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Emerging Markets Heading Down, Say Option Traders

Today’s tickers: EEM, POT, JAVA, BARE, SHAW, EWZ & KG

EEM – iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets exchange-traded fund are down 1.25% to $40.77 as we head toward the closing bell this afternoon. One bearish option trader exchanged 70,000 contracts in the January 2010 contract to protect against potential declines in the EEM through expiration. It appears the investor sold 35,000 calls at the January 41 strike for an average premium of 2.34 apiece. A chunk of 25,000 of those call options were spread against the purchase of 25,000 puts at the same January 41 strike for a premium of 3.00 per contract. The remaining 10,000 calls were spread against the purchase of 10,000 puts at the lower January 34 strike for 81 pennies each.

POT – Potash Corporation of Saskatchewan, Inc. – The Canada-based potash producer rose more than 2.5% to $96.72 despite the overall bearish trend for the larger marketplace today. Plain-vanilla call buying suggests bullish investors are hoping POT’s shares continue on the up-and-up through the end of 2009. Approximately 4,000 calls were picked up at the November 100 strike for an average premium of 3.05 apiece. More optimistic individuals looked to the December 105 strike to get long of some 6,200 calls for about 3.02 per contract. Investors holding the December 105 strike calls are now positioned to accumulate profits if shares of POT rally at least 12% from the current price to breach the breakeven point at $108.02.

JAVA – Sun Microsystems, Inc. – Call-selling and put-buying in the January 2010 contract suggests investors expect JAVA’s shares could experience further declines before the year is over. Shares fell less than 0.5% to $9.13 during the trading session. It appears traders sold 4,500 calls at the in-the-money January 9.0 strike for 40 cents apiece. Perhaps these individuals are throwing in the towel on JAVA, salvaging whatever premium they can in case the stock falls below $9.00. Additional bearishness took place at the January 7.5 strike where investors bought more than 16,000 puts for an average premium of 16 cents per contract. Perhaps put-buyers are long shares of the underlying stock. If this is the case, downside protection from the put options will kick in if shares plummet 20% to $7.34 by expiration in January.

BARE – Bare Escentuals, Inc. – The cosmetics and skin care products company popped up on our ‘hot by options volume’ market scanner this morning due to the actions of one investor. Shares suffered a slight 0.5% decline thus far in the session to stand at $13.80. It appears the trader reeled in significant gains by employing a calendar roll. The investor originally purchased 2,500 calls at the in-the-money October 12.5 strike for 50 cents apiece back on September 16, 2009, when shares were trading at $11.31. The trader was rewarded for his bullishness today when he sold the contracts for 1.30 each. Net profits on the sale amount to 80 cents per contract or $200,000. The investor then shelled out 2.15 apiece to reestablish the 2,500-lot call position at the November 12.5 strike. Profits from the new bullish stance begin to accumulate if shares rise 6% to surpass the breakeven price of $14.65 by expiration next month.

SHAW – Shaw Group Inc. – In late Thursday afternoon trading when shares at power-plant builder Shaw Group were trading at $31.31, an investor paid just 70 cents to bag 2,500 put options securing rights to sell shares in the company at a fixed $32.00 each. Today an analyst has lowered the prospects for the company, which owns a 20% stake in Westinghouse Electric, after pointing to a Thursday decision by the Nuclear Regulatory Commission that raised safety issues over a nuclear plant built by its partner. While the full details or responsibilities are somewhat sketch in media comments we’ve read, the report says the plant might not withstand a tornado, earthquake or high winds. So we’re guessing that today’s 9.2% slide in Shaw’s share price is one of investors acting now and asking for gory details later. From our perspective the options activity once again turned up on our market scanners as relatively high volume for this company. The 2,500 lot appears to have been sold today at a 2.83 premium or a 2.13 profit for, dare we say, windfall gains of $532,500.

EWZ – iShares MSCI Brazil Index ETF – Shares of the exchange-traded fund are trading slightly lower today by less than 0.5% to $75.70. Some investors scooped up downside protection in the November contract while others purchased bullish call options. A bearish put spread was established through the purchase of 10,000 November 74 strike puts for a premium of 3.10 apiece, spread against the sale of 10,000 puts at the lower November 69 strike for 1.45 each. The net cost of the transaction amounts to 1.65 per contract and provides protection if shares decline beneath the breakeven price of $72.35 by expiration. In contrast, about 2,000 call options were purchased by optimistic traders at the in-the-money November 75 strike for an average of 3.30 apiece. Bullish call buyers may profit by expiration if shares of the EWZ rise at least 3% to $78.30.

KG – King Pharmaceuticals, Inc. – A bullish risk reversal on the pharmaceuticals company suggests one investor expects shares of KG to improve by expiration in January 2010. Shares edged less than 0.25% lower thus far to stand at $11.15. The optimistic investor shed 2,000 puts at the January 10 strike for 50 cents premium in order to partially offset the cost of purchasing 2,000 calls at the higher January 12.5 strike for 56 cents apiece. The net cost of the reversal is reduced to just 6 pennies per contract. Shares of KG must gain at least 12.5% by expiration in order for the trader to begin to accrue profits above the breakeven point at $12.56.


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