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Wednesday, February 21, 2024

Call Buyers Emerge

Today’s tickers: EEM, DRYS, SLV, GLD, DHI, BRCM, STSI & LFC

EEM– The emerging markets fund attracted a number of option investors again today following the put-spreading frenzy observed yesterday. A repeat performance looks to be in the works in the September contract, but fresh call buying activity was witnessed in the July contract today. Shares of the ETF have risen 1% to $33.05. It appears that 5,000 calls were purchased at the July 36 strike price for a premium of 51 cents apiece. But, even more noteworthy was the July 39 strike where it looks as though some 30,000 calls were bought for about 13 cents per contract. Shares would need to experience a rally of approximately 18% to breach the breakeven point at $39.13 by expiration in a couple of months. The emerging markets fund was last trading above $39.00 on August 29, 2008. – iShares MSCI Emerging Markets Index ETF

DRYS– Shares of the Greek cargo-carrier are higher by more than 11% to $8.13 today fueled by gains of 5.05% in the dry bulk shipping index, which has climbed more than 90% in the month of May. A number of shipping stocks have edged upwards, but DryShips caught our attention as option traders made some bullish plays in the July contract. The July 9.0 strike price had more than 5,800 calls purchased for an average premium of 80 cents apiece. More optimistic individuals targeted the July 10 strike and pocketed 1,200 calls for 63 cents each. Shares would need to rally by an additional 30% through the breakeven point at $10.63 before profits are realized by investors long of July 10 calls. – Dryships, Inc.

SLV– A massive strangle strategy was initiated by one option trader looking for shares of the silver ETF to continue to exhibit bullishness through expiration in January of 2010. The SLV ticker symbol exploded to the top of our ‘most active by options volume’ market scanner after 100,000 puts were sold at the January 13 strike for a premium of 83 cents apiece in conjunction with 100,000 calls shed at the January 19 strike for 1.04 each. The gross premium on the strangle amounts to 1.87 and looks to have been applied toward the purchase of 75,000 calls at the in-the-money January 14 strike at a cost of 2.80 each. The price tag on the long call position was effectively reduced to just 23 cents given the higher ratio of sold options versus those purchased. The investor is likely looking to amass profits on the long call position through expiration. – iShares Silver Trust ETF

GLD– With the value of the dollar coming under increasing pressure recently, those of protective hedges have risen. Today’s rally in the euro to above $1.41 against the dollar marks its strongest price since December 31, 2008. We noted in our daily forex commentary that signs of growth in Asia had conspired to convince investors that the health of the global economy was sound and so undermined the value of the dollar. In addition, physical commodities are having a storming month and rallying hard. But the additional burden on the U.S. treasury as it continues its program to issue debt to bailout the economy is taking its toll on bond yields and the value of the dollar. Accordingly gold investors have stepped in to the fray in the belief that gold remains the ultimate hedge against the dollar and both inflation or deflationary forces. Option traders have joined the debate today as gold, up 1.7% at $977.90, edges towards $1,000 per ounce. The June contract saw a 100/105/110 call butterfly trading for 50 cents on a chunky combination involving the sale of 30,000 calls at the central strike and half of that amount purchased at the surrounding strikes. This investor would benefit most should the price of shares in GLD settle at $105.00 at June’s expiry. A far more bullish trade indicates one investor’s belief that gold’s rally will be sustained through year-end, seeing prospects for a rise above at least $1,200 per ounce. An investor placed a large bull call spread in purchasing 16,000 December expiration 120 strike calls while selling the same amount of calls at the 140 strike. The net cost of 1.77 implies a breakeven price of gold at $1,217.70. – SPDR Gold Trust

DHI– The mostly negative housing data that continues to plague homebuilding equities has failed to put a lid on DHI’s shares today which have rallied more than 5% to $9.14. The stock appeared on our ‘most active by options volume’ market scanner after one investor purchased 20,000 in-the-money protective put options at the July 10 strike price for 1.55 per contract. We believe the investor holds a large long position in the underlying shares and is looking to maintain his footprint on the stock. The trader is willing to accept the 1.55 price tag on the options in exchange for the right to lock into a selling price of $10 per share in the event that DHI erodes by expiration. – D.R. Horton, Inc.

BRCM– Shares of the semiconductor company have rallied slightly by about 1.5% to $25.52 amid a new ‘hold’ rating by an analyst at Roth Capital Partners this morning. Option investors displayed mixed sentiment on the firm as a number of puts and many calls were purchased. The near-term June 27 strike price had about 1,500 calls bought for a premium of 67 cents apiece as some individuals expect further bullish movement in the stock. Conversely, the July contract attracted protective put patrons. The July 24 strike price witnessed more than 2,400 puts purchased for 1.05 each and the higher July 25 strike had 1,500 puts picked up for 1.45 apiece. Investors seeking to profit from a decline in shares have effective breakeven points at $23.55 for the July 25 strike puts and at $22.95 for the July 24 strike options. Finally, medium-term investors are looking for a rise in shares by expiration in August. The August 26 strike price had 1,400 calls scooped up for 2.45 each while the higher August 27 strike had 1,500 calls pocketed for 2.00 per contract. Shares must rally about 14% through $29.00 before the more bullish traders long of August 27 calls breakeven on the trade. – Broadcom Corporation

STSI– Option investors sent out bullish smoke signals on Star Scientific, a technology-oriented tobacco company which develops dissolvable smokeless tobacco products with fewer carcinogenic toxins. Shares have surged more than 17% today to $5.58 as second-quarter sales data indicated that dissolvable tobacco sales have rebounded. The stock has surpassed its 52-week high of $5.30 reached back on April 17, 2009. STSI’s jury trial in its patent infringement lawsuit against RJ Reynolds Tobacco Company (RJR) continues in Maryland and investor uncertainty remains high with option implied volatility at 224%. Investors looking for further bullish movement in Star Scientific got long of more than 5,600 calls at the July 10 strike price for an average premium of 45 cents each. Perhaps such optimistic positioning stems from speculation that the firm will win its appeal and send shares soaring more than 87% through the breakeven point at $10.45 by expiration. We also note the purchase of 2,500 bullish call options at the near-term June 7.5 strike price for 77 cents apiece which adds to investor optimism observed on STSI. – Star Scientific, Inc.

LFC– Following this week’s annual general meeting for China Life, one investor seems to like what he sees and has placed an interesting combination using January expiration options today. The investor spread the sale of 2,000 January puts at the 45 strike, about $10.00 south of the current share price of $54.75, against the purchase of 2,000 calls at the January 75 strike. The put sale discounted the cost of the call premium to provide a trade credit to the investor to the tune of 1.65 per contract. At the AGM management disclosed greater exposure to equities throughout the rising market hot on the heels of the government’s $586 billion stimulus package. In addition the company also increased its exposure to high-yield fixed income within its portfolio. China Life also expects to grow revenues and premium income as it expands its marketing spend in larger Chinese cities following a recent loss of market share. The prevailing 52-week high of $61.04 is within sight, while a rally to $75 would require a near 50% rally over seven months. Still, the loss of time value to the puts in the event of even a gentle share price rise would benefit this investor. – China Life Insurance Co.


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