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Iron Condor Nesting in Brazil Index ETF

Today’s tickers: EWZ, CVX, WFC, GFI, SU, MA, ZION, DAL, AMAG & JWN

EWZ – iShares MSCI Brazil Index ETF – An iron condor options strategy employed in the February contract on the EWZ implies one investor expects the underlying share price of the fund to stagnate ahead of expiration in two weeks. Shares of the exchange-traded fund, which generally correspond to the price and performance of publicly traded securities in the Brazilian market, are down 5% today to $64.37. Today’s decline merely adds salt to the wounds – The Brazil index ETF has taken a severe beating in the past few months, falling 20.5% since attaining a 52-week high of $80.93 back on December 3, 2009. The iron condor, a strategy utilized by option traders anticipating little movement in the underlying share price, is perhaps one investor’s way of indicating the worst is over and a bottom is close at hand. The iron condor’s construction is essentially the combination of two strangles, or alternatively can be thought of as two credit spreads. On the call side, the investor pockets a net credit of $0.09 per contract by selling 10,000 calls at the February $71 strike for $0.13 apiece, spread against the purchase of 10,000 calls at the higher February $74 strike for $0.04 each. As for the puts, the trader receives a net credit of $0.26 per contract on the sale of 10,000 puts at the February $59 strike for $0.44 each, marked against the purchase of 10,000 puts at the lower February $56 strike for $0.18 apiece. Therefore, the combined credit enjoyed on the iron condor amounts to $0.35 per contract. Maximum retention of the $0.35 credit, or total monetary profits of $350,000, is contingent upon the underlying share price at expiration. EWZ shares must trade within a range of $59.00 to $71.00 in order for the investor to walk away with maximum profits. The investor holding the iron condor is exposed to significant losses if his ‘neutral’ prediction is wrong. Maximum loss potential on the transaction of $2.65 per contract is far greater than the $0.35 credit received for undertaking such risk. But, apparently this trader is confident that shares of the underlying stock will move sideways – at least through February expiration. Perhaps this confidence stems from the fact that losses do not amass to the upside unless shares rebound 10.85% to surpass the upper breakeven price of $71.35. Additionally, the fund’s share price would need to fall another 8.90% before losses to the downside accrue beneath the breakeven point at $58.65. The investor responsible for the options play need only wait a couple of weeks to see if he can take the money and run.

CVX – Chevron Corp. – A bullish risk reversal play on oil and gas company, Chevron Corp., indicates one trader doubts that an all out collapse in the value of the underlying shares is likely to occur. CVX shares edged 2.30% lower during the trading day to stand at $71.51 just one hour ahead of the closing bell. The optimistic options trader sold 10,000 puts at the June $60 strike, receiving an average premium of $1.19 each, in order to buy 10,000 calls at the higher June $85 strike for $0.43 apiece. The investor pockets a net credit of $0.76 per contract, which is safe in the bank as long as Chevron’s shares trade no lower than $60.00 ahead of expiration in five months time. Additional profits accumulate for the reversal player if the price of the underlying stock rallies sharply by 18.90% over the current day’s price to surpass the $85.00-level by expiration. Options implied volatility is soaring 17.81% higher to stand at 24.86%.

WFC – Wells Fargo & Co. – A large-volume ratio put spread enacted on Wells Fargo today is likely the work of an investor bracing for continued bearish movement in the price of the underlying ahead of expiration in March. Shares of the financial firm dropped 3% today to $27.28. The spread involved the purchase of 25,000 puts at the March $25 strike for an average premium of $0.69 apiece, marked against the sale of 50,000 puts at the lower March $20 strike for about $0.16 each. The net cost of the bearish play amounts to $0.37 per contract. The investor responsible for the trade is likely seeking downside protection on a long underlying stock position. If this is the case, protection kicks in if Wells Fargo’s shares trade beneath the effective breakeven price of $24.63 ahead of expiration. Options implied volatility is up 13.6% in late afternoon trading to stand at 38.83%.

GFI – Gold Fields, Ltd. ADR – Bearish traders romped through Gold Fields today with shares of the gold mining company down sharply by 8% to $10.98. The April and July contracts were both heavily populated with pessimism as options traders utilized both calls and puts to brace for- and benefit from- continued downward movement in the price of the underlying shares. One trader purchased a put spread by picking up 1,500 deep in-the-money put options at the April $13 strike for a premium of $2.36 each, and selling the same number of puts at the lower April $10 strike for $0.48 each. The net cost of the spread amounts to $1.88 per contract, and therefore yields maximum potential profits of $1.12 per contract if shares decline to $10.00 ahead of expiration day. Larger bearish positioning on Gold Fields also appeared in the April contract and involved a three-legged credit call spread. This investor sold 7,000 calls at the April $12 strike for a premium of $0.39 each, and sold 7,000 calls at the higher April $13 strike for $0.18 apiece. The gross premium received on the sales amounts to $0.57 per contract. Next, the investor purchased 14,000 calls at the April $14 strike for $0.12 apiece in order to limit his exposure to losses on the short call positions that would otherwise have been potentially unlimited in the event that GFI shares suddenly rebound. Thus, the investor pockets a net credit of $0.45 per contract, which he keeps if GFI’s shares trade below $12.00 through expiration in three months time.

