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Wednesday, December 6, 2023

Human Genome Sees Modest Bullish Plays After Analyst Predicts Surge

Today’s tickers: HGSI, BRCM, AAP, VIX & EWC

HGSI– Shares of the biopharmaceutical company have reached a new 52-week high today, rising 7.5% to $16.00, surpassing the old high for the past year of $15.72 attained on August 4, 2009. Helping to boost shares was the reiteration of an ‘outperform’ rating on the stock and a target price of $30.00 by analysts at Leerink Swann today. Bullish option trades were observed on HGSI this morning with call activity outweighing that of puts by a factor of more than 3-to-1. One investor initiated an optimistic play by purchasing 1,500 calls at the September 16 strike price for a premium of 1.59 apiece. He reduced the cost of getting bullish by spreading the purchase against the sale of 1,500 calls at the higher October 17.5 strike for 1.46 per contract. The net cost of the transaction amounts to just 13 cents and provides the investor with an effective exit strategy by expiration in October if the stock should surpass $17.50. If the trader chooses to take delivery of the underlying shares by exercising the calls in September, and shares rise above $17.50 by expiration in October, he will ultimately bank profits of 1.37 per contract or a total of $205,500 by having the shares called away from him. – Human Genome Sciences, Inc.

BRCM – The producer of semiconductors for wired and wireless communications appeared on our ‘most active by options volume’ market scanner after investors began hoarding put options in the September contract. Shares of BRCM are currently lower by more than 2% to stand at $26.62. Perhaps bracing for further near-term declines, traders picked up some 3,000 puts at the in-the-money September 28 strike price for a premium of 2.25 apiece. Additional downside protection was picked up at the now in-the-money September 27 strike where 5,000 puts cost an average 1.58 each. Finally, the most bearish traders purchased 5,000 puts at the lower September 25 strike price for a premium of 80 cents per contract. Investors long the out-of-the-money put options must see shares of BRCM decline another 9% before profits begin to amass beneath the breakeven point to the downside at $24.20. – Broadcom Corp.

AAP – The specialty retailer of automotive parts and accessories edged onto our ‘hot by options volume’ market scanner after one investor established a ratio put spread on the stock. Shares have slipped lower by more than 1.5% to arrive at the current price of $42.25. The bearish trader initiated the position by purchasing 2,500 puts at the in-the-money September 45 strike price for a premium of 2.10 apiece spread against the sale of 5,000 puts at the lower September 40 strike for 55 cents per contract. The net cost of the transaction amounts to 1.00 and yields maximum potential profits of 4.00 if shares decline to $40.00 by expiration. The investor has already begun to amass profits of approximately 1.75 apiece because the current market price of the stock is beneath the effective breakeven point at $44.00. An additional 5% decline in the price of AAP is required for the trader to pocket the maximum amount of available profits. But, he must be careful because he is short twice as many puts as he is long. This ratio implies that he stands ready to have the shares underlying 2,500 contracts put to him by expiration if the stock falls beneath $40.00 and the puts are exercised. – Advance Auto Parts, Inc.

VIX – Much was made Monday of a Bloomberg news story indicating that option traders were looking for a jump in the degree of implied volatility in the market. Ergo, the stock market is due a sharp decline. It’s true that the Vix futures market indicates a near-term rise is expected volatility through October, but that’s likely tied to the perspective that September has a bad history for stock market performance. Investors clearly sense that it’s too early to throw the life buoy out of the raft especially when the market is navigating the crest of a wave, albeit a bullish one. The Vix index reacted to a triple-digit loss for the Dow industrials today by rallying 6.2% or 1.5 points to 26.54. We’re left scratching our heads today trying to interpret a 1*3 ratio call spread in the September expiration Vix options. Some 25,000 call options changed hands at the 37.5 strike against 75,000 at the 47.50 strike. We’re a little blind (courtesy to time and sales data) which way the investor is positioning. Typically the purchase of the lower strike would be offset by the sale at the higher strike, but it appears that it was the 37.5 strike that was sold today. If this is the case, the investor is taking a credit of around 10 cents per contract but bears the risk of a spike in implied volatility by expiration between the two strikes. – CBOE Volatility Index

EWC – Shares of the Canada fund have declined nearly 3% during the trading session to $23.17. Options activity in the September contract today suggests that investors may expect continued declines through expiration. It appears that approximately 11,000 puts were picked up at the September 22 strike price for an average premium of 65 cents apiece. Investors responsible for the put action may currently hold long positions in the underlying. If this is the case, downside protection would kick in if shares of the EWC slip below the breakeven price of $21.35 by expiration. Otherwise, traders may simply be hoping to amass profits beneath the breakeven point. This would require shares to fall another 8% from the current price by the third Friday in September. – iShares MSCI Canada Index

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