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Saturday, February 24, 2024

Uranium company sees calendar call spread

Today’s tickers: CCJ, BAX, XHB, T, VIX, PCP, PG, JNJ, HIG & USO

CCJ Cameco Corporation – The producer of commercial-use uranium to fuel nuclear power plants has experienced a share price decline of about 4.5% to $17.08. According to one news source, uranium-oxide concentrate for immediate delivery rose 2.5% or $1, to $41.50 per pound last week, although uranium spot prices have declined by more than 26% since December 1, 2008. Additionally, trading last week jumped to more than 4.3 million pounds up from just 2.2 million pounds in the first three months of the year. CCJ edged onto our ‘hot by option volume’ market scanner after one investor initiated a calendar spread. Perhaps with revived demand for uranium and trading volume for the commodity on the rise, this investor is hoping that CCJ’s share price will receive a boost in the next six months. The trader purchased 7,500 calls at the September 22.5 strike price for an average premium of 52 cents per contract. The long call position was funded by the sale of 7,500 calls at the January 2010 22.5 strike price for 1.15 apiece. The investor receives a credit of 63 cents on the trade and is hoping shares rally through $22.50 by expiration as he would then be able to exercise the call options and take delivery of the underlying shares. The fact that the sooner-to-expiration September calls have a higher gamma means that its premium will rise faster for a given rally in the underlying share price. On the flip side, the investor could see the credit pocketed today erode if the calls fail to land in-the-money by expiration in September. We’re unsure what the investor will do with this strategy should shares rally but not far enough to allow September exercise – an event that would leave him short of calls after expiration.

BAX Baxter International, Inc. – Shares have dipped by about 1.5% to $50.95 for BAX, a company that develops, manufactures, and markets products that aid persons with hemophilia, immune disorders, infectious diseases and other chronic and acute medical conditions. A complex combination trade took place that grabbed our attention, but the trade is likely marked inaccurately on the exchange. The trade shows the sale of twice as many calls purchased, which makes little sense and so we’ll describe the way we think the trade went. Using the May contract an investor possibly initiated a 50/45 strike put spread 8,100 times and used the May 55 strike calls to help fund the position. The put spread would ordinarily have cost 90 cents, although the proceeds from the sale of the calls reduced the outlay by 58 cents. Not since February 26th has Baxter’s share price been above $55.00 and on the following date its share price gapped lower leaving a price gap between $54.87 and $53.97, which remains to be filled. Last week’s attempt to stay above $52.00 has been thwarted by selling pressure today, and hence the sale of calls at a strike price beyond which this investor believes Baxter’s share price will stray. Meanwhile, the put spread offers protection against a re-run at the $46.59 low from April 7th.

XHB SPDR Homebuilders ETF – Shares of the homebuilders ETF have tumbled more than 7.5% today to stand at $12.03 ahead of New Homes Sales data which is scheduled for release this coming Friday. The decline in share price today provided some bullish investors the opportunity to pick up calls at reduced premiums. At the September 13 strike price, 17,800 calls were purchased for an average premium of 1.60 apiece out of the more than 30,000 calls which traded at the strike throughout the day. Shares would need to reverse course and head upwards by about 21% to the breakeven point at $14.60 in order for investors to reel in profits by expiration.

T AT&T, Inc. – The telecommunications company has experienced a 2.5% dip in shares to $25.28. Option trades on the stock today were bearish as investors shed calls in the May contract. The May 26 strike price witnessed the sale of more than 12,800 calls for a premium of 71 cents apiece while the May 27 strike had about 5,000 calls shed for an average premium of 38 cents per contract. Perhaps traders see shares continuing to decline through expiration in May, and are thus taking in whatever premium they can by selling their options now.

