despite offering a marginally better outlook for the year, that fell short of Wall Street’s estimate and so shares slipped 9% to $48.86. However, option traders appeared a little more forgiving and scooped up 2,800 April call options at the 50 strike for around 1.30 each, where premiums are down drastically from 4.20 yesterday. There appeared to be a greater willingness to write put options expiring next month at the 45 strike for a premium of 70 cents. Anyone selling puts would retain the full premium unless by expiration shares had lost a further 10% to $44.30. One thing working against the bulls who like staple companies such as General Mills is evidence that retrenching consumers are prone to ditch brand names in favor of discounted food products offered under generic labels. Shares today breached an existing 52 week low.

BK Bank of New York Mellon Corp – Shares have rallied 4.5% to $25.65 amid reports that BK management is unlikely to reduce its 96 cent annual dividend. BK has tended to outperform the struggling financial sector. A bellwether for financials, the XLF (Financial Select Sector SPDR) ETF, has experienced a 64% drop as compared to BK’s 43% decline in share price over the past year. A couple of noteworthy trades were enacted by one highly particular investor. While the volumes traded to the middle of the market we believe this option trader has initiated near-term bullish plays in the March and April contracts. At the March 25 strike price 9,462 at-the-money calls appear to have been purchased for 55 cents each while puts at the April 22.5 strike price saw 9,462 sold for a premium of 1.65 apiece. This investor receives a credit on the trade of 1.10 and looks to be crossing his fingers that shares will remain above $25 by Friday. This investor will be able to exercise his call options on Friday if shares can remain at or above $25 in order to get long of the stock. We believe that this investor has accepted the 1.10 premium for bearing the risk that shares now fall below the strike price in March, leaving him short of 9,462 puts in the April contract. However, if shares continue to rally this investor will not need to worry about the out-of-the-money puts, and he will bank the 1.10 premium at expiration.

SLM SLM Corporation – Shares of the provider of student loans, more commonly known as Sallie Mae, have slipped slightly by less than 1% to stand at $4.45. At the March 5.0 strike price investors shed more than 12,000 call options for a premium of 5 cents per contract. The delta on the out-of-the-money strike yields a 1-in-4 chance that the calls will land in-the-money by Friday. Thus, investors who are bearish on SLM are likely banking 5 cents today rather than wait for the options to expire worthless in two days. Option implied volatility has come off over the past week from 175% to the current value at 149%.

C Citigroup Inc. – Shares are being squeezed once again today and the company has a valuation some 23% higher today with shares stretching above $3.00. Intrigue continues in the June 5.0 strike options where arbitrageurs are using conversion plays that typically land a credit to take advantage of the squeeze. The volume in that line has more than 150,000 contracts trading both sides today with puts bought and calls sold when investors can position long of the stock. Earlier in the week rumors did the rounds that the authorities might be on the hunt for hard-to-borrow stock certificates in select financial names. This in itself has created a surge at AIG and Citigroup as desperate short-sellers try to cover their positions. The conversion trade could be established earlier in the week for a credit of 20 cents, but given the near-panic buying in the stock has shifted to a 1.10 cost to traders.

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