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Sunday, February 5, 2023

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Nvdia Options Under the Spotlight

Today’s tickers: NVDA, BJS, LDK, MCD, CAT, MGM & IYR

NVDA– The worldwide provider of visual computing technologies has seen shares rally more than 1% today to $11.51. We observed a number of option traders getting bullish on the stock and looking for continued upward movement as far out as expiration in January 2010. The near-term June contract attracted one investor to bank profits. It appears that this individual originally bought 10,000 calls at the June 11 strike price for 35 cents back on May 29, 2009 in the expectation of a rally in the stock. Today, with the June 11 calls in-the-money, he exited the position by selling the options for a premium of 75 cents apiece. The net profit pocketed on the trade amounts to 40 cents per contract or $400,000. Looking at the June 12.5 strike price, a similar strategy was employed albeit at a loss. We note that the transaction may or may not have been the work of the same investor described in the previous trade. Some 43,000 calls were sold for a dime apiece at the 12.5 strike today and look to have been originally purchased for an average premium of 18 cents. This transaction yields a net loss of 8 cents or $344,000. If both trades were initiated by the same individual, he would still be rewarded for his efforts in the amount of $56,000. Additional activity on NVDA was a massive chunk of 60,000 calls which traded to the middle of the market at the July 12 strike for an average premium of 75 cents each. Rounding out July activity was optimistic call buying enacted at the July 13 strike price where 2,000 lots were scooped up for 35 cents a pop. Finally, a bullish reversal took place in the January 2010 contract where 5,000 puts were shed at the January 10 strike price for a premium of 1.28 in order to finance the purchase of 5,000 calls at the sky-high January 15 strike for 98 cents each. The investor responsible for this trade has taken a credit of 30 cents and will add to his profits if shares can rally 30% and breach the breakeven point at $15.00 by expiration next year. – NVDIA Corporation

BJS – The oilfield services firm has experienced a share price decline of approximately 1% to $15.30. Despite the bearish movement in the stock, investors were seen taking bullish stances on the company amid improvements seen in demand and the price of oil. The July 17.5 strike price saw some 32,000 calls purchased for an average premium of 53 cents per contract. Traders long of the calls will be looking for shares of BJS to breach the breakeven point at $18.03 by expiration next month. The price of the stock will need to improve approximately 18% before investors strike black gold. – BJ Services Company

LDK – Shares of the Chinese solar wafer producer have risen sharply today by more than 21% to $13.85 in the midst of a significant rally for solar stocks. LDK took up residence on our ‘most active by options volume’ market scanner as more than 67,000 options contracts exchanged hands on the stock. Traders appeared cautiously bullish by picking up both calls and puts across multiple expiries. The near-term June contract had 4,200 calls bought by optimistic individuals at the June 15 strike price for an average premium of 41 cents each. Should shares reverse direction by expiration, some traders have prepared to profit from downside movement as 3,800 puts were picked up at the June 12.5 strike price for 67 cents per contract. More bearish individuals got long of 2,500 puts at the lower June 10 strike for 15 cents. Guarded optimism spread to the July contract where 5,600 calls traded at the July 15 strike for about 1.65 each along with some 4,200 puts that were purchased at the July 12.5 strike price for 1.66 apiece. Finally, uber-bullish wafer-lovers looked as high as the September 17.5 strike to get long of 4,500 calls for an average premium of 1.65 per contract. LDK appeared this morning on our ‘top implied volatility % losers’ market scanner with volatility down more than 9% to 99.5%. However, volatility came roaring back throughout the trading day to peak at 119%. – LDK Solar Company, Ltd.