VIX CBOE Vix Index – Just when they thought it was safe to tread back into the water! Despite the 3.4% slump in the S&P 500 index the fear gauge is up, but still below that key reading of 40.0, which it recently broke beneath. There is no shortage of stories driving the equity markets lower today. Investors are slowly cooling from the idea that six months from now the global economy will be in fully-fledged recovery mode and as such equity prices are under pressure. Much of the fanfare had stemmed from perceived heath for financial stocks. More analysts are poking holes in recent results either because they are overly-reliant on one-off-volatility-inspired revenue gains, or because they mask ongoing writedowns indicating no material floor has yet been established. Many investors question whether the pumped-up earnings are no coincidence given the timing of the results of the stress testing next week. Investors sold put options on the VIX using the May contract perhaps expecting that the recent bullish mood may be over. Put volumes at the 32 and 35 strikes expiring next month were largely sold to the bid indicating a lower perceived likelihood that the VIX will remain depressed for long.

PCP Precision Castparts Corp. – Shares of the worldwide manufacturer of complex metal components and products have declined by more than 2% to $62.36. Despite the dip in its share price, option investors were observed making bullish plays on the stock. At the May 70 strike price, investors purchased more than 2,300 calls for an average premium of 1.13 apiece. More optimistic individuals targeted the May 75 strike price and picked up about 1,600 calls at an average price of 44 cents each. In order to profit from call purchases at the more realistic May 70 strike price by expiration, traders would require that shares rally by about 14% to the breakeven point at $71.13. Option implied volatility on the stock has spiked to 55% today from the 50% reading recorded at the conclusion of last week.

PG The Procter & Gamble Company – The provider of more than 300 branded products around the globe has experienced a slight share price decline of less than 0.5% to $51.49. PG received an upgrade today by an analyst at SunTrust Robinson Humphrey to a rating of ‘buy’, however, option traders were certainly not keen on that idea. At the May 55 strike price, more than 6,000 calls were sold for an average premium of 39 cents apiece. Existing open interest at the May 55 strike is approximately 4,000 indicating that some investors will be short call options. Perhaps traders are willing to take in the premium on the short sale in exchange for bearing the risk that shares rally by about 7% and land in-the-money by expiration at the close of this month.

JNJ Johnson & Johnson – The health care products company has dipped slightly by less than 0.5% to $52.82 amid an upgrade to ‘outperform’ by analysts at Wachovia. Despite the bullish label of ‘outperform’ option investors were seen selling calls in the May and June contracts. At the near-term May 55 strike price, traders sold more than 4,700 calls for an average premium of 63 cents apiece. Further along at the June 55 strike price, about 2,800 calls were shed for 1.15 per contract. Perhaps these investors do not see shares rallying through $55.00 by expiration in either of the months targeted and are happy to collect call premiums afforded them by selling lots today.

HIG Hartford Financial Services Group – A 13% slip in the fortunes of the multi-line insurer to $9.66 has been accompanied by a jump in options implied volatility from 128% to 147%. Investors buying into the stock over the last two weeks are in danger of seeing all gains eroded as the financial storm clouds gather. Investors awarded a double-whammy of gloom by selling May expiration calls while diving for protective put options. Investors sold calls at the 9.0 strike at a 2.36 premium and the 10.0 strike for an average 1.51 premium while 1,600 calls at the 11.0 strike were ditched for 1.61 as shares dropped. In exchange other investors paid 56 cents to get long of 7.5 strike put options inferring a breakeven share price at expiration of $6.94.

USO United States Oil Fund Limited Partnership – Shares of the fund engaged in the trading of oil futures contracts and options has experienced a 7% decline to $27.38. Despite the dip in shares, option traders were observed making bullish plays in the July contract. Out of more than 22,000 calls traded at the July 28 strike price, 11,700 calls were purchased for an average premium of 2.76 apiece. In order for traders to profit from call purchases at the July 28 strike, shares would need to rally by about 12% to the breakeven point at $30.76 by expiration. Rounding out the bullish picture on the stock was the sale of 3,500 puts at the July 24 strike price for a premium of 1.25 per contract. Perhaps investors who expect shares to rise in the next few months, acted today in order to take advantage of reduced call premiums afforded them by the decline in the price of the underlying. As for put selling-traders, they were able to reel in richer put premiums given today’s share price decline.

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