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Option Traders Try Their Luck with Out-of-the-Money Calls on MGM Mirage

Today’s tickers: MGM, EWC, EWZ, DHI, XLF, GLW, TRA, CF, PHM, GFI & EBAY

MGM – MGM Mirage, Inc. – Shares of casino resort operator, MGM Mirage, rallied 5.25% this afternoon to $9.62. Option traders expecting shares to rally significantly in the next 12 months bought call options in the January 2011 contract. Approximately 20,000 calls were purchased at the January 2011 20 strike for an average premium of 70 cents per contract. Investors break even on the calls if MGM’s shares more than double by expiration. Shares must rally at least 115% to the breakeven price of $20.70 in order for call-buyers to begin to accumulate profits.

EWC – iShares MSCI Canada Index ETF – The exchange-traded fund, which mirrors the performance of publicly traded securities in the Canadian market, attracted pessimistic option players. The bearish risk reversal established on the fund contrasts with the nearly 1.5% rally in shares of the underlying to $26.30 during the session. It appears one investor sold 12,500 calls at the June 27 strike for a premium of 1.60 each, spread against the purchase of the same number of calls at the lower June 26 strike for two dollars premium apiece. The net cost of the reversal amounts to 40 cents per contract. Profits on the trade – assuming the investor holds no underlying stock position – accrue if shares of the EWC slip beneath the breakeven point to the downside at $25.60 by expiration in June 2010.

EWZ – iShares MSCI Brazil Index ETF – A number of bullish trades on the Brazil exchange-traded fund today suggest shares of the EWZ are set to rally in the first few months of the new year. Shares edged 1.5% higher during the trading day to stand at $73.21. Optimistic traders employed a number of different option strategies in order to position for bullish movement in the price of the underlying stock. One trader initiated a risk reversal in the January contract by selling 6,000 puts at the January 72 strike for 1.80 each, spread against the purchase of 6,000 in-the-money calls at the same strike for 2.70 apiece. The cost of getting long the call options is reduced to 90 cents per contract for the reversal player. Profits on the position amass above the breakeven price of $72.90. Another option bull unfurled the wings of a butterfly spread in the March contract. The trader purchased the 1000-lot wings of the spread at the in-the-money March 57 strike for 17.04 each [wing 1], and at the March 89 strike for 50 cents premium apiece [wing 2]. The body of the butterfly was centered at the March 73 strike where 2,000 calls were sold for a premium of 5.05 per contract. The net cost of the bullish butterfly combination amounts to 7.44 per contract. Maximum potential profits of 8.56 per contract are available to the trader if shares rally up to $73.00 by expiration in March.

DHI – D.R. Horton, Inc. – Long-term bullish activity on homebuilding firm, D.R. Horton, is practically a carbon-copy of the optimistic trading observed on Pulte Homes, Inc., earlier in the session. DHI’s shares were trading higher following the opening bell, but declined in afternoon trading after disappointing new home sales data hit newsstands. Shares are down 0.25% to $11.12 as of 12:20 pm (EDT). The optimistic investor populating the January 2012 contract on DHI brushed aside the day’s gloomy stats and focused in on a long-term recovery play. It appears the trader sold a put spread and purchased call options on the stock. The investor wrote 7,000 puts at the January 2012 10 strike for a premium of 2.55 each, marked against the purchase of 7,000 puts at the lower January 2012 7.5 strike for 1.50 apiece. Next, the trader bought 7,000 calls at the January 2012 15 strike for 1.90 per contract. The bullish trader paid a net 85 cents per contract for the three-legged combination play. The transaction signals that the trader expects shares of D.R. Horton to remain above $10.00 through the next two years. Additionally, profits amass for the investor if shares rally at least 42.5% over the current price to surpass the breakeven point at $15.85. The sudden increase in demand for option contracts on DHI lifted option implied volatility 10.76% from an opening reading of 41.14% to an intraday high of 44.57%.

XLF – Financial Select Sector SPDR ETF – Shares of the financials exchange-traded fund slipped slightly lower in afternoon trading, falling less than 0.50% to $14.40. Options activity in the February contract indicates greater volatility in the price of the underlying through expiration in two months. One investor purchased a strangle by picking up 10,000 puts at the February 14 strike for 46 cents each, and by purchasing 10,000 calls at the higher February 15 strike for 37 cents premium apiece. The net cost of the strangle amounts to 83 cents per contract. The parameters of the strangle imply the trader expects shares to shift dramatically by expiration. The investor accrues profits if the XLF’s shares move above the upper breakeven point at $15.83, or if shares fall below the lower breakeven price of $13.17. Option implied volatility on the fund rose about 4% during the trading session to an intraday high of 26.32%.

GLW – Corning, Inc. – Shares of the largest maker of glass for liquid-crystal displays are up 0.75% to $19.37 today perhaps after receiving an upgrade to ‘buy’ from ‘hold’ at ThinkEquity. The bullish move in shares of the underlying during the session was matched by an optimistic options strategy initiated in the February 2010 contract. It appears a bullish risk reversal was initiated through the sale of 8,000 puts at the February 18 strike for an average premium of 48 cents apiece, spread against the purchase of 8,000 calls at the higher February 21 strike for roughly 43 cents each. The investor responsible for the transaction receives an average net credit of 5 cents per contract on the trade. The full 5 cent credit is safe in the trader’s piggy bank as long as GLW’s shares trade above $18.00 through expiration in two months. Additional profits accumulate if Corning’s share price increases about 8.5% to surpass the $21.00-level by expiration day.

TRA – Terra Industries Inc. – The North American maker of nitrogen products edged onto our ‘most active by options volume’ market scanner after one investor initiated a bullish calendar spread on the stock. TRA’s shares appreciated 0.50% to $33.03 by the middle of the trading day. The investor likely financed the purchase of nearer-term in-the-money call options in the March contract by selling longer-term out-of-the-money calls in the June contract. The spread involved the purchase of 5,800 calls at the now in-the-money March 33 strike for two dollars apiece, marked against the sale of the same number of calls at the June 37 strike for about 1.60 each. The net cost of the transaction amounts to 40 cents per contract and positions the investor to accrue profits above the breakeven price of $33.40. Perhaps the trader aims to take delivery of the underlying shares at $33.00 each. In such a case, the investor is left with a covered call position, with an effective exit strategy provided by the short calls in the June contract. If Terra’s shares rally 12% to surpass the $37.00-level, the investor will likely have the underlying share position called from him. The trader, in this scenario, walks away with roughly 12% gains on the rally in shares.

CF – CF Industries Holdings, Inc. – The manufacturer of nitrogen and phosphate fertilizer products experienced a 2.5% rally in shares today to $88.60. The increase in share price prompted one investor to take short-term profits off the table. It looks like the option trader purchased approximately 9,500 calls at the May 105 strike for a premium of 2.80 apiece in late afternoon trading yesterday. Today, the investor sold the contracts for an average premium of 3.04 each. The closing sale yields net profits of 24 cents per contract – not too shabby for a 24-hour payoff.

PHM – Pulte Homes, Inc. – Option volume on the homebuilding company jumped to 36,000 contracts within the first 15 minutes of the trading session. One investor initiated a three-legged combination play, while other players purchased near-term call options. Pulte’s shares are up 1.5% today to $10.01, perhaps inspiring the plain-vanilla call buying activity observed in the February contract. It looks like 5,800 calls were purchased at the now in-the-money February 10 strike for an average premium of 80 cents per contract. Call-buyers stand ready to profit if PHM’s shares rally through the breakeven price of $10.80 by expiration. A long-term bullish bet on a recovery in the homebuilding sector over the next two years was established in the January 2012 contract. The transaction, involving 30,000 option contracts, suggests one investor is positioning for further upward momentum in PHM’s shares. The trader appears to have purchased call options in conjunction with writing a put spread on the stock. A chunk of 10,000 calls were purchased at the January 2012 15 strike for a premium of 1.50 each. Next, the trader established a credit spread by selling 10,000 puts at the January 2012 10 strike for an average premium of 2.79 each, marked against the purchase of 10,000 puts at the lower January 7.5 strike for 1.50 apiece. The investor paid a net 21 cents per contract to put on the combination play. The trader expects shares to remain above $10.00 through the next two years, and hopes to see the stock rally above $15.00 by expiration. The parameters of the transaction imply that the investor breaks even if shares surge 52% over the current price to $15.21 in the next two years.

GFI – Gold Fields Ltd. – Shares of the gold mining company improved 1.5% this morning to stand at $13.34 as of 10:25 am (EDT). A large chunk of 14,000 calls were sold at the near-term January 15 strike for 10 pennies per contract. The transaction is likely the work of an investor closing out a previously established long call position. It seems the investor is throwing in the towel on a near-term surge in gold mining stocks, and taking what premium is available during today’s rally in GFI shares. The call-seller perhaps doubts that GFI’s shares will rally 13% over today’s price to push the January 15 strike call options in-the-money by expiration next month. Of course, the transaction could also be fresh bearish positioning by a short call seller, or perhaps, the work of an investor selling covered call options.

EBAY – eBay, Inc. – Call options on the e-marketplace are in high demand today with EBAY’s shares up 4% to $23.84. It looks like one investor put on a calendar roll by selling roughly 1,500 calls at the January 24 strike for 43 cents premium apiece, in order to purchase the same number of calls at the February 24 strike for an average premium of 1.10 each. The calendar roll positions the bullish trader to profit above the effective breakeven price of $24.58 by expiration in February.


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