MCD – More volatility selling was the theme at the home of the world’s biggest restaurant chain. We noted a similar strategy earlier this week following some decent earnings results. Shares today are 1% lower at $58.45 but well above the 52-week low of $44.29. Since the time when shares reached $61.00 last week, option implied volatility has slipped 4% to 24%, which makes it a very stable stock in this environment and lower than the broader market fear gauge – the VIX, which reads 28.78 today. A writer of option premium sold 10,000 put options in the December contract at the 52.50 strike for a premium of 2.40. Shares in MCD have closed beneath this strike price on 13 occasions in 2009 and if delivered by expiration the seller is buying a Big Mac here at a share price of $50.10 courtesy of the juicy premium received by way of compensation for agreeing to take delivery of the stock. Considering option open interest at this strike is less than 2,000 we’re guessing that this is the activity of an option investor bullish on the prospects for the company. – McDonald’s Corp.

CAT– The continued contraction of some of the world’s largest economies has widened the U.S. trade deficit for the month of April and pushed exports to the lowest level in approximately three years. The shrinkage in exports reflects the decline in foreign demand for engines, machinery, and metals, driving shares of the machinery giant lower by nearly 2% to $37.49 today. Options activity on CAT revealed that some investors wouldn’t bet their lives on a significant recovery in the price of the stock through expiration in November. Thus, sold strangles were initiated through the sale of 2,000 puts at the November 35 strike price for a rich, in-the-money premium of 3.63 apiece, while an additional 2,000 calls were also sold at the November 45 strike for 2.18 per contract. The gross premium amassed on the transaction amounts to 5.81 and will be retained in full if shares of the underlying remain strangled between the two strike prices described above. The parameters of the trade provide ample leeway for the price of CAT to fluctuate over the next six months. However, we note that losses would accrue on the strangle in the event that shares swing higher than the breakeven point to the upside at $50.81 or fall below the breakeven point to the downside at $29.19 by expiration. One other noteworthy transaction occurred at the November 25 strike price where an investor took profits today by closing out a short position. He originally sold 8,000 puts for an approximate premium of 1.70 per contract on April 30, 2009. Today he realized profits of about 72 cents each by buying back the puts for an average premium of 98 cents. Investors involved in both trades described were likely taking advantage of the lower volatility reading of 46% on CAT today, down from 51% at the start of the week. – Caterpillar, Inc.

MGM – Shares of casino-operator, MGM are down 1.3% today at $7.05 while an option investor has taken on board premium of $700,000 after the sale of 20,000 put options expiring in July at the 6.0 strike. The trade appears to be the work of an investor relatively bullish on the outlook for the gaming and hotel sector or the work of a volatility bear in the expectation that option premium will decline as recovery expectations grow. In either case, a naked put sale here would require a commitment from the seller to take delivery of the shares should a put buyer wish to exercise his selling rights ahead of July’s expiration. In taking on board that possibility the put writer is compensated by a 35 cent premium today, which would effectively lower the entry price on buying shares of MGM to $5.65. Implied volatility is creeping lower on theses options today and has once again broken the 100% barrier as markets calm. The fair-value of these puts at the time they were recorded this morning was 39 cents with implied volatility at 100%. To put declining volatility in perspective, a 10% drop in its reading to 91% over the course of the next week would theoretically reduce the put premium to 27 cents or 30% lower than fair value today. – MGM Mirage

IYR – Options activity observed in the July contract this afternoon may indicate some nearer-term bullish sentiment on the real estate ETF. Shares of the underlying fund are off by more than 2% to stand at $34.27. Traders appear to be taking advantage of richer put premiums on today’s decline by selling 3,000 puts at the July 30 strike price for 60 cents each as well as selling another 3,000 lots at the just out-of-the-money July 34 strike for 1.90 per contract. Put-shedding in isolation is generally a bullish signal, but we also noticed some 3,000 calls traded to the middle of the market at the July 38 strike price for a premium of 65 cents. Further, an additional chunk of 3,000 calls were purchased at the July 40 strike price for 33 cents apiece. The call options traded may or may not be the work of an IYR-bull. Plain vanilla call buying would suggest a potential near-term rally in the ETF, but the transactions could also represent the work of a bearish investor utilizing the premium proceeds from the sale of these options to fund put purchases. – iShares Dow Jones U.S. Real Estate Index ETF

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