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Friday, April 12, 2024

Natural Gas Options Trader Enacts Bullish Risk Reversal

Today’s tickers: UNG, IP, EEM, CAH, TRA, UAUA, USO, WFMI, BRK.B & ANF

UNG – United States Natural Gas ETF – Shares of the natural gas exchange-traded fund, which mirrors the price and performance of natural gas, are down 1.85% to $9.67 with just under one hour remaining in the trading session. Options traders initiated bullish plays in the March contract despite the dip lower in the price of the underlying shares. It looks like one investor initiated a bullish risk reversal to position for a rebound in the price per UNG share by March expiration. The trader sold 8,250 in-the-money puts at the March $10 strike for a premium of $0.64 each in order to offset the cost of buying 8,250 calls at the same strike for $0.40 apiece. The trader pockets a net credit of $0.24 per contract on the reversal, which he keeps if shares of the fund trade above $10.00 by expiration day. Additional profits are available to the upside if and when the price per share exceeds $10.00 apiece.

IP – International Paper Co. – Global paper and packaging firm, International Paper Company, enticed bullish options traders to initiate optimistic positions in the March contract as shares of the underlying stock jumped 6% in late afternoon trading to $23.92. Plain-vanilla call buying took place at the March $25 strike where upwards of 10,000 contracts were purchased for an average premium of $0.45 apiece. Call buyers stand ready to accrue profits should IP’s shares rally another 6.40% over the current value of the stock to surpass the effective breakeven point on the calls at $25.45 by March expiration.

EEM – iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets exchange-traded fund, which generally corresponds to the price of the MSCI Emerging Markets index that was created by MSCI as a benchmark for international stock performance, rallied 2.30% to $39.32 this afternoon. June contract options activity on the EEM suggests shares may stagnate near the current price through expiration in four months. It looks like options traders sold straddles in order to pocket premium on the sale of both calls and puts. Investors sold approximately 9,100 calls at the June $39 strike for an average premium of $2.95 apiece and sold 9,100 puts at the same strike for a premium of $2.65 each. Gross premium enjoyed by straddle-sellers amounts to $5.60 per contract. Investors keep the full $5.60 premium per contract if shares of the underlying stock settle at $39.00 at expiration. The short call and put positions leave straddlers exposed to potentially devastating losses should EEM shares trade above the upper breakeven price of $44.60, or if the stock falls below the lower breakeven point at $33.40, by expiration.

CAH – Cardinal Health, Inc. – The provider of products and services aimed at improving productivity and safety in the healthcare industry received a vote of confidence by one long-term bullish investor populating the January 2011 contract today. Shares of Cardinal Health improved in earlier trading, but slipped 0.15% this afternoon to $33.34. The optimistic trader purchased a debit call spread to position for a rally in the price of the underlying stock by expiration next January. The investor bought 3,500 calls at the January 2011 $35 strike for a premium of $2.30 each, spread against the sale of 3,500 calls at the higher January 2011 $40 strike for an average premium of $0.85 apiece. The net cost of the spread amounts to $1.45 per contract. Maximum available profits of $3.55 per contract accumulate for the trader if Cardinal’s shares surge nearly 20% from the current price of the stock to $40.00 by expiration day. Shares of the underlying stock must increase at least 9% before the trade breaks even at a share price of $36.45.

TRA – Terra Industries Inc. – News that fertilizer maker, Yara International ASA, is buying rival Terra Industries for $4.1 billion – or $41.10 per Terra share – lifted TRA’s shares 22.40% to $40.70 today and prompted bullish options activity on the stock. Investors picked up 2,800 now in-the-money calls at the February $40 strike for $0.60 per contract. Additional call buying action occurred at the June $40 strike where 1,000 in-the-money calls were coveted for a premium of $1.15 each. June contract call-buyers stand ready to accrue profits if Terra’s share price increases above the breakeven point at $41.15 ahead of expiration day in approximately four months. Option players looking to lock in gains on the recent share price rally picked up 2,200 puts at the February $40 strike for an average premium of $0.17 per contract. Options implied volatility plummeted on the takeover news, falling 94.45% to 2.55%.

UAUA – UAL Corp. – Bearish investors piled into put options on the Chicago-based owner and operator of United Airlines today with shares of the underlying stock down 2% to $15.62. A number of large U.S. carriers experienced share price improvement in morning trading on reports of positive international premium growth for the month of December. UAL Corp., however, attracted significant put trading action with its share price down on the day. It looks like at least 21,500 puts were purchased at the March $15 strike for an average premium of $1.00 per contract. Investors holding the put options are perhaps bracing for continued share price erosion ahead of March expiration. Traders amass profits to the downside should UAUA shares slip beneath the effective breakeven price of $14.00. The surge in demand for options on UAL Corp. boosted options implied volatility 17.75% to 77.86%.

USO – United States Oil Fund LP – Shares of the U.S. Oil Fund, which invests in futures contracts for West Texas Intermediate light, sweet crude oil, are up 3.85% to $37.71 today. Bullish trading patterns emerged throughout the first half of the trading session, with notable activity apparent in the April contract. It appears one trader initiated a ratio call spread to position for an improved USO share price by expiration in approximately two months time. The investor picked up 5,000 calls at the March $40 strike for an average premium of $0.95 apiece, and sold 10,000 calls at the higher March $45 strike for $0.20 each. The net cost of the transaction amounts to $0.55 per contract. Thus, the maximum potential payoff for the trader is $4.45 per contract if shares of the underlying stock rally 19.30% over the current value of the fund to $45.00 ahead of expiration. The investor breaks even on the transaction only if USO’s shares increase 7.50% to $40.55 by March expiration.

WFMI – Whole Foods Market, Inc. – Shares of the natural and organic foods retailer are up 1.50% to $30.19 this morning ahead of the firm’s first-quarter earnings report scheduled for release after the closing bell. Bullish options traders picked up nearly 2,000 calls at the March $35 strike for an average premium of $0.33 per contract. Perhaps call buyers anticipate a surge in the price of the underlying stock should Whole Foods’ earnings exceed average analyst expectations of $0.26 per share this evening. Individuals long the calls stand ready to accrue profits if WFMI’s shares rally 17% from the current price to surpass the breakeven point at $35.33 ahead of March expiration day. Options implied volatility is up approximately 5.5% to 52.64% ahead of earnings.

BRK.B – Berkshire Hathaway, Inc. Class B – Warren Buffett’s property and casualty insurance and reinsurance business appeared on our ‘most active by options volume’ market scanner in morning trading due to bearish trading activity. Shares of BRK.B are down 1.50% to $75.76 prompting bearish put buying in the March contract. It looks like 2,250 puts were purchased at the March $75 strike for a premium of $2.20 apiece. Investors buying the puts perhaps expect Berkshire’s price per share may fall beneath the effective breakeven price at $72.80 ahead of March expiration. Options traders exchanged more than 29,100 contracts on the stock in the first seventy minutes of the trading session.

ANF – Abercrombie & Fitch Co. – Teen and tween clothing retail firm, Abercrombie & Fitch, posted fourth-quarter earnings of $0.91 per share, which is lower than the $1.10 earned by the company in the same period a year earlier, but greater than average analyst forecasts of $0.87 a share. Abercrombie’s shares are up more than 4.50% this morning to $35.41, while options implied volatility is down roughly 13.20% to 40.66% following earnings. Investors are trading slightly more calls on the stock than puts and have exchanged 15,760 contracts on ANF as of 10:45 am (EDT).


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