SU – Suncor Energy, Inc. – The Canadian energy company attracted both bullish and bearish options players in the first half of the trading session even though shares of the underlying stock are down more than 4.5% to $29.35. The plain-vanilla put spread enacted in the March contract is likely the work of an investor seeking downside protection on a long underlying stock position. The trader responsible for the transaction purchased 5,000 puts at the March $29 strike for an average premium of $1.16 each, spread against the sale of 5,000 puts at the lower March $27 strike for about $0.53 apiece. The net cost of the trade amounts to $0.63 per contract, thus providing protection for the investor should Suncor’s shares fall beneath the breakeven price at $28.37 ahead of expiration day in March. Interestingly, a bullish options player also selected the March contract in order to position for a rally in the stock. This individual appears to have purchased 7,500 call options at the March $32 strike for $0.75 each. The contrarian transaction yields profits to the investor only if shares of Suncor surge 11.40% from the current price to surpass the breakeven point on the calls at $32.75 by expiration.

MA – MasterCard, Inc. – Global payment solutions company, MasterCard, hosted bearish options players in the near-term February and March contracts today amid a nearly 10% decline in its share price to $223.67. The world’s second-largest payments network reported fourth-quarter earnings that underwhelmed average analyst expectations for the firm just one day after its rival, Visa, revealed better-than-expected profits. MasterCard posted earnings of $2.24 per share for the quarter, but analysts were hoping to see profits of $2.48 a share. Disappointed options players initiated bearish strategies on the stock following earnings. Some traders sold 1,500 calls at the February $250 strike to pocket average premiums of $0.91 per contract. Call sellers retain the full premium as long as the credit card company’s shares trade below $250.00 through expiration day. Pessimism spread to the March contract where uber-bearish individuals purchased 2,900 puts at the March $185 strike for an average premium of $1.00 apiece. These deep out-of-the-money puts yield profits only if shares fall 17.75% from the current price to breach the breakeven point at $184.00 by March expiration.

ZION – Zions Bancorp. – Bearish investors dominated options trading on banking company, Zions Bancorporation, today with shares of the firm trading 5.75% lower to $17.55. A large three-legged combination play involving put options indicates medium-term pessimism by one trader through expiration in April. The investor sold 20,000 puts at the February $16 strike for a premium of $0.30 apiece in order to offset the cost of buying a put spread. The spread involved the purchase of 10,000 puts at the April $1.60 each, marked against the sale of 10,000 puts at the lower April $13 strike for $0.40 apiece. The net cost of the transaction is reduced to $0.60 per contract given the larger proportion of puts sold to those purchased in the trade. Therefore, the trader – who is likely long shares of the underlying stock – is protected should shares of the underlying stock trade beneath the effective breakeven price of $16.40 ahead of expiration in April.

DAL – Delta Air Lines, Inc. – The 4.35% decline in shares of Delta Air Lines to $11.87 and a downgrade to ‘neutral’ from ‘overweight’ at JPMorgan this morning prompted one options investor to extend a previously established bearish put position on the stock. The trader rolled a 10,000 lot put position at the February $11 strike to a lower strike price in the March contract. It appears the investor sold 10,000 puts at the February $11 strike for an average premium of $0.31 apiece, and purchased the same number of puts at the lower March $10 strike for an approximate premium of $0.42 each. It is unclear how much the investor initially paid for the February contract put options, but the net cost of the calendar roll in isolation amounts to $0.11 per contract. This bearish move suggests the trader is expects shares of the underlying stock may fall another 25% from the current price to breach the breakeven point on the puts at $9.49 ahead of March expiration. Options implied volatility is up 14.57% over Wednesday’s closing reading of 51.61% to an intraday high of 59.13%.

AMAG – AMAG Pharmaceuticals, Inc. – Shares of biopharmaceutical company, AMAG Pharmaceuticals, are down 9% to $41.16 in the first thirty minutes of the trading session. AMAG shares dipped as low as $40.48, a 10.5% decline from Wednesday’s closing price of $45.25. Bearish investors selling 1,000 call options at the May $42.5 strike received a premium of $3.00 per contract in exchange for bearing the risk that AMAG’s share price rebounds in the next four months to expiration. Call sellers apparently do not anticipate a resurgence in the value of the underlying stock, and likely expect to keep the $3.00 premium on the transaction. The sharp move in the price of the stock and increased demand for option contracts spurred a 22.22% shift higher in options implied volatility to 52.86%.

JWN – Nordstrom, Inc. – Department store operator, Nordstrom, Inc., reported a 14% increase in January same-store sales and a 15.8% rise in total retail sales for the month to $543 million. Shares are trading 0.65% lower to $35.82 despite the positive report this morning. Options traders exhibited bullish sentiment, however, by selling near-term put options. It looks like roughly 1,100 puts were shed at the in-the-money February $36 strike for an average premium of $0.90 apiece. Another 1,000 puts were sold at the lower February $35 strike for roughly $0.64 per contract. Open interest levels at both strike prices indicate investors could be banking profits on previously established long put positions given today’s decline in share price. However, the put selling could also be the work of bullish traders expecting a near-term rally in Nordstrom’s shares ahead of February expiration. Investors exchanged 6,353 contracts on the stock in the first seventy-five minutes of the trading day.


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