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Fannie Mae Put Action Explodes in Afternoon Trading

Today’s tickers: FNM, EWZ, IYR, GILD, FXI, WLP, EEM, ARG, DWA & WMB

FNM – Fannie Mae – Mortgage-financer, familiarly known as Fannie Mae, jumped onto our ‘most active by options volume’ market scanner after one investor went hog-wild with put options. Fannie’s shares slipped 3% during the trading day to $0.95 apiece. The investor appears to have traded 118,000 in-the-money put options at the March $1.0 strike for a premium of $0.15 apiece, spread against the sale of 118,000 puts at the January 2012 $1.0 strike for a premium of $0.40 each. Open interest of 156,689 puts at the March $1.0 strike indicate the trader could be buying-to-close a previously established 118,000-lot short put position initiated back in September of 2009. If this is the case, the investor is extending the short put position out to the January 2012 contract and expecting the government agency to ultimately survive the next couple of years. In this scenario, the trader keeps the $0.40 in premium on the sale of the fresh batch of put options if Fannie’s share price rallies above $1.00 by expiration in 2012. But, there are a other possible explanations for the trade. It is possible that the open interest at the March $1.0 strike is unrelated to today’s activity. In this second scenario, the trader is essentially predicting that shares will erode ahead of March expiration. If this is the case the trader sold 118,000 January 2012 $1.0 strike puts for $0.40 apiece in order to take a long 118,000-lot put stance at the March $1.0 strike for which he paid $0.15 each. The net credit received in this scenario amounts to $0.25 per contract and generates additional profits as Fannie’s shares continue to fall under $1.00. It will be interesting to see whether the open interest level at the March $1.0 strike changes to reflect the closing of a previously established long or short put position. Regardless of the direction of- or motivation behind- the transaction the large volume of the trading activity is certainly noteworthy.

EWZ – iShares MSCI Brazil Index ETF – A ratio put spread enacted on the Brazil ETF suggests we may continue to see bearish movement in the price of the underlying stock through expiration in June. Shares of the fund are down 3% to $61.80 as of 2:20 pm (EDT). The investor responsible for the transaction purchased 7,500 puts at the June $60 strike for a premium of $5.15 apiece and sold 15,000 puts at the lower June $52 strike for an average premium of $2.45 each. The trader pockets a net credit of $0.25 per contract on the trade, which he keeps if shares of the fund trade above $60.00 through expiration in five months time. The EWZ is currently trading nearly 24% below its 52-week high of $80.39 attained back on January 3, 2010. But, it seems the ratio put-spreader is protecting himself in case the price of the underlying shares nose-dive down to $52.00 each, which would signify a more than 35% decline from the 52-week high mentioned above.

IYR – iShares Dow Jones U.S. Real Estate Index ETF – Afternoon put activity on the real estate exchange-traded fund appears to be the work of an investor banking profits on a previously established long put position, while simultaneously augmenting the pessimistic stance. Shares of the IYR are down 0.65% to $42.50 with just under two hours remaining in the trading session. The trader sold 7,000 in-the-money puts for a premium of $1.84 apiece, which he originally bought for an average premium of $1.29 each back on January 29, 2010, when shares of the underlying stock were trading at $43.46. Net profits on the sale amount to $0.55 per contract. Next, it looks like the trader purchased 12,000 puts at the lower February $42 strike price for a premium of $0.83 each. The larger and more bearish stance implemented today provides downside profits should shares slip beneath the breakeven point at $41.17 ahead of expiration in two weeks.

GILD – Gilead Sciences, Inc. – Biopharmaceutical company, Gilead Sciences, attracted bullish options traders today despite the 1.35% decline in the value of its shares to $45.84. Near-term optimistic individuals purchased debit call spreads in the February contract to position for a rebound in share price ahead of expiration. Investors bought approximately 11,000 calls at the February $47 strike for an average premium of $0.73 each, and sold roughly the same number of calls at the higher February $49 strike for about $0.19 apiece. The net cost of the spread amounts to $0.54 per contract. Investors stand ready to accrue maximum potential profits of $1.46 per contract in the event that Gilead’s share price rallies 6.90% from the current value to $49.00 by expiration. The stock must increase at least 3.70% before call-spreaders break even at $47.54. Options implied volatility on the biopharm-firm is up roughly 6.6% to 29.60% as of 11:50 am (EDT).

FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the FXI, an exchange-traded fund that invests in 25 of the largest and most liquid Chinese companies, fell 2.40% to $37.10 today. However, the decline in share price did not deter bullish investors from making optimistic trades on the fund. It looks like options players utilized a couple of different strategies in order to assume bullish positions. One investor purchased a debit call spread. The trader bought 9,000 calls at the March $38 strike for a premium of $1.56 apiece, and sold the same number of calls at the higher March $41 strike for $0.54 each. The investor paid a net premium of $1.02 per contract, but stands to make maximum potential profits of $1.98 apiece if shares of the underlying stock trade above $41.00 ahead of expiration. Shares must increase at least 5.15% from the current price before the trader breaks even at $39.02. Another options-bull appears to have initiated a risk reversal. It looks like the investor sold 22,000 puts at the March $35 strike for an average premium of $1.09 each in order to purchase the same number of calls at the higher March $40 strike for approximately $0.75 apiece. This individual pockets a net credit of $0.34 per contract, which he keeps as long as shares trade above $35.00 through expiration day. The long call stance positions the trader is amass additional profits to the upside only if the price of the stock exceeds $40.00 ahead of expiration in March.

WLP – WellPoint, Inc. – Bullish options activity on health benefits company, WellPoint, Inc., took place in the March contract even though shares are down 1.30% to $62.01 today. Investors purchased call spreads on the stock to position for a rebound in the price of the underlying stock by March expiration. Bulls picked up roughly 5,000 calls at the March $65 strike for a premium of $1.50 each, spread against the sale of 5,000 calls at the higher March $70 strike for approximately $0.45 premium apiece. Optimistic traders paid a net premium of $1.05 per contract for the debit spread. The parameters of the trade dictate that maximum potential profits of $3.95 per contract are available to investors if WellPoint’s share price rallies through $70.00 ahead of expiration. Option traders long the debit spread are hoping shares increase at least 6.50% from the current value to reach the breakeven point on the trade at $66.05. Maximum available profits accrue only if WLP shares surge 12.90% to $70.00 by expiration day.

EEM – iShares MSCI Emerging Markets Index ETF – Bearish options trading patterns continue today as shares of the emerging markets exchange-traded fund relinquished another 2.50% to stand at $36.68. The value of the underlying stock is down 15.60% from a 52-week high of $43.47 attained back on January 11, 2010. Apparently at least one investor is bracing for continued bearish movement in the price of the fund through June expiration. The trader initiated a bearish risk reversal by selling 7,000 calls at the June $42 strike for a premium of $1.04 each in order to partially finance the purchase of the same number of put options at the June $35 strike for $2.22 apiece. The net cost of the reversal play amounts to $1.18 per contract. Profits to the downside accumulate if shares of the fund slip 7.80% beneath the current day’s price to breach the breakeven point of $33.82 by expiration in June.

ARG – Airgas, Inc. – Shares of the distributor of specialty gases and hardgoods to the industrial and medical industries are trading 40% higher this morning, blowing the lid off its previous 52-week high of $51.00, to arrive at a new high of $60.80. The underlying share price exploded after the company confirmed that Air Products & Chemicals, Inc. has extended a bid to acquire Airgas for $60.00 per share. Options traders exchanged more than 9,350 contracts on the stock in the first forty-five minutes of the session, which is almost 100% of the total existing open interest on the stock of 11,720 lots. Notable put trading appeared at the February $60 strike where the majority of 2,500 contracts were likely purchased by investors locking in the day’s share price rally. Two-way trading traffic of roughly 1,400 call options appeared at the March $60 strike for a last-traded price of $1.65 per contract.

DWA – Dreamworks Animation SKG, Inc. – Animated film development company, Dreamworks, received a downgrade yesterday to ‘neutral’ at Piper Jaffray. Perhaps the downgrade partially inspired the call selling observed this morning amid a 0.25% decline in shares of the underlying stock to $38.65. It looks like some investors are throwing in the towel on Dreamworks by shedding roughly 2,000 calls at the June $50 strike for an average premium of $0.68 per contract. Thus far in the session, 3,827 option contracts changed hands on the stock.

WMB – The Williams Companies, Inc. – Shares of the natural gas company are down 1% to $20.25 in morning trading. Williams Companies popped onto our ‘hot by options volume’ market scanner at the start of the session after one investor rolled a long call position forward from the May contract to the August contract. It appears the trader sold 14,111 calls at the now in-the-money May $20 strike for a premium of $1.70 apiece and purchased the same number of call options at the same strike price in the August contract for a premium of $2.25 each. There is no telling how much the investor originally paid for the May contract call options, however, the net cost of the transaction – in isolation – amounts to $0.55 per contract and positions the trader to amass profits above the breakeven price of $20.55 by August expiration.


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