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Put Volume Explodes on iShares MSCI Hong Kong Index ETF

Today’s tickers: EWH, HPQ, M, GLD, LCC, KRE, BBY, WAG & DYAX

EWH – iShares MSCI Hong Kong Index Fund – The EWH popped onto our ‘most active by options volume’ market scanner today after one investor traded 70,000 put options on the fund. Shares of the ETF are up 0.25% this afternoon to stand at $16.22. It appears the trader shed 35,000 puts at the January 14 strike for 10 cents apiece in order to partially offset the cost of purchasing 35,000 puts at the June 14 strike for 65 cents each. The net cost of the protective play amounts to 55 cents per contract. The nearer-term short put position in the January contract implies the investor does not expect shares to dip below $14.00 by expiration in less than two months. The investors stands ready to have a whopping 3,500,000 shares of the underlying put to him at $14.00 apiece in the event that the put options do land in-the-money. The long put position in the June 2010 contract suggests the trader is already long the stock. He is most likely extending downside protection on the underlying position for the next seven months before expiration. Shares of the EWH would need to fall 17% from the current price in order for downside protection to kick in beneath the breakeven point at $13.45. We note that shares of the fund have traded above $14.00 since July 15, 2009.

HPQ – Hewlett-Packard Co. – Medium-term bullish trading graced the global technology company’s February 2010 contract despite a 1% decline in HPQ shares this afternoon to $49.06. A risk reversal by one option player suggests shares could increase significantly by expiration in February. The trader sold 12,000 puts at the February 40 strike for an average premium of 27 cents apiece, and bought the same number of calls at the higher February 60 strike for 8 pennies each. The transaction yields a net credit of 19 cents per contract. The investor retains the full credit as long as HPQ’s shares remain above $40.00 through expiration day. Additional profits accumulate if the stock surges 22% higher than the current price to surpass the $60-level. The long call position probably serves more as a stop loss, or insurance policy, on the trade in the unlikely event that shares do jump more than 22% in the next three months. The reversal was more likely motivated by the 19 cent credit received rather than by the expectation that the February 60 strike calls will land in-the-money ahead of expiration.

M – Macy’s, Inc. – Shares of the operator of Macy’s and Bloomingdale’s retail stores are up nearly 1.5% to $16.23 today. Perhaps the appreciation in share price inspired the bullish activity we observed in the February 2010 contract. It appears one optimistic investor initiated a risk reversal by selling 6,000 puts at the February 15 strike for a premium of one dollar apiece, and purchasing the same number of call options at the higher February 17 strike for 1.20 each. The sale of the put options offset the cost of buying the calls, reducing the net cost of the transaction to approximately 20 cents per contract. The investor responsible for the bullish play profits if shares rally 6% from the current price to surpass the breakeven point at $17.20 by expiration. Option implied volatility on the stock edged 2.84% lower during the session to 49.26%.

GLD – SPDR Gold Trust ETF – A bevy of bullish option traders populated the gold exchange-traded fund today as the price of gold reached another all-time high. Shares of the GLD traded up to $119.12 earlier in the session. Investors utilized a variety of option strategies on the fund to solidify optimistic stances. One trader rolled a previously established 30,000-lot call position to a higher strike price in the January 2010 contract. It appears the investor originally purchased the January 100 strike calls for 14.00-15.30 per contract on February 19, 2009, when shares of the ETF were at $96.27. The surge in shares since the initial trade lifted the premium on the calls to today’s value of 19.30 apiece. Net profits on the sale amount to a minimum of 4.00 apiece up to a maximum of 5.30 per contract. Next, the trader reestablished a bullish position by purchasing 30,000 calls at the in-the-money January 115 strike for 6.40 apiece. The investor breaks even on the new position if shares rally through $121.40 by expiration in January. Further along, in the February 2010 contract, an investor enacted a bullish butterfly spread. The trader purchased 1,000 calls at the February 130 strike for 2.06 each [wing 1], purchased another 1,000 calls at the higher February 150 strike for 45 cents apiece [wing 2], and finally sold 2,000 calls at the central February 140 strike for 89 cents per contract [body]. The net cost of the spread amounts to just 73 cents and positions the investor to accrue maximum potential profits of 9.27 per contract if shares rise 17.5% to $140.00 by expiration day in February. The investor may only ever lose the 73 cents paid to initiate the spread, but stands to gain more than 12 times that amount.

LCC – US Airways Group Inc. – The airline industry received a boost courtesy of an analyst’s upgrade on Continental and American Airlines parent, AMR Corp. The analyst called a floor in shares at companies stating his doubt that investors would get a better chance to get on board. US Airways Group surged more than 5% to $3.88. An option investor, however, used the opportunity to spend 15 cents per contract on about 20,000 puts aimed at protecting a long underlying position in US Airways should they fall beneath $2.50 before expiration in January. The move was a little strange. The investor paid up to buy protection since Tuesday’s close saw the puts close at 10 cents. In the face of a surge in its shares the puts, which should otherwise have declined, commanded a heartier premium. The villain here appears to be a 12% gain in implied volatility, which accompanied the jump. Implied volatility, a measure of uncertainty surrounding the future price direction of a security rose to 104% today.

KRE – SPDR KBW Regional Banking ETF – Shares of the KBW Regional Banking ETF are up more than 1.5% to $21.36 as of midday (EDT). One investor employed bullish tactics on the fund in the March 2010 contract. At first glance the transaction appeared to be a bullish risk reversal. However, after further investigation, it looks like the investor responsible for the activity is simply swapping strategies. The trader originally displayed optimism on the KRE by selling 6,000 puts short at the March 15 strike for 40 cents premium apiece. Today, he closed out the short position by buying back the puts for 30 cents each. The investor banks net profits of 10 cents per contract on the closing purchase. Next, the trader changed tactics and got bullish on the fund by purchasing 6,000 calls at the higher March 25 strike for 40 cents premium apiece. Profits are available on the new position if shares rally 19% from the current price to surpass the breakeven point at $25.40 by expiration in March.

BBY – Best Buy Co., Inc. – Early-morning bullish trading on the specialty retailer of consumer electronics suggests shares are not likely to decline much below the current price. Best Buy’s shares are slightly off this morning by less than 0.25% to $43.49. Optimistic investors are initiating credit put spreads in the near-term December contract. It appears approximately 5,000 puts were sold at the December 43 strike for an average premium of 1.26 apiece, spread against the purchase of roughly the same number of contracts at the lower December 41 strike for 65 cents each. Credit-spreaders pocket an average net credit of 61 cents per contract, which they keep if shares remain above $43.00 through expiration day.

WAG – Walgreen Co. – The largest drugstore chain in the U.S. posted a 3.9% increase in same-store sales for the month of November, which failed to satisfy average analyst expectations of 6.1%. The smaller-than-expected rise sent Walgreen’s shares 4% lower this morning to $37.76, and pushed implied volatility 15.39% higher to 27.92%. Option traders exchanged roughly 4,600 contracts on the stock by 10:15 am (EDT).

DYAX – Dyax Corp. – Shares of the biotechnology company jumped 27% to a new 52-week high of $4.46 this morning on news the firm received U.S. regulatory approval for its drug to treat hereditary angioedema. Option implied volatility on the stock imploded 50.42% to 118.27%. Investors exchanged approximately 3,615 call options at the December 5.0 strike as of 10:22 am (EDT). Total option volume thus far in the session exceeds 4,760 contracts, which represents 52% of total existing open interest on the stock of 9,099 lots.


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