Today’s tickers: VIX, MS, BAC, UNG, SU, RL, GIGM, FCX, CVS, SPF & DOW
VIX – CBOE Volatility Index – A massive bearish put position initiated on the VIX today is a bullish sign for the S&P 500 index. The VIX fell more than 6% during the current session to stand at 21.21 as the past two day’s uptick in equities serve to dissipate some of the fear and uncertainty felt by investors during the prior trading week. One investor anticipating further downside movement for the VIX picked up roughly 103,000 puts at the March 20 strike for an average premium of $0.70 per contract. The put options position the investor to accrue profits beneath a VIX reading of 19.30 through expiration. It appears the investor expects the so-called fear-gauge to head in the direction of the index’s 52-week low of approximately 17.49 attained on January 19, 2010. But, the VIX must fall another 9% from the current reading in order for the investor to breakeven by expiration. Furthermore, today’s reading is still 21.25% greater than the 52-week low described previously.
MS – Morgan Stanley – Global financial services firm, Morgan Stanley, attracted the attention of bullish options investors in afternoon trading. Shares are currently trading 1.00% higher at $27.83 with roughly one hour remaining in the trading day. A bull call spread stuck out like a sore thumb in the scantily populated March contract on the stock today. One investor purchased 5,000 calls at the March $28 strike for a premium of $1.35 each, and sold the same number of calls at the higher March $31 strike for an average premium of $0.34 apiece. The trader paid a net premium of $1.01 per contract for the spread, but stands to accrue maximum potential profits of $1.99 per contract should Morgan Stanley’s shares rally up to $31.00 ahead of expiration day. The call-spreader breaks even on the transaction as long as MS’s shares rise 4.25% from the current price to $29.01 before the options expire.
BAC – Bank of America Corp. – Optimistic sentiment on Bank of America appeared in the August contract today amidst a 0.65% improvement in shares of the underlying stock to $15.52. One bullish trader initiated a call spread to position for upward movement in BAC’s shares by expiration. The investor purchased 4,000 calls at the August $16 strike for an average premium of $1.52 apiece, spread against the sale of 4,000 calls at the higher August $20 strike for $0.37 each. The net cost of the bull call spread amounts to $1.15 per contract. Maximum potential profits of $2.85 per contract accumulate for the trader if the financial firm’s shares rally 29% from the current price to $20.00 ahead of August expiration.
UNG – United States Natural Gas ETF – A bullish risk reversal enacted on the US natural gas exchange-traded fund suggests one investor anticipates continued upward movement in the price of the underlying shares by expiration in March. Shares of the UNG are up 1% on the day to stand at $9.90. The reversal player sold 10,500 in-the-money puts at the March $10 strike for a premium of $0.64 apiece in order to buy 10,500 calls at the same strike for $0.63 each. The trader pockets a net credit of 1 penny per contract on the transaction, and keeps that amount if shares trade at $10.00 or above by expiration. Additional profits accumulate if shares of the underlying rally over and above $10.00.
SU – Suncor Energy, Inc. – Shares of Canada’s largest oil company are trading 2.75% lower to $31.84 today after the firm posted fourth-quarter profits of $0.21 per share, which came in below average analyst expectations of $0.39 a share. Investors enacted interesting options trades in the near-term February contract. Traders expecting Suncor’s shares to rebound ahead of expiration day sold straddles at the February $33 strike. It looks like 1,000 calls were sold at the February $33 strike for a premium of $0.46 each, in combination with the sale of 1,000 in-the-money puts at the same strike for $1.73 apiece. Straddle-sellers pocket a gross premium of $2.19 per contract on the trade, and keep the full premium if shares settle at $33.00 by February expiration. Investors short the straddle are exposed to losses, however, should shares swing above the upper breakeven price of $35.19, or if the stock falls below the lower breakeven point at $30.81 ahead of expiration day. Option implied volatility decreased by 8% post-earnings.
RL – Polo Ralph Lauren Corp. – American athletes kicked off the opening ceremony for this year’s Winter Olympics in Vancouver decked out in stylish, yet patriotic, Ralph Lauren attire. The fashion company’s shares enjoyed a 2.20% move higher to $84.98 today, perhaps motivating the protective options transaction observed in the March contract. A ratio put spread was employed on RL today by an investor who is likely looking to protect recent gains in the value of the underlying stock. The trader purchased 2,000 puts at the in-the-money March $85 strike for a premium of $4.40 apiece, spread against the sale of 4,000 puts at the lower March $80 strike for $2.35 each. The investor pockets a net credit of $0.30 per contract on the trade, which he keeps in the event shares remain above the lower $80.00 strike at expiration. Below the upper $85.00 strike, the long leg of the put combination yields penny-for-penny profits to a maximum of $5.00. Erosion of those gains starts below $80.00. The 6,000 option contracts employed in the spread comprise nearly 25% of the stock’s total existing open interest of 24,552 lots. The trader benefits from a move higher in the price of the underlying, but is also protected in case shares shift lower in the next couple of months.
