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Tuesday, February 27, 2024

ACE Call Options in Demand – Option Implied Volatility Explodes

Today’s tickers: ACE, EFA, HAL, AMAT, WHR, DE, JTX & WCG

ACE – ACE Limited – The surge in demand for call options on the insurance company today drove option implied volatility up 19.75% to 28.67%, while shares gained more than 2% to $49.78 during the trading day. Investors populating the December contract exhibited bullish sentiment on ACE by selling puts and buying calls. Approximately 3,000 puts were shed at the December 50 strike for an average premium of 1.51 apiece, while some 2,100 calls were purchased at the same strike for roughly 89 cents each. Call volume at the January 50 strike sky-rocketed to 21,666 contracts – on previous existing open interest of just 1,402 calls – as traders scooped up about 20,000 lots for a premium of 1.42 per contract. Investors long the January contract call options are positioned to accrue profits if ACE’s shares trade above the breakeven price of $51.42 by expiration.

EFA – iShares MSCI EAFE Index ETF – The exchange-traded fund, which includes stocks from Europe, Australasia and the Far East, attracted bearish option players despite the 2.5% rise in shares today to $56.88. One investor, who may hold a long position in the underlying stock, unfurled a ratio put spread in the January 2010 contract. The trader purchased 10,000 puts at the January 55 strike for an average premium of 1.39 each, and sold 20,000 puts at the lower January 52 strike for about 70 cents apiece. The investor pockets a net credit of 1 penny per contract on the trade and establishes downside protection in case shares of the EFA decline ahead of expiration. The 1 cent credit is ‘free money’ for the trader as long as the shares remain above $55.00 through expiration in January.

HAL – Halliburton Co. – Options activity on the oil and gas company today suggests at least one investor is bracing for potential share price erosion through expiration in January. Halliburton’s shares rose 1% during the session to $29.57. The trader responsible for the bearish ratio put spread is likely holding a long position in the underlying stock. If this is the case, today’s transaction provides downside protection for the investor. It appears 5,000 puts were purchased at the January 29 strike for an average premium of 1.24 apiece, spread against the sale of 10,000 puts at the lower January 24 strike for 18 pennies each. The net cost of the ratio spread amounts to 88 cents per contract. Downside protection kicks in if shares of HAL slip beneath the breakeven point at $28.12 by January’s expiration day.

AMAT – Applied Materials, Inc. – Shares of the semiconductor company climbed more than 4.5% today, reaching an intraday high of $12.93. Bullish investors positioned for continued upward movement in the price of AMAT’s shares by initiating plain-vanilla call-buying on the stock. The near-term December 13 strike had approximately 23,000 calls picked up for an average premium of 29 cents each. Investors long the December 13 strike calls may amass profits if shares surpass the breakeven price of $13.29 by expiration in a few weeks.

WHR – Whirlpool Corp. – Shares at household white-goods manufacturer, Whirlpool are higher by 3.6% today to $76.85 and a single combination trade in its options has landed it on our radar screen today. We’re pretty sure this was a plain-vanilla put spread using defensive options expiring in January at the 70 and 60 strikes. The trade, however, may have a twist to it. The 20,000 lot transaction appears to be the purchase of the upper strike and simultaneous sale of the identical amount of lower strike puts. Since the distance between the two strike prices is $10 the maximum gain is this value less the net cost of the two premiums, which is 1.55. The puts at the lower strike appear to have been sold at 50 cents this morning. That means that a slide for Whirlpool might deliver a maximum profit of 8.45 per contract in the unlikely event of a near-$17 decline in the share price. However, as we said above, there may be a twist here. Back in late October when shares were trading at $71.74 we can see the sale of a similar block of puts at the $60 strike at a 1.65 premium at that time. It is possible that today the investor is closing out that short position for a 1.15 profit and established a fresh short on the puts (writing premium) at the 70 strike. We’ll only learn more when open interest data is updated Wednesday.

DE – Deere & Co. – Shares of the agricultural equipment maker are up more than 1% today to $54.15, but options activity on the stock suggests investors are bracing for potential bearish movement in the price of the underlying through March of 2010. One DE-pessimist enacted a butterfly spread in the March 2010 contract. The investor might be protecting the value of a long stock position with the spread. Otherwise, the trader is outright bearish on Deere, and is hoping to amass profits to the downside by expiration. The spread involved the purchase of 15,000 puts at the March 50 strike for a premium of 2.70 apiece [wing 1], and the purchase of another 15,000 puts at the lower March 30 strike for 10 cents each [wing 2]. The wings of the butterfly were spread against the sale of 30,000 puts at the central March 40 strike for 60 cents premium apiece [body]. The net cost of the bearish play amounts to 1.60 per contract. Maximum potential profits of 8.40 per contract are available to the investor if shares plummet 26% from the current price to $40.00 by expiration in March. Profits, or downside protection on a long position in the underlying, kick in if Deere’s shares decline through the breakeven price of $48.40.

JTX – Jackson Hewitt Tax Service Inc. – JTX call options were in high demand today by investors positioning for continued upward momentum in the price of the underlying shares. The share price rose 3.6% during the session to $4.30. Plain-vanilla call buying occurred at the April 5.0 strike where investors scooped up approximately 6,600 calls for an average premium of 55 cents apiece. Call-buyers will break even if shares rally at least 29% over the current price to $5.55 by expiration in April. Additional bullish interest appeared at the July 5.0 strike where it looks like traders picked up some 3,000 calls for about 85 cents per contract. Option implied volatility slipped 12.61% to an intraday low of 80.52%. Option traders exchanged more than 10,800 contracts on the stock by 12:00 pm (EDT), which represents roughly 50% of the total existing open interest on JTX of 21,717 lots.

WCG – Wellcare Health Plans, Inc. – The provider of managed care services to government-sponsored health care programs appeared on our ‘hot by options volume’ market scanner after one bullish investor exchanged a couple of call spreads on the stock. WCG’s shares rallied nearly 5% to a new 52-week high of $34.60 during the trading session. The trader banked significant profits by unraveling one previously established call spread in the January 2010 contract. It appears the investor originally paid a net 2.70 per contract to buy a 1,500-lot January 25/35 call spread back on August 10, 2009. Today the trader neutralized the position to bank average net profits of 4.58 per contract. Next, the investor established a new bullish stance on the stock in the June contract. A fresh call spread was initiated through the purchase of 2,000 calls at the June 35 strike for 4.50 apiece, marked against the sale of the same number of calls at the higher June 45 strike for 1.35 each. The net cost of the transaction amounts to 3.15 per contract and positions the investor to accrue maximum potential profits of 6.85 each if shares surge to $45.00 by expiration in June. Option implied volatility on WCG contracted 8.22% today to 44.94%.


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