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Friday, July 19, 2024

Brazilian Stocks Capture Option Traders’ Imagination

Today’s tickers: VALE, EWZ, NYX, PFE, HOG, XRT, S & ROVI

VALE – Vale S.A. – Rio de Janeiro-based mining company, Vale S.A., experienced a 6.25% surge in shares today to $26.57. Perhaps the jump in shares is due to unconfirmed news the company plans to invest $5.8 billion to expand projects in the Brazilian state of Minas Gerais. In options-land one investor took a bullish stance by selling puts to buy calls. It appears the risk reversal involved the sale of 4,000 puts at the November 23 strike for 45 cents apiece, spread against the purchase of 4,000 calls at the higher November 28 strike for 38 cents premium each. The investor receives a net credit of 7 pennies per contract on the trade. He will retain the full credit as long as shares of VALE remain higher than $23.00 through expiration day. To add to profits shares must climb 5% higher to surpass the breakeven price of $28.00.

EWZ – iShares MSCI Brazil Index ETF – Bullish call action in the March contract today certainly jives with the 3.25% rally in shares of the exchange-traded fund to $75.18. An investor hoping for further upward movement in the price of EWZ shares enacted a call spread. The trader bought 2,500 calls at the now in-the-money March 73 strike for an average premium of 7.00 each, and simultaneously sold 2,500 calls at the higher March 78 strike for 4.54 apiece. The net cost of the bullish play amounts to 2.46 per contract. Thus, the investor stands to accumulate maximum potential profits of 2.54 if shares rise to $78.00 by expiration in March. Profits start to accumulate if shares break through $75.46, which is just 28 cents above the current price per share. But, the stock must climb 4% to $78.00 for the investor to revel in maximum available profits of $635,000.

NYX – NYSE Euronext, Inc. – Bullish call buying this afternoon pushed New York Stock Exchange operator, NYSE Euronext, onto our ‘most active by options volume’ market scanner. Shares of NYX are currently trading 5% higher to stand at $29.81. Investors expecting continued upward movement in the stock scooped up call options in the November contract. The November 30 strike had 2,100 calls purchased for an average premium of 1.13 each, while the November 31 strike had 1,200 calls coveted for 82 cents premium apiece. Finally, super-bullish traders looked to the higher November 33 strike to take ownership of 1,400 calls at 34 cents a-pop. Optimistic investors holding the higher strike calls will accumulate profits if shares of NYX rise 12% from the current price to surpass the breakeven point at $33.34 by expiration next month.

PFE – Pfizer, Inc. – Shares of the world’s largest drug maker rose 2.5% to $17.20 on news the company won U.S. and Canadian regulatory approval for its $68 billion acquisition of Wyeth. One investor took to the December contract to position for further upside gains in the stock by expiration. It appears he partially financed the purchase of a call spread by selling out-of-the-money put options. The three-legged transaction involved the sale of 5,000 puts at the December 15 strike for 24 cents apiece. The puts were spread against the purchase of 5,000 calls at the December 17 strike for 68 cents premium, and the sale of 5,000 calls at the higher December 19 strike for 13 cents each. The net cost of the bullish play amounts to 31 cents per contract. The December 17 strike call options are now in-the-money by 20 pennies, and shares need only increase 11 cents more for the investor to breakeven on the trade at $17.31. Maximum potential profits of 1.69 per contract are attainable if shares of PFE rally 10% to $19.00 by expiration in December.

HOG – Harley-Davidson, Inc. – Shares of the motorcycle manufacturer jumped nearly 7% to $26.32 after receiving an upgrade to ‘outperform’ from ‘market-perform’ at Wells Fargo. HOG-bulls reacted to the positive news by shedding puts in the October contract. The October 25 strike had more than 2,300 puts sold for 35 cents premium, while the higher October 26 strike had 1,500 puts sold for an average of 69 cents apiece. Put-selling investors retain the full premium on the sale as long as the options remain out-of-the-money through expiration on Friday.

XRT – SPDR S&P Retail ETF – With September’s retail sales surprisingly strong compared to predictions of a larger decline, shares at the retail ETF are 1.6% higher at $35.95. the rally appears to have inspired one investor to purchase a block of 15,000 in-the-money call options expiring in December for a 2.90 premium. The share price by expiration must be above $36.90 in order for this transaction to make money, but the tactic is most likely to achieve a longer-term stake in shares at retailing companies since the investor chose a higher delta (in-the-money) option. Elsewhere the November 37 strike calls were bought 10,000 times at a premium of 80 cents with investors hoping for ongoing consumer-led strength.

S – Sprint Nextel Corp. – Long-term bullish trades in the May 2010 contract pushed the telecommunications company onto our ‘most active by options volume’ market scanner this morning. Shares have added nearly 1.25% during the session to stand at $3.45. Options activity by one investor suggests the stock may recover significantly by expiration in May. The trader appears to have sold 7,500 puts short at the May 2.0 strike for 15 pennies apiece in combination with the sale of another 7,500 puts at the higher May 3.0 strike for 53 cents each. The investor sold the puts in order to finance the purchase of 10,000 calls at the May 5.0 strike for 40 cents per contract. The three-legged combination play results in a net credit to the trader of approximately 28 cents. Additional profits are available if shares rally 45% from the current price to surpass the breakeven point at $5.00 by expiration. We note that implied volatility jumped 17% during the session, from an opening value of 80% to the current reading of 93.5%. Analysts currently predict a 14 cent per share loss when quarterly earnings are revealed ahead of the market opening on October 29.

ROVI – Rovi Corp. – Investors in software company Rovi Corp. are probably feeling the pain of the 7.5% decline in shares today to $29.73. A recent analyst upgrade appears to be riddled with a sense of guarded optimism on its prospects and appears to blame its lofty share price of late with merger talk. However, one option trader populating the November contract will likely profit despite the bearish move in shares. The investor utilized a short strangle to take advantage of higher volatility on the stock. Implied volatility on ROVI rose 18% during the session to 53%. The trader sold a strangle by shedding 2,500 puts at the November 25 strike for 33 cents apiece, and simultaneously selling 2,500 calls at the higher November 30 strike for 1.97 each. The gross premium of 2.30 per contract may be fully retained by the investor as long as shares remain ‘strangled’ within the confines of the strike prices described above through expiration day. We note that this individual probably does not need to wait until expiration to take profits. Declines in volatility and the eroding time value of the contracts will inevitably cheapen option premiums. Thus, the trader may choose to close out the strangle by buying back the options for less than the initial cost of the position.

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