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Wednesday, April 17, 2024

Costco Puts Busy

Today’s tickers: COST, HRB, UNH, EEM, EWZ, XLE, DELL & RIMM

COST – July 45 strike puts are attracting traders today where 17,700 contracts have so far been traded with premiums reaching 1.30 by this afternoon. Shares in the company are lower but not by much at $46.27, but that’s been enough to boost put premiums by 30% today. Notable is the fact that this bearish strike is home to around 20,000 established bear plays. Not quite sure why the bearish tack for the retailer today, but options activity is certainly active. – Costco Wholesale Corp.

HRB – The financial services provider jumped onto our ‘hot by options volume’ market scanner this afternoon after one option player took a bullish stance on the firm. Shares of HRB have rallied approximately 1.25% to $15.49. Hoping for continued upward movement in the stock through expiration in October, the trader was seen selling 5,000 puts at the October 15 strike price for a premium of 1.20 apiece. It appears that he then purchased 5,000 calls at the higher October 16 strike price for 1.15 per contract. The trader receives a credit of one nickel per option contract and is looking for shares to rally through the breakeven point at $16.05 by expiration in four months time. Risk is of a share price decline through $13.80. – H&R Block, Inc.

UNH – Shares have rallied more than 4% to $25.03 today, prompting one investor to look for continued bullish movement in the stock through expiration in July. The trader initiated a ratio call spread by purchasing 7,500 now in-the-money July 24 strike calls for a premium of 2.15 apiece spread against the sale of 15,000 calls at the higher July 27 strike for an average premium of 70 cents each. The net cost of the optimistic play amounts to 75 cents and yields maximum potential profits to the investor of 2.25 per contract if shares can surge to $27.00 by expiration. Given the current price of the underlying, this individual has already surpassed the breakeven point on the trade at $24.75 and has realized gains of approximately 28 cents. – UnitedHealth Group, Inc.

EEM– We observed one investor who expects little price movement in shares of the emerging markets ETF through expiration in July. Shares of the fund are currently higher by less than 0.5% to $31.75. This individual established a sold straddle at the July 31 strike price by selling 20,000 calls for 1.76 apiece and 20,000 puts for an average premium of 1.46 per contract. The gross premium on the transaction amounts to 3.22 and is safe under this investor’s mattress if shares settle at $31.00 by expiration. The premium provides a buffer against losses as long as the price of the underlying does not rise higher than the breakeven point to the upside at $34.22 or all below the breakeven point to the downside at $27.78. We note that the ETF was trading at $34.66 just a few weeks ago on June 1, 2009, and was last trading beneath $27.00 at the end of April. – iShares MSCI Emerging Markets Index

EWZ – Shares of the Brazil ETF are slightly higher today by less than 1% to stand at $53.17. The EWZ ticker symbol took up residence on our ‘most active by options volume’ market scanner early on in the trading day after one investor initiated a large ratio put spread in the December contract. Motivating factors underlying this transaction may be downside protection on a long stock position, or it could be that the trader is simply bearish on the fund and hoping to profit from downward movement in price. The ratio spread involved the purchase of 15,000 puts at the December 45 strike price for a premium of 4.10 per contract spread against the sale of 30,000 puts at the lower December 35 strike for 1.55 apiece. The net cost of the trade amounts to 1.00 to the investor who stands ready to realize maximum potential profits of 9.00 if shares decline to $35.00 by expiration. The choice of the 35 strike is probably little to do with an ultimate target for this investor and probably has more to do with offsetting the cost of the 45 strike puts. To reach the lower strike price would require a shift down in Brazilian shares by one-third from present. The investor has about six months before the options expire and he will begin to profit on the transaction if shares fall 17% from the current price to breach the breakeven point at $44.00. – iShares MSCI Brazil Index ETF

XLE – The energy ETF’s shares have remained relatively flat at $50.12 today, but one investor expects the price of the fund to shift dramatically through expiration in July. The trader looked to the July 52 strike price to establish a bought straddle. The transaction involved the purchase of 22,000 calls for 1.35 each in combination with the purchase of 22,000 puts for a premium of 3.05 per contract. The net cost of initiating the straddle amounts to 4.40. Over the next four weeks the investor will amass profits if shares either rise above the breakeven point to the upside at $56.40 or decline beneath the breakeven point to the downside at $47.60. We note that the trader could in theory face potential profits before expiration should a jump in implied volatility force option premiums to higher current levels and it is advantageous for him to sell to close out the position. A rise in option implied volatility from the current reading of 37% could result in richer premiums at the July 52 strike price. – Energy Select Sector SPDR

DELL – Options activity in the January 2010 contract on Dell caught our eye as one trader’s sold strangle play suggests limited price movement through expiration at the start of next year. Shares of the PC manufacturer have slipped slightly today by less than 1% to stand at $12.67. The sold strangle was established through the sale of 10,500 puts at the January 10 strike price for an average premium of 71 cents per contract, combined with the sale of 10,500 calls at the January 15 strike for about 90 cents each. The gross premium pocketed on the trade amounts to 1.61 and is money-in-the-bank for this trader as long as shares remain strangled between the two strike prices described by expiration. If the price of Dell were to rise higher than the breakeven point to the upside at $16.61, or fall lower than the breakeven to the downside at $8.39, the trader will begin to accrue losses. – Dell, Inc.

RIMM– Perhaps memories of the 20% rally in RIMM’s shares following last quarter’s earnings announcement has incited the frenzy of option trading on the stock ahead of its first-quarter earnings scheduled for release after today’s closing bell. Analysts predict that earnings per share will come in at about 94 cents on revenue of $3.5 billion. The pre-earnings excitement has pushed shares higher by less than 1% to $77.88 this afternoon as the stock recovers from losses seen during the last week – we note shares are lower by 10% off an $86.00 peak this time one week ago. Option traders have heavily populated the June contract ahead of expiration tomorrow, with the July contract experiencing high trading volume, as well. There is good two-way action on RIMM options with notable volume in the June 80 and 90 calls, where traders are selling higher strikes to cheapen the cost of a bullish wager on the lower strike. Option implied volatility in the June contract exceeds 225% compare to the overall implied volatility reading on the stock at 70%. This has drawn some premium sellers to the June contract hoping that the swings won’t be so wild this time round. We’re not sure many wars were ever won on hope. Watch out for earnings this evening. – Research in Motion Limited

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