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Wednesday, September 28, 2022


Bearish Risk Reversal Anchored in Royal Caribbean Cruises

Today’s tickers: RCL, GE, YHOO, XLF, X, FCX, AIG, CF, JAVA & UAUA

RCL – Royal Caribbean Cruises Ltd. – Bearish option traders clawed-aboard global cruise company, Royal Caribbean, today despite the 0.5% increase in shares during the trading session to $24.24. A large-volume risk reversal in the June 2010 contract indicates rougher seas could cloud RCL’s horizon. One investor sold 20,000 calls at the June 30 strike for an average premium of 1.70 apiece, spread against the purchase of the same number of put options at the lower June 20 strike for 2.25 each. The net cost of the reversal amounts to 55 cents per contract. The investor responsible for the trade is likely long shares of the underlying stock. If this is the case, the long put position established today, provides downside protection beneath the effective breakeven point at $19.45. Conversely, if shares surge during the next seven months, the underlying stock position will be called away from the trader if shares exceed $30.00 by expiration in June.

GE – General Electric Co. – A sold straddle on General Electric this afternoon indicates one investor expects shares to settle at $16.00 by expiration in June of 2010. Shares edged slightly lower by less than 0.50% to $15.88 in late afternoon trading. The trader looked to the June 16 strike to sell approximately 5,000 calls for a premium of 1.61 apiece and 5,000 puts at the same strike for 1.89 each. The gross premium pocketed by the investor amounts to 3.50 per contract. The trader keeps the full 3.50 premium on the straddle if shares center at $16.00 through expiration. The investor may take profits ahead of expiration by buying back the short straddle for less than 3.50 per contract. Premiums on both calls and puts are elevated today because of the 6% increase in option implied volatility on the stock to 35.50%. The trader benefits from lower volatility on GE and from eroding time value of option premiums. Both factors drag option premiums lower and allow the trader to buy back the straddle in a profitable manner.

YHOO – Yahoo!, Inc. – The 0.5% decline in shares of the internet company to $14.93 did not deter one investor from taking a bullish stance in the April 2010 contract today. It appears the trader put on a ratio call spread to position for a rebound in shares by expiration. The investor purchased 2,500 calls at the April 15 strike for 1.32 apiece, and sold 5,000 calls at the higher April 17 strike for 56 cents premium each. The net cost of the transaction amounts to 20 cents per contract. Profits begin to accrue if shares of YHOO surpass the breakeven price of $15.20 by expiration. Maximum potential profits of 1.80 per contract are available to the call-spreader if shares jump 14% from the current price to $17.00 by expiration in April. Yahoo’s shares last traded above $17.00 on October 23, 2009.

XLF – Financial Select Sector SPDR ETF – Large-volume option plays on the financials exchange-traded fund caught our attention today as shares of the XLF rose 1% to $14.43. It appears one bullish investor sold about 150,000 out-of-the-money put options across various strike prices to purchase 50,000 out-of-the-money calls. The trader sold 50,000 puts at the January 12 strike for 12 cents each, 50,000 puts at the higher January 13 strike for 24 cents apiece, and finally shed another 50,000 puts at the January 14 strike for 51 cents per contract. The put sales were spread against the purchase of 50,000 calls at the January 16 strike for 16 pennies apiece. Let’s assume all 200,000 contracts exchanged by the investor today represent fresh activity. If this is the case, the trader pockets a net credit of 71 cents per contract, which he retains in full as long as shares of the XLF remain above $14.00 through expiration in January. Additional profits accumulate if shares of the fund rally 11% from the current price to surpass the $16.00-level by expiration day.

X – United States Steel Corp. – United States Steel was one of four steel companies named by a Goldman Sachs’ analyst whose shares investors should buy. The sector was upgraded from “neutral” to “attractive” in the expectation that favorable pricing will follow the sector’s fortunes out of recession. Steel and scrap prices, having hit rock bottom should improve next year thanks to rising demand from automakers and China. Shares in U.S. Steel responded thanks to the favorable note with a 3% rally to $44.39 with the 52-week high of $51.60 set in late-September clearly in sight. Option traders responded through buying December expiration calls from the 45 through 50 strikes and lifting marginally the reading of options implied volatility to 46.5%. The January contract was less active although the 45 strike price saw 1,000 contract trade at a premium of around 2.74.

FCX – Freeport McMoRan Copper & Gold, Inc. – At the same time Goldman removed shares of gold and copper miner, Freeport from its conviction “buy” list causing its share price a 1.7% reversal of fortunes to $82.75. As a result option trades sold December expiration calls at the $85 strike where volume rose to near-6,000 contracts representing almost one-third of the number of open options positions. Premiums quickly subsided on the bullish contracts having reached an intraday peak of 2.85 as investors responded to the removal of the weight of Goldman’s recommendation. Those calls slipped to a premium of 2.05 by lunchtime. Investors also took aim at more defensive posturing and bought December put options at the 80 strike driving the premium up by around one-third to 2.26. As a result of today’s movement, implied volatility, a measure of forward-looking uncertainty added a few basis points to 44.5%.

AIG – American International Group, Inc. – Shares of the insurance company are down more than 12% today to $29.19 after Sanford Bernstein slashed its price target on AIG by 40% to $12.00 from $20.00. Bernstein reiterated its ‘underperform’ rating on the stock today. Bearish option investors flooded the near-term December contract to purchase put options. AIG-pessimists picked up 4,200 puts at the December 17.5 strike for an average premium of 16 cents apiece. These contracts will land in-the-money if shares of AIG plummet 40% from the current price by expiration in December. Traders scooped up 3,300 puts at the December 20 strike for 23 cents each. The higher December 25 strike had approximately 13,500 puts purchased for an average premium of 61 cents per contract before accelerating declines in the underlying boosted premiums above 1.0 and put volume doubled to around 26,000 contracts. Finally, the now in-the-money December 30 strike attracted option bears who bought 6,700 puts for 1.78 each. Option implied volatility on the stock surged 44.8% to 81.2% by the middle of the trading session.

CF – CF Industries Holdings, Inc. – The manufacturer and distributor of nitrogen and phosphate fertilizer products experienced a 0.25% increase in shares today to stand at $84.18. One investor initiated a bearish option strategy in the January 2010 contract. It appears the trader established a put spread by purchasing 4,000 puts at the January 80 strike for a premium of 3.50 apiece, marked against the sale of the same number of puts at the lower January 75 strike for an average premium of 1.95 each. The net cost of the spread amounts to 1.55 per contract. Perhaps the investor is long shares of the underlying stock. If this is the case, the trader is utilizing the put spread to protect the value of the underlying position in the event that shares of CF decline beneath the breakeven price of $78.45. Option implied volatility on the stock is up on the day at 42.66%.

JAVA – Sun Microsystems, Inc. – Large chunks of put options traded on JAVA this morning amid a slight 0.25% increase in shares to $8.55. It appears some 20,000 puts were sold at the December 8.0 strike for about 10 cents each, while 50,000 puts were likely purchased at the lower December 7.0 strike for 6 pennies apiece. Perhaps the put activity represents a large volume ratio credit spread.

UAUA – UAL Corp. – It looks like bullish investors are purchasing call options on the owner and operator of American Airlines this morning. UAUA’s shares are up 4% to $7.55 as of 10:25 am (EDT). More than 10,000 calls changed hands at the January 2010 9.0 strike price. Option traders buying calls are positioning for continued upward movement in the price of the underlying stock through expiration in January.

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