GIGM – GigaMedia Limited – Entertainment software development company, GigaMedia Limited, attracted a barrage of bullish options players today with shares up 6.90% at times during the session to an intraday high of $2.94. Investors positioning for continued upward momentum in the value of the underlying stock purchased more than 12,400 calls at the now in-the-money July $2.5 strike for an average premium of $0.68 per contract. GIGM call buyers stand ready to accumulate profits if shares rally 8.15% above the day’s high of $2.94 to surpass the average breakeven price of $3.18 by expiration day in July. Options investors exchanged 29,500 contracts on GigaMedia by noontime on the East Coast, which represent 53.50% of the stock’s total existing open interest of 55,057 lots. The sharp surge in demand for options on GIGM lifted options implied volatility 26.15% to 72.03%.
FCX – Freeport-McMoRan Copper & Gold, Inc. – Mining firm, Freeport-McMoRan, received a ‘buy’ recommendation with a target share price of $95.00 at Citigroup today. FCX shares are up 0.85% to $72.18 as of 12:15 pm (EDT). Despite the ‘buy’ rating options traders continue to utilize cautious strategies on the stock. Perhaps bearish sentiment pervades because the recent nose-dive in the price of the underlying remains fresh in investors’ minds. Plain-vanilla put buying took place at the March $70 strike where roughly 10,500 contracts were purchased for an average premium of $3.83 apiece. Put volume at the March $70 strike exceeds 17,600 lots, which trumps the existing open interest level at that strike of 6,996 contracts. Put buyers might be positioning to accrue profits to the downside should Freeport’s share price drop ahead of expiration. In such a scenario, traders start to see profits if shares trade beneath the effective breakeven price of $66.17. Investors might also be motivated to buy the put options if they are holding long positions in the underlying stock. In this case, put purchasers are building up downside protection to hedge against further declines in the price of FCX shares.
CVS – CVS Caremark Corp. – A sold strangle involving 20,000 option contracts pushed CVS Caremark to the top of our ‘most active by options volume’ market scanner at the start of the trading day. Shares are trading 0.75% higher to $33.17 today, but the short strangle play suggests one investor expects the price of the underlying stock to remain range-bound through expiration in August. The investor appears to have sold 10,000 calls at the August $36 strike for a premium of $1.50 apiece in combination with the sale of 10,000 puts at the August $30 strike for an average premium of $1.65 each. The gross premium pocketed by the strangler amounts to $3.15 per contract. If shares trade within the strike prices described through expiration in seven months, the investor keeps the full premium on the transaction. However, the trader could be enacting a volatility play, in which case he could choose to unravel the transaction ahead of expiration if implied volatility declines. The short position in both calls and puts leaves the investor vulnerable to losses if CVS’s shares fluctuate greatly going forward. Losses amass if the stock trades above the upper breakeven price of $39.15, or if shares fall below the lower breakeven point at $26.85, ahead of expiration day.
SPF – Standard Pacific Corp. – Options trading on single-family homebuilding company, Standard Pacific Corp., jumped through the roof this morning as investors exchanged 8,815 contracts on the stock in the first hour of trading. The current volume represents nearly 88% of the 10,033 contracts of total existing open interest on Standard Pacific. Shares are trading 8.33% higher to $4.16 as of 10:28 am (EDT). Bullish players are buying out-of-the-money calls at the March $5 strike where roughly 5,000 contracts were coveted for an average premium of $0.20 apiece. Call-buyers enjoy profits if Standard’s shares rally at least another 27% from the current price to surpass the breakeven point at $5.20 by expiration in March. The explosion in demand for options on the homebuilding firm pushed options implied volatility up 20.93% to 99.23%.
DOW – The Dow Chemical Co. – Shares of chemicals and plastics manufacturer, Dow Chemical Company, tumbled 6% to $26.91 in the first thirty minutes of the trading session. The Michigan-based company posted earnings of $0.18 per share for the fourth-quarter (excluding one-time items), which exceeded average analyst expectations by about $0.07 a share. Positive earnings were helped by strong emerging market growth, but the stock slipped lower this morning on reports the chemical company’s prices and volumes declined in North America and Europe. Bearish option traders purchased roughly 2,000 put options for an average premium of $0.35 apiece at the February $25 strike perhaps because they expect Dow’s shares will continue to fall ahead of expiration. Profits accrue to the downside if shares of the underlying stock edge 8.40% below the current price to breach the average breakeven point on the puts at $24.65.
