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Thursday, November 30, 2023

Bullish Ddollar Index ETF Intrigues Once Again

Today’s tickers: UUP, VIX, FSLR, HMY, M, GMCR, CTRP & DOW

UUP – PowerShares DB US Dollar Bullish Fund – A pair of bullish risk reversals on the PowerShares US Dollar Bullish Fund suggests today’s sharp rally for the dollar will likely continue over the next several months. We observed massive bullish plays on the UUP over the past couple of weeks, some tied to machinations of whether or not the fund had enough shares in circulation. But today’s activity predicts far more extreme movements in the price of the dollar index. The UUP is current up 1.4% to $22.80, while the dollar index, which it supposedly tracks, is up just 0.7%. Investors sold 4,700 deep in-the-money put options at the December 29 strike for an average premium of 6.30 apiece, spread against the purchase of 4,700 calls at the same strike for one nickel each. The high-delta put options hold very little extrinsic value because expiration is just over one month away. Thus, investors are expecting the intrinsic value of the puts to decline. The only way this will occur is if the dollar rallies forcing the UUP to increase. If traders’ bullish predictions are correct, the value of the long calls will appreciate, while premium on the short puts erodes. Such a scenario allows investors to profit by buying back the puts for less than the 6.25 net premium received on the reversal. A similar uber-bullish strategy was employed at the January 2010 28 strike price where investors sold 4,250 deep-in-the-money puts short for about 5.30 each, and purchased the same number of calls for 5 cents apiece.

VIX – CBOE Vix index – With the equity market down and the dollar on the rise, investors across different asset classes today appear to be blaming one another for prevailing direction. No one seems to know why anything is moving in the fashion it is. The suggestion of course is that risk appetite is on the demise and fear is picking up. Compounding such indecision in the volatility class are trades suggesting ongoing disparate views on the fortunes for equities going forward. The so-called fear gauge is 5% higher at 24.90 today while trading has been two way. In the November options one investor loaded up on 25,000 call options at a 25 cent premium suggesting that the index will be above 25 when options expire next Tuesday. The December contract equally hinted at more volatility ahead as one traded bought the 27.5/35 call spread 25,000 times at a net 93 cents. In order for this trade to break even next month the Vix index would need to settle above 28.43. Arguing the bullish case another investor bought 15,000 put options at the December 20 strike, which suggests that volatility will subside into year end rally for equities.

FSLR – First Solar, Inc. – Bullish options activity appeared in the November contract despite the 2.5% decline in shares of the semiconductor company today to $116.98. A bull call spread on FSLR suggests one investor doubts shares will continue much lower. The trader purchased approximately 2,300 calls at the in-the-money November 115 strike for 4.75 each, spread against the sale of roughly the same number of calls at the higher November 120 strike for 2.44 apiece. The net cost of the transaction amounts to 2.31 per contract. Shares must recover through $117.31 in order for the contrarian trader to breakeven by expiration next Friday. Maximum potential profits of 2.69 per share are available to the call spreader if the stock rebounds up to $120.00. We note that FSLR traded as high as $120.14 during yesterday’s trading session.

HMY – Harmony Gold Mining Co. Ltd. – A tiny tap on the brakes of the gold rush was enough to force some investors to abandon bullish positions on the underground and surface gold mining company today amid the 5% decline in shares to $10.23. Gold prices retreated from a record high earlier today as the dollar rose. Traders originally purchased call options at the out-of-the-money January 12.5 strike to position for continued gains in the stock. Harmony’s shares were trending upward and rallied 16% from $9.59 on November 3, 2009, up to $11.09 on November 9, 2009. However, current declines inspired investors to take whatever reduced premium they could get their hands on. Approximately 19,500 calls were shed at the January 12.5 strike for an average premium of just 33 cents per contract. Investors were paying upwards of 1.00 per contract for the same call options a few days ago. Traders are cutting their losses, salvaging what premium is available in case shares of HMY continue to erode.

M – Macy’s, Inc. – Shares of the department store operator are recovering slightly from yesterday’s significant decline. The stock is trading 0.25% higher to $17.91. Option activity in the February 2010 contract suggests one investor expects little movement in price and lower volatility on Macy’s through expiration. The trader initiated a sold strangle by selling 4,000 puts at the February 16 strike for 1.09 apiece, and by selling 4,000 calls at the higher February 20 strike for a premium of 1.19 each. The gross premium enjoyed on the sale amounts to 2.28 per contract. The investor retains the full 2.28 premium as long as shares remain ‘strangled’ within the strike prices described through expiration. The risk to the trade is a rally above $22.28 in shares of Macy’s or a decline beneath $12.72. In either case option related losses would mount penny-for-penny.

GMCR – Green Mountain Coffee Roasters, Inc. – Shares of specialty coffee maker, Green Mountain Coffee Roasters, are 9.5% lower this morning to $68.94 as of 9:50 am (EDT). The Vermont-based firm doubled its profit in the fourth quarter, earnings 34 cents per share as compared with 18 cents in the previous year. Green Mountain’s share price slipped today because the firm stated first-quarter earnings are likely to disappoint. GMCR proffered first-quarter profit guidance of 11-15 cents per share while average analyst expectations range from 19-37 cents per share. Option implied volatility on the stock is lower by 28.87% following earnings to stand at 53.47%. Investors exchanged more than 18,600 option contracts on GMCR within the first 30 minutes of the trading session.

CTRP – CTrip.com International, Ltd. – The travel service provider’s shares jumped 8.5% to a new 52-week high of $69.73 today. CTRP posted better-than-expected third-quarter earnings that sent shares up as much as 13% after the close on Wednesday. Third-quarter profits of 39 cents per share exceeded average expectations of 32 cents. The firm also said it expects revenue growth in the fourth quarter. Investors traded 9,000 option contracts, or 20% of total existing open interest of 43,763 lots, by 10:15 am (EDT). Option implied volatility is 22.70% lower to stand at 51.55%.

DOW – The Dow Chemical Co. – Shares of the chemical manufacturer reached a new 52-week high on a 7.5% run up this morning to $28.71. The firm revealed it expects to earn $4.00-$4.50 in 2012, and stated the benefits of acquiring Rohm and Haas to its investors in a meeting today. The Michigan-based chemical company has pared noncore assets and slashed costs to reduce debt from the Rohm acquisition. Option traders exchanged more than 27,000 option contracts on Dow as of 10:30 am (EDT).

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