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Saturday, October 1, 2022


Low Cost Calendar Spread in the Homebuilders ETF

Today’s tickers: XHB, YHOO, S, MSFT, WFC, TIF, AMZN, & COF

XHB – Shares of the homebuilders fund have gained 0.5% during today’s trading session to arrive at the current price of $13.58. The XHB ticker symbol jumped onto our ‘most active by options volume’ market scanner after some 80,000 call options were traded on the ETF. Perhaps the bullish activity was fueled by reports that suggest the housing market has reached a bottom. New and existing home starts are said to have improved for the month of June, and at least some investors are positioning for a rally by the end of 2009. It appears that 20,000 calls were purchased at the September 14 strike price for a premium of 75 cents each and spread against the sale of 20,000 calls at the December 16 strike for 65 cents apiece. The plain-vanilla spread yields a net cost of just 10 pennies per contract. With the nearer-term calls just 42 cents out-of-the-money, we believe this investor would like the ETF to exceed $14.00, at which point he would exercise the calls and take delivery of the underlying shares by expiration. He would then like to see the XHB rally at least 14.25% to $16.00 by expiration in December. If this scenario should come to fruition, the trader will have exited the position by having the shares called away from him, with 13.5% gains tucked away under his mattress. Finally, there were another 40,000 calls that traded to the middle of the market at the December 16 strike for 58 cents each. While it is likely the work of a bullish investor, we must wait until Monday to check the open interest at that strike to confirm. – SPDR Homebuilders ETF

YHOO – Shares have recovered after spending a portion of the trading day in the red. Shares of the internet destination have climbed slightly higher by 0.5% to stand at $17.45. One bullish trader swooped into the September contract in order to initiate a plain-vanilla call spread. The transaction involved the purchase of 10,000 calls at the September 18 strike price for 92 cents apiece spread against the sale of 10,000 calls at the higher September 20 strike for 39 cents each. The net cost of the trade amounts to 53 cents and yields maximum potential profits to the investor of 1.47 if the stock rises to $20.00 by expiration. Shares must gain 6% before the trader begins to realize profits at the breakeven price of $18.53. Additional call selling at the September 20 strike price suggests other investors believe shares are likely to hover beneath $20.00 by expiration in September. – Yahoo!, Inc.

S – The more than 2.5% decline in shares of the communications company to $4.53 today was ignored by bullish investors hungry for a rally by expiration in September. We observed fresh call buying action at the September 5.0 strike price as 2,500 lots were picked up for 30 cents each. The higher September 7.0 strike attracted more optimistic individuals who got long of 20,000 calls for a nickel per contract. If shares can climb higher by a whopping 56% by expiration, investors holding the higher strike calls will begin to profit at the breakeven point of $7.05. Traders who purchased the September 5.0 strike calls are hoping the stock rises at least 17% to $5.30 by expiration. Sprint has not traded above $5.30 since June 17, 2009, and has not edged higher than $7.05 since September 25, 2008. – Sprint Nextel Corp.

MSFT – Yesterday’s nervousness as played out by Microsoft skeptics in the options pit proved to be quite prescient. Following a lousy earnings report with little optimism for near-term recovery in demand, Microsoft’s shares slipped 9% to $23.26 today. Mid-morning it appeared that an investor used the January contract to place a bearish option trade by selling 15,000 calls with a 25 strike to pick up 15,000 puts at a net 6 cent credit. The combination in its raw form pervades pessimism and provides a breakeven just below the put strike at $20.00 thanks to the offset of the 1.03 received from the call sale. The position could alternatively have been protection against an opportunist long position on the stock, which fell to as low as $22.81 earlier. For example buying stock at $23.00 coupled with this protective option strategy would provide an 8.7% return if the shares reach the short call strike by expiration. – Microsoft Corp.

WFC – Massive chunks of puts were traded on WFC today as shares continued lower by 3% to stand to $23.53. The stock began this week just 2 pennies shy of $26.00 and surrendered nearly 11% of its value over the past five trading days when it reached its lowest intra-day price of $23.17 today. Some investors were able to bank gains today despite the dismal week Wells Fargo experienced. One trader purchased to close a 50,000-lot put position that he originally sold short for 50 cents per contract at the August 17.5 strike price back on August 7, 2009. Today he bought back all 50,000 puts for just 20 cents each, padding his wallet with profits of 30 cents apiece, for a total of $1,500,000. Another massive trade observed on WFC was the purchase of 65,000 puts at the now in-the-money October 24 strike price for 3.10 each. These options, likely purchased by an investor who is long shares of the underlying, provide downside protection if shares slip beneath the breakeven point at $20.90 by expiration. Increasing investor uncertainty was apparent from the spike in option implied volatility on the stock to a high of 55% today, up from yesterday’s closing reading of 45%. – Wells Fargo & Co.

TIF – Bearish option traders feasted on a breakfast of hearty puts at Tiffany’s this morning amid a slight 1% decline in shares to $29.14. Perhaps investors’ appetite for downside protection on the specialty retailer stems from fears that consumer spending on luxury-goods has yet to recover. The most pessimistic individuals purchased 3,400 puts at the September 24 strike price for an average premium of 60 cents apiece. Shares of TIF would need to tumble 19% before profits begin to amass beneath the breakeven point at $23.40. The higher September 26 strike price had 1,200 put options picked up for 1.01 per contract. Finally, the just out-of-the-money September strike attracted the heaviest volume with some 25,300 puts coveted by investors for 2.05 each. A 7.5% decline in the price of the underlying must occur before downside protection kicks in beneath the breakeven point at $26.95. – Tiffany & Co.

AMZN – Despite an 8.5% slide in its share price following earnings at the world’s largest online retailer, today’s put option activity tells a rather different story. Shares have declined to $85.90 while put writers are banking on a rebound after the next set of earnings by October. Noteworthy was a credit put spread involving the October 90/75 strike puts where an investor took the credit from the sale of 6,900 puts at the higher 90 strike in exchange for paying out a lesser amount at the lower strike. Should shares at Amazon clear the 90 strike through expiration with a mere 4.8% rally, the full net 6.18 premium from today’s activity. Currently 4.10 of that premium is purely intrinsic. A share price rally and the approach of expiration would be two factors benefiting this investor’s view. At the 95 strike investors dumped 1,700 well in-the-money puts likely in the same expectation. Option implied volatility – another factor that would reduce put premiums has cratered in the earnings aftermath by 17% to 39%. – Amazon.com, Inc.

COF – Investors in the financial services firm should feel good about having COF in their wallets today as the stock gained nearly 7% to $29.76 by lunchtime. Capital One’s reported second-quarter losses, which were less dismal than analysts had anticipated, helped boost shares upward. The firm posted a loss of 65 cents per share versus the average Street consensus of 73 cents. Option traders responded by locking in gains experienced in the rally. The now out-of-the-money September 29 strike price had 15,000 puts purchased for an average premium of 3.53 per contract. Investors looking for much cheaper downside protection bought 2,200 puts at the lower September 25 strike for 1.66 each. Finally, investors hoping for a continued rally purchased calls in the near-term August contract. The now in-the-money August 29 strike had about 1,100 calls scooped up for 2.00 each while the higher August 30 strike price had 4,000 calls coveted for an average premium of 1.52 apiece. Shares must gain another 6% for call-buyers at the higher strike to begin to accumulate profits by expiration. – Capital One Financial Corp.


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Why not just to simly sell the Dec 16 put for $3.00. If indeed XHB will rally to 16 by Dec expiration then he will end up making almost 100% on his margin outlay.

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