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Wednesday, April 17, 2024

Brazil ETF Investor Employs Covered Call Strategy Through December

Today’s tickers: EWZ, XLF, RVSN, MHK, COST, AKAM, & LLTC

EWZ – iShares MSCI Brazil Index ETF – Shares of the Brazil exchange-traded fund edged 0.5% lower to $72.55, perhaps inspiring the put spread we observed in the November contract. It appears one investor purchased 3,000 puts at the November 71 strike for 2.70 apiece, and simultaneously sold 3,000 puts at the lower November 65 strike for 1.00 each. The net cost of the put spread amounts to 1.70 per contract, thus yielding downside protection beneath the breakeven point at $69.30 through expiration next month. Longer-term activity seen in the December contract looks to be a covered call. It seems 25,000 calls were sold at the December 90 strike for an average premium of 13 pennies each. The investor responsible for the trade probably purchased an equivalent number of shares of the underlying stock at the time the calls were sold today. If this is the case, the investor reduced the cost of buying the shares to approximately $72.18 apiece by selling the call options. The short call position serves as an effective exit strategy for the investor if the fund trades above $90.00 by expiration. Shares of the ETF must rally 24% from the current price for the investor to have the underlying shares called away. If this occurs by expiration, the trader will enjoy the 24% gains on the rally in the stock, and walk away with no outstanding position in the fund.

XLF – Financial Select Sector SPDR – Fresh options activity in the March 2010 contract on the financials exchange-traded fund looks like a bearish risk reversal using deep in-the-money put options. Shares of the XLF have slipped 1.5% during the trading session to $15.13. It appears 5,500 calls were sold short at the March 19 strike for a premium of 30 pennies apiece to partially offset the cost of buying 5,500 puts at the same strike for 4.30 each. The net cost of the reversal amounts to 4.00 per contract. The breakeven point on the trade resides at $15.00. Thus, if the investor holds a long position in the underlying fund, downside protection is provided by the puts if shares slip more than 13 cents from the current price to breach the breakeven price of $15.00 by expiration next year.

RVSN – RADVision Ltd. – Telecommunications equipment designer and developer, RadVision, experienced a 1.75% decline in shares this afternoon to $5.71. Despite the dip in shares, one investor made a bullish move in the November contract. It appears the trader sold 5,000 puts short at the November 5.0 strike for a premium of 20 cents per contract – or a total of $100,000. The investor will retain the full premium received on the sale as long as shares of RVSN remain higher than $5.00 through expiration next month. The 20 cent option premium serves as a buffer against losses in case the stock falls beneath the $5.00-level. The investor receives the premium in exchange for bearing the risk that the puts land in-the-money, and shares of the underlying stock are put to him at an effective price of $4.80 apiece. That would set this investor back $2.5 million do. Losses to the trader will accumulate if shares fall beneath $4.80 – the breakeven point to the downside – by expiration day.

MHK – Mohawk Industries, Inc. – New coverage from Barclays yesterday, assigned Mohawk Industries a rating of ‘equal weight/positive’, and a target share price of $49.00. Today, bullish option traders took an interest in call options on the stock as shares rose more than 3% to $49.23. Call option volume of 4,100 contracts at the near-term October 50 strike rose to seven times that of existing open interest at the strike of 580 lots. At least 1,700 of the calls were purchased for an average premium of 35 cents each. Investors long the calls will accumulate profits by Friday if shares rally a minimum of 2% to surpass the breakeven price of $50.35. We note that shares of MHK were trading above $51.00 just last month on September 23, 20009.

COST – Costco Wholesale Corp. – Shares of the merchandise warehouse operator rose nearly 1.5% during the trading session to $58.77. A chunk of calls purchased in the front-month today indicates some investors expect continued upward movement in shares by expiration this Friday. Approximately 8,000 calls were purchased at the October 60 strike for 15 cents apiece. Shares of COST must increase at least 2% to $60.15 for investors to amass profits.

AKAM – Akamai Technologies, Inc. – Investors took up optimistic positions on the web content delivery and application company today amid a 3% rise in shares to $20.71. Analysts expect AKAM to report earnings of 35 cents per share on revenue of $199.8 million for the third-quarter, when the firm reveals earnings on October 28, 2009. Bullish traders purchased call options in the front month despite the fact that the contracts expire on Friday ahead of the earnings announcement. Approximately 1,400 calls were scooped up at the now in-the-money October 20 strike for 20 cents apiece, while the higher October 21 strike had 3,400 calls purchased for 29 cents each. The most hopeful investors bought 1,200 calls at the October 22 strike for 14 pennies per contract. Perhaps call-buyers plan to sell the contracts at a profit before the calls expire at the end of the week. Traders will likely accrue profits if implied volatility and upward movement in shares continues to boost option premium at the strike prices described. AKAM-bulls need only close-to-sell call positions at a higher premium than they paid initially to bank profits by expiration day.

LLTC – Linear Technology Corp. – The semiconductor company edged onto our ‘hot by options volume’ market scanner amid a 0.5% improvement in shares to $28.76. Varied option plays caught our eye today as one investor initiated a bullish position and another trader banked gains on an existing short put position. The near-term October contract at the 30 strike had 1,500 calls picked up for an average premium of 33 cents apiece. The transaction appears to be the work of one individual who hopes shares increase 5% to surpass the breakeven point on the trade at $30.33 by Friday. The other trade smells like profit taking. It appears the investor originally sold 9,950 puts short at the November 24 strike for approximately 78 cents apiece, back on August 4, 2009. Today he bought back the put options for 25 cents each. Thus, the investor banked profits of about 53 cents per contract for a total of $527,350. Option implied volatility on LLTC rose during the session from an opening value of 38% to an intraday high of 42%.

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