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Friday, March 1, 2024

Market Slide has Japanese Tracker Options Active

Today’s tickers: EWJ, VIX, BP & AMT

EWJ – iShares MSCI Japan Index – Since the middle of May, shares in the Japanese market tracker have lunged between a peak at $10.00 and $9.15 creating a neat trading range. With an overnight confidence in global stocks hitting the fan and a capitulation to a 15-year high for the yen, the EWJ has pretty much fallen from the top to smack bang in the middle of that same range in just three days. One option traders appears to be translating more of the same by selling that same strangle combination expiring in January. It’s one of several strategies emerging today where this expiration contract was used to play out various views. The $9.00/$10.00 strangle appears to have been sold for a premium totaling