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Wednesday, July 24, 2024

PetroBras Bear Braces for Aftershock – Buys Ratio Put Spread

Today’s tickers: PBR, HOG, BMY, FXE, KFT, YHOO, MOS, NTGR, BIDU & DIS

PBR – Petroleo Brasileiro SA ADR – Shares of Brazil’s state-owned oil and natural gas company rose 1.20% to $40.02 this afternoon, adding to the nearly 8% recovery in shares since Friday February 5, 2010, up to an intraday high of $40.25. But, painfully recent memories of the nearly 30% decline in the price per PBR-share from $52.88 on December 1, 2009, to a six-month low of $37.31 on February 8, 2010, have one investor casting doubts that this week’s rebound in shares will last. The investor initiated a ratio put spread to hedge against further share price erosion through February expiration. The trader bought 10,000 puts at the February $39 strike for a premium of $0.50 apiece, and sold 20,000 puts at the lower February $36 strike for a premium of $0.10 each. The net cost of the pessimistic play amounts to $0.30 per contract. Thus, the investor is positioned to amass profits should PBR’s shares slip beneath the breakeven price of $38.70 by expiration day. Maximum potential profits of $2.70 per contract are available to the trader if PetroBras’ share price falls 10% from the current price of $40.02 to reach $36.00 by expiration next Friday.

HOG – Harley-Davidson, Inc. – The motorcycle manufacturer’s shares declined 0.25% to $22.67 today prompting pessimistic options trades in the March contract. Investors purchased put spreads to position for potential share price erosion through expiration next month. Approximately 12,500 puts were picked up at the March $22 strike for an average premium of $1.08 apiece, spread against the sale of 12,500 puts at the lower March $19 strike for a premium of $0.25 each. The debit put spreads cost traders a net $0.83 per contract. Maximum potential profits of $2.17 per contract accumulate for put-spreaders if HOG’s share price plummets more than 16% from the current value of the stock to reach $19.00 by expiration.

BMY – Bristol-Myers Squibb Co. – Pharmaceutical company, Bristol-Myers Squibb, attracted bullish options traders today despite the 1.25% decline in the price of its shares to $23.94. One investor is optimistic that BMY’s shares will rally approximately 9% in the next five months to June expiration. The trader purchased a debit call spread to position for potential bullish movement in the price of the underlying stock. It appears the investor purchased 5,900 calls at the June $24 strike for a premium of $1.35 apiece, and sold 5,900 calls at the higher June $26 strike for an average premium of $0.58 each. The net cost of the spread amounts to $0.77 per contract. Shares of the pharmaceutical firm must increase 3.5% from the current day’s share value before the call-spreader breaks even on the transaction at a share price of $24.77. Maximum potential profits of $1.23 per contract accumulate for the bullish investor only if Bristol-Myers’ shares rally 8.60% (over the current price of $23.94%) to $26.00 by expiration day in June.

FXE – CurrencyShares Euro Trust – Shares of the CurrencyShares Euro Trust, which aims to mirror the price of the Euro, dipped 0.25% today to $137.15. Options activity on the FXE indicates one big player is bracing for continued bearish movement in the price of the underlying stock – and therefore in the price of the Euro – by expiration day in February. The pessimistic player purchased a put butterfly spread to establish a bearish stance on the fund. The 10,000-lot wings of the butterfly spread were purchased at the February $135 strike for an average premium of $0.45 each [wing 1], and at the higher February $137 strike for a premium of $1.20 apiece [wing 2]. The body of the butterfly, sandwiched between the two wings, centered at the February $136 strike price where 20,000 puts were sold for a premium of $0.75 apiece. The net cost of the bearish transaction – which is also the maximum loss potential on the position – amount to $0.15 per contract. Maximum potential profits of $0.85 per contract accumulate if shares of the FXE decline to $136.00 by expiration day.

KFT – Kraft Foods, Inc. – A bullish risk reversal on the U.S. foods manufacturer indicates at least one investor is positioning for continued upward movement in the price of the underlying stock by March expiration. Kraft’s shares edged 0.35% higher to $29.00 in the first half of the trading day. The optimistic trader sold 5,000 puts at the March $28 strike for a premium of $0.51 apiece in order to offset the cost of purchasing 5,000 calls at the higher March $30 strike for a premium of $0.47 each. The investor pockets a net credit of $0.04 per contract on the transaction, which he keeps if Kraft’s shares trade above $28.00 through expiration. Additional profits amass if the value of the underlying shares increases 3.45% from the current price ($29.00), and exceed the breakeven point at $30.00 by expiration day in March.

YHOO – Yahoo!, Inc. – Option traders initiated near-term bearish transactions on Yahoo as shares slipped 2% to $14.78, but longer-term trades on the internet destination suggest bullish players are also at work today. Investors scooped up protective put options at the March $14 strike where 4,400 puts were picked up for an average premium of $0.35 each. Another chunk of 5,200 puts were purchased at the now in-the-money April $15 strike price for a premium of $0.84 apiece. Put buyers are perhaps bracing for continued share price erosion through the next several months. Conversely, longer-dated options trading patterns were dominated by bullish players. It looks like 4,000 in-the-money call options were purchased at the July $14 strike for an average premium of $1.59 each. Investors long the calls stand ready to accrue profits if Yahoo’s shares rally 5.50% over today’s current value per share to surpass the breakeven point at $15.59 by July expiration.

MOS – The Mosaic Co. – The manufacturer of concentrated phosphate and potash crop nutrients for the agriculture industry attracted bullish options players in the first half of the trading session. Mosaic’s shares rallied 1% to $57.50 as of 12:10 pm (EDT). Highly optimistic traders purchased ratio call spreads in the March contract to position for a sharp rally in the value of the underlying stock by expiration. It looks like some 3,500 calls were purchased at the March $70 strike for an average premium of $0.39 apiece, and spread against the sale of roughly 7,000 calls at the higher March $75 strike for $0.12 each. The average net cost of the ratio spread amounts to $0.15 per contract. Investors buying the spread are positioned to accrue profits should shares surge 22% above the current price to surpass the effective breakeven point at $70.15 by March expiration. Maximum potential profits of $4.85 per contract are available to bullish players only if Mosaic’s shares jump more than 30% to $75.00 ahead of expiration day.

NTGR – Netgear, Inc. – Shares of the provider of networking equipment for small business and home users are up 15.40% this morning, reaching a new 52-week high of $25.12. The price of the underlying shares jumped after Netgear revealed it expects to generate sales of at least $195 million in the first quarter, which is greater than average analyst expectations of $178.6 million in revenue. One option trader headed straight for March contract put options to roll up downside protection in order to keep pace with the sudden burst higher in share price. It looks like the investor sold 4,000 puts at the March $22.5 strike for a premium of $0.40 each, rolling the previously established long put position up to the March $25 strike, where 4,000 put contacts were picked up for a premium of $1.35 apiece. The net cost of the current transaction, excluding the unknown value originally paid for the March $22.5 strike puts, amounts to $0.95 per contract. Thus, the investor is protected in case Netgear’s shares trade beneath the breakeven price of $24.05 ahead of March expiration. Given the current open interest level at the March $22.5 strike, we believe the scenario described above is the most likely explanation for the put activity observed. However, it is possible the investor held no previous long put position, and is instead enacting a credit spread to take a bullish stance on Netgear. If this is the case, the trader pockets a net premium of $0.95 per contract, which he keeps if shares trade above $25.00 through expiration in March. Options implied volatility contracted 25.10% to 39.85% in morning trading.

BIDU – Baidu, Inc. – Chinese-language internet search provider, Baidu, Inc., said it expects its first-quarter sales to exceed analysts’ forecasts, citing rival Google’s exit from the Chinese market. Shares surged to a new 52-week high of $474.22 in the first fifteen minutes of the trading session. The price of the underlying is slightly lower as of 10:30 am (EDT), though still up more than 7.50% on the day to stand at $468.00.The jump in the value of Baidu’s shares prompted frenzied options activity in the near-term February contract. Put selling is taking place at the February $460 strike where roughly 1,000 contracts were shed for an average premium of $8.66 apiece. Two-way trading traffic in February $500 strike call options for an average premium of $3.13 each suggest some investors are positioning for continued upward momentum in the price of the underlying stock, while others are perhaps banking gains in the current rally. Options implied volatility slipped 15.93% to 41.20% following the firm’s first-quarter forecast.

DIS – The Walt Disney Co. – Worldwide entertainment company, Walt Disney, attracted call buyers to the February contract this morning despite the 1.85% decline in the value of its shares to $29.29. Approximately 3,100 calls were picked up at the February $30 strike for an average premium of $0.27 per contract. Open interest of 16,144 contracts at that strike suggests traders could be closing out short call positions. However, the buying action is probably the work of investors taking long call positions to posture for a potential rebound in Disney’s share price by expiration in just over one week’s time.

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