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Investor Initiates Volatility Play on Alcoa Ahead of Earnings

Today’s tickers: AA, GLD, MGM, NXY, INTC, NDAQ, ANDS, F, EEM, MMR & MELI

AA – Alcoa, Inc. – A short straddle play on the largest U.S. producer of aluminum today implies one investor anticipates Alcoa’s shares will remain range-bound through January’s expiration on Friday. Alcoa’s shares appreciated 1% to a new 52-week high of $17.20 (as of 12:40 pm EDT) during the session. According to one Bloomberg article, the firm may report fourth-quarter profits of $0.06 per share today. The sold straddle strategy also indicates the trader expects lower volatility in the price per share. Perhaps this individual is taking advantage of the typical drop in option implied volatility, which tends to accompany earnings announcements. The investor sold 10,000 calls at the January $17.50 strike for a premium of $0.59 apiece, and sold 10,000 puts at the same strike for about $0.69 each. The gross premium pocketed on the trade amounts to $1.28 per contract. The full $1.28 premium is safe in the investor’s wallet if the contracts expire worthless at a share price of $17.50 on Friday. The short call and put positions established today leave the investor vulnerable to potential losses in the event that Alcoa’s shares swing outside of the breakeven boundaries. Losses accrue if shares edge beneath the lower breakeven price of $16.22, or if shares rise above the upper breakeven point at $18.78.

GLD – SPDR Gold Trust ETF – Shares of the exchange-traded fund, which mirrors the price of gold bullion, may be up more than 1.25% to $112.82 today, but option traders populated various contracts with bearish strategies. A hefty put spread appeared in the June contract. The transaction involved the purchase of 17,000 puts at the June $105 strike for a premium of $3.50 each, marked against the sale of 17,000 puts at the lower June $95 strike for roughly $0.52 apiece. The net cost of the pessimistic play amounts to $2.98 per contract. If the investor is holding a long position in GLD shares, the spread provides downside protection in case shares slip beneath the breakeven price of $102.02, by expiration in June. Additional bearish indications appeared in the September contract. One trader initiated a risk reversal by selling 5,000 calls at the September $130 strike for $4.55 each, spread against the purchase of 5,000 puts at the lower September $100 strike for $3.60 apiece. GLD’s shares must trade beneath $130.00 through expiration in order for the reversal-player to keep the net credit of $0.95 received on today’s transaction. Additional profit, or downside protection on a long stock position, kick in beneath the effective breakeven share price of $100.00.

MGM – MGM Mirage, Inc. – Gaming and resort operations firm, MGM Mirage, attracted a long-term bullish trader to the January 2011 contract this afternoon. MGM’s shares appreciated 5% during the session to $11.14. It looks like the investor purchased nearly 30,000 call options on the stock at the January 2011 $20 strike for an average premium of $1.32 per contract. MGM Mirage’s shares must rally at least 91% from the current price before the call-buyer breaks even at $21.32.

NXY – Nexen, Inc. – The Canada-based global energy company appeared on our ‘hot by options volume’ market scanner this afternoon after one trader established a bullish risk reversal play on the stock. NXY’s shares are down more than 1% to $24.90 as of 2:45 pm (EDT). The reversal involved the sale of 8,200 puts at the March $20 strike for $0.33 apiece, spread against the purchase of 8,200 calls at the higher March $30 strike for a premium of $0.17 each. The investor receives a net credit of $0.16 per contract on the transaction, which he keeps if shares of Nexen trade above $20.00 through expiration in March. Additional profits accumulate if the stock rallies 20.5% to $30.00 in the next couple of months. The sharp increase in demand for option contracts during the trading day lifted NXY’s reading of option implied volatility 6.00% to 40.12%.

INTC – Intel Corp. – Plain-vanilla call buying on the chip maker today indicates investors are positioning for a rally in shares by expiration in February. The stock received an upgrade to ‘hold’ from ‘sell’ at AURIGA this morning. Shares appreciated 0.75% to $20.99 today, trading just 15 pennies beneath Intel’s current 52-week high of $21.14. Bullish traders bought approximately 8,500 call options at the February $23 strike for an average premium of $0.15 per contract. Investors long the calls profit if INTC’s shares increase sharply by 10.25% to surpass the effective breakeven price of $23.15 by expiration next month.

NDAQ – The Nasdaq OMX Group – Options on shares of the Nasdaq exchange stood out today as investors provoked some thoughts on where its share price might move following today’s announcement that the company was reorganizing some debt. Shares were just a little lower at $20.14 while it appears that some investors seem prepared to bet on a continuation of the rising trend. Its shares have shifted sideways during the past two weeks having rebounded from a November low at $18.57. Using options expiring this weekend, some 6,500 contracts were earlier traded at the $21 strike for a dime. That implies that these investors are looking for a decent pop during this week, or at least enough to boost the option’s value. These call options carry a 20% delta implying a one-in-five chance of rallying by 4.3% before Friday’s close. Elsewhere an investor appears to have sold about 2,300 put options for $1.45 at the same $21 strike but this time expiring in March. The seller would have to buy shares at the fixed strike price within the lifetime of the contract in the event shares in Nasdaq don’t shift higher. The premium of $1.45 means the put writer is effectively paying $19.55 to buy its shares. In September the share price topped out at just under $23.00.

ANDS – Anadys Pharmaceuticals, Inc. – One investor initiated a bull call spread on the clinical-stage biopharmaceutical company today as shares of the firm rallied nearly 6% to $2.36. The optimistic trader purchased 4,000 calls at the March $2.50 strike for a premium of $0.40 apiece, spread against the sale of the same number of calls at the higher March $5 strike for $0.05 each. The net cost of the bullish play amounts to $0.35 per contract and positions the investor to accrue profits above the breakeven price of $2.85. The trader pockets maximum available profits of $2.15 per contract only if ANDS’s shares increase 112% over the current price to $5.00 within the next couple of months to expiration.

F – Ford Motor Company – As Ford sweeps up the awards at the Detroit Motor Show investors have swept its shares to above $12 for the first time since March 2005. The acceleration in the share price comes at a time when the Chinese market officially overtook the U.S. market as the world’s largest, thanks to successful domestic stimulus at a time when American sales slumped. Still, options trading patterns reflect the risks of getting long the stock as American equity prices struggle to grind higher. Today’s investor interest using options appears to be skewed to the put side. In the February contract volume of 10,000 contracts traded at the $11 strike at a price of 32 cents while more than twice that volume went through at the $12 strike for 70 cents. In the June contract exactly 1,000 contracts were bought for an 8 cents premium at the lowly $5 strike.

EEM – iShares MSCI Emerging Markets Index ETF – The wings of a massive bearish butterfly spread were unfurled in the March contract on the emerging markets fund today, suggesting shares of the EEM may suffer declines in the coming months. Shares are off 0.25% today to stand at $43.09. The investor responsible for the spread purchased 50,000 puts at the March $30 strike for $0.09 apiece [wing 1] and purchased 50,000 puts at the higher March $40 strike for $1.07 each [wing 2]. The central March $35 strike, representing the body of the butterfly, had 100,000 puts sold for $0.32 per contract. The investor paid a net $0.52 per contract to establish the bearish spread. Downside protection, if the trader holds a long position in the underlying stock, extends all the way down to $35.00. Alternatively, in the case that the spread is an outright bearish bet on the fund aimed at accruing profits to the downside, maximum gains of $4.48 per contract amass given declines of 18.5% from the current price to $35.00 by expiration.

MMR – McMorRan Exploration Co. – Call options on the oil and gas company are flying off the shelves this morning on news the firm and its partner Energy XXI Ltd. discovered gas-bearing sands in the Gulf of Mexico. MMR’s shares exploded to the upside, rising 41.5% to a new 52-week high of $13.00 in early trading. Fresh bullish positioning appeared at the May $15 strike where more than 4,200 calls changed hands. It looks like the majority of the contracts were purchased, suggesting some investors expect MMR’s shares to climb higher in the next four months to expiration. The surge in demand for options on the stock lifted option implied volatility 9.66% during the session to 84.08%.

MELI – MercadoLibre, Inc. – Shares of the operator of online retail marketplaces in Latin America are trading more than 8% lower this morning to $46.39 prompting call selling in the January and February contracts. Option traders who do not expect to see a near-term recovery in MELI’s shares shed more than 2,000 calls at the out-of-the-money January $50 strike for an average premium of $0.20 per contract. Additional call-selling activity took place at the February $50 strike where another 2,000 calls appear to have been sold short for an average of $1.50 apiece. Investors selling the calls keep the premiums pocketed today if MercadoLibre’s shares trade under $50.00 for the duration of the life of the option contracts described. Option implied volatility on the stock is up sharply by 18.32% to 49.77%.


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