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Wednesday, April 17, 2024

Savient calls in play at heady volatility readings

Today’s tickers: SVNT, WFC, EEM, MCO, XHB, EXEL, GDX & HIG

SVNT– The specialty biopharmaceutical company’s shares have slipped 2% throughout the trading day to $5.78. The slight decline has not deterred some investors from establishing covered calls in anticipation of the potential approval of Savient’s novel biological drug treatment for failure gout patients. The firm’s biologics license application is set for review before the Arthritis Advisory Committee appointed by the FDA on June 16, 2009. Option traders were seen making some interesting plays on the stock ahead of judgment day. One investor purchased 5,000 calls at the near-term June 7.5 strike price for a premium of 1.05 apiece spread against the sale of 5,000 calls at the July 10 strike for a premium of 50 cents each. The spread cost the investor 55 cents. Such a strategy has a number of possible outcomes contingent upon the decision of the advisory committee. We note that the committee is scheduled to convene just a couple of days before the June 19th expiration of the June 7.5 calls. In the event that the drug, KRYSTEXXA ™, is approved the investor is likely expecting the June 7.5 calls to land in-the-money allowing him to take delivery of the underlying shares. Once long the stock, he has an effective exit strategy in place because of writing the calls today. He will have amassed gains of 44% on the stock if shares rise through $10.00 by expiration. Pure covered call writers also targeted the July 10 strike price where another 7,000 calls were sold and likely tied to a long stock position. The sky-high implied volatility reading of 272% for the near-term June 7.5 strike calls will likely compress after the review has yielded a decision on the gout drug. Thus, traders will be singing a more melancholy tune in the event that the drug does not receive approval and the call premium plummets.  – Savient Pharmaceuticals, Inc

WFC– Shares have reversed direction this afternoon to rise more than 1.5% to $24.50 after spending the majority of the day in the red. We noticed some traders stocking up on protective put options in the July contract at multiple strike prices. The most bearish of investors picked up 15,500 put options at the July 15 strike price for an average premium of 30 cents each. Higher up at the July 19 strike, some 20,000 puts were coveted for about 1.00 each. Finally, 10,000 puts were scooped up for a hefty 2.45 per contract at the July 23 strike price. – Wells Fargo & Co.

EEM– The emerging markets ETF is trading higher by about 3% to stand at $32.75. Bearish option traders dug their claws into the September contract early this morning by selling calls to fund put spreads. The first three-legged trade involved the sale of 20,000 calls at the September 36 strike price for a premium of 1.15 apiece. The put action involved the sale of 20,000 puts at the September 23 strike for 40 cents each spread against the purchase of 20,000 puts at the higher September 28 strike for 1.35 per contract. All together the trades resulted in a net credit of 20 cents to the investor who stands ready to gain maximum potential profits of 5.00 in the event that shares of the fund decline to $23.00 by expiration. Otherwise, the trader is content to retain the 20 cent credit if the ETF trades higher than $28.00 and lower than $36.00 by September’s expiration day. The initial trailblazing bear braved the emerging markets alone at around 10 am (EDT). However, he has since attracted a band of followers who have driven up the volume to 50,000 contracts traded at each of the same strike prices described above. – iShares MSCI Emerging Markets Index ETF

MCO– The investor who poured scorn on Lehman Brothers just months before the investment bank entered the record books as the world’s largest bankruptcy, has found a new victim and is shorting Moody’s Corp. Judging by its 6.8% share price decline and a put-to-call ratio of 5.2 this morning David Einhorn appears to have started a new trend. The investor runs New York-based Greenlight Capital Inc., a hedge fund managing assets of $5.1 billion. At a conference last night in the city, Mr. Einhorn denounced the business model of ratings agencies, undermining demand for their services as government-mandated. Ill-ratings of asset-backed debt by ratings agencies served to fuel the recent credit crisis. Much of today’s option activity appears to be fresh positioning judging by the fact that relatively few outstanding positions exist at today’s active strikes. The June 26 strike puts were traded on volume of 4,100 contracts compared to established open interest of 709 lots, while the July 25 strike puts were traded almost 1,400 times dwarfing existing positions of 183 lots. The picture was the same at the August 21.0 strike where premiums rose by 69%. Volume at the January 2010 25 strike puts was a neat 1,200 lots before lunch. Implied options volatility as you might expect rose 20% overnight to 60% to reflect increased uncertainty by option players. – Moody’s Corp.

XHB– Shares of the homebuilders ETF have declined more than 4% to $11.53 this morning as the housing sector continues to get slammed with falling home prices and rising inventory. Investors are possibly suffering a delayed reaction to the latest slide in bond prices, which has forced yields higher. That’s bad news for anyone wanting to get a mortgage and last week’s 19% slump in refinancing activity confirms the sensitivity to rising price. But that hasn’t stopped one option trader in hoping for a significant rebound this coming fall as he appears to have established a bull call spread in the September contract. The transaction involved the purchase of 25,000 calls at the September 15 strike price for a premium of 40 cents apiece spread against the sale of 25,000 calls at the higher September 17 strike for 10 cents each. The net cost of the bullish position amounts to 30 cents and yields a maximum potential profit of 1.70 if shares of the ETF can rally up to $17.00 by expiration. Shares of the fund would need to climb more than 32% and breach the breakeven point at $15.30 before this housing-bull can amass profits on the trade. The XHB has approximately four months to make a McMansion out of a Mobile home. – Homebuilders Select Sector SPDR

EXEL– The biotechnology company’s shares surged upward by more than 27.5% to $5.76 after it entered into an exclusive global alliance for novel targeted oncology therapies with Sanofi-Aventis (SNY). The license agreement gives SNY an exclusive worldwide license to certain inhibitors (XL147, XL765) that are currently in phase 1 clinical trials as well as provides for exclusive collaboration with EXEL for the discovery of PI3K (phosphoinositide-3) inhibitors. The ultimate goal of discovering PI3K inhibitors stems from the theory that the activation of the PI3K pathway is common in human tumors. The pathway has been indicated in promoting cell proliferation and survival in addition to resistance to chemotherapy and radiotherapy. Combining the research efforts of the two firms will hopefully accelerate the discovery of PI3K inhibitors which, per the license agreement, grants Sanofi-Aventis sole responsibility for subsequent clinical, regulatory, manufacturing, and commercial activities. Exelixis will receive an upfront cash payment as well as future payments that could potentially amass to $1 billion according to the SNY press release. Exelixis will also receive royalties when and if products are commercialized. The collaboration agreement spurred option investors to exchange more than 15,200 contracts this morning out of the total existing open interest on the stock of 34,785 lots. A chunk of 10,000 calls appear to have been sold at the January 2010 7.5 strike price for a premium of 65 cents apiece. It is likely that the transaction is a covered call initiated by an investor who bought shares of the underlying stock and is looking to secure gains on EXEL by establishing an exit strategy. If this is the case, the trader has effectively reduced the cost of the shares to approximately 4.88 (assuming a purchase price of 5.53) by writing the call options. The trader will enjoy gains of more than 53% if the stock rallies through $7.50 and the underlying shares are called away from him at expiration. – Exelixis, Inc.

GDX– Shares of the fund are higher by more than 5% to $43.38 attracting bullish option investors seeking the pot of gold at the end of the rainbow. One individual hoping for continued upward movement in shares was observed shedding puts in exchange for out-of-the-money calls. At the July 35 strike price 5,500 puts were sold for a premium of 52 cents apiece and were spread against the purchase of 5,500 calls at the July 48 strike for 1.07 each. The net cost of getting long the calls amounts to 55 cents and yields a breakeven point at $48.55. The ETF must rise approximately 12% from the current price in order for this golden-boy to begin to garner profits to the upside. GDX was trading higher than $49.00 back on July 15, 2008, and has since failed to recover to that level, despite the fact that the inflation/deflation debate is hotter than ever increasing the appeal of gold as a hedge. Further evidence of bullish sentiment was seen in the form of some 2,000 calls picked up at the near-term June 44 strike price for a premium of 1.20 each. Traders long of the contracts are hoping for shares to increase 4% through the breakeven point at $45.20 by expiration next month. – Market Vectors Gold Miners ETF

HIG – The insurance and financial services company attracted a frenzy of near-term put buyers who appear to be bracing for continued bearish movement in the stock in addition to the ex-dividend deduction of one nickel subtracted from today’s price. HIG shares are currently off by less than 1% to $14.62. The June 14 strike price was targeted by one investor who purchased 25,000 puts for an average premium of 1.16 each. The transaction yields a breakeven point at $12.84 and suggests that the trader is expecting to profit – or protect a long stock position – from a more than 12% decline in the stock by expiration. We note additional bearishness at the now in-the-money June 15 strike price where more than 2,700 puts were coveted for 1.79 each as well as some 2,600 deeper in-the-money puts scooped up at the June 16 strike for 2.44 per contract. All signs, at least those on Main St. in Options Land, point downtown for HIG. – Hartford Financial Services Group, Inc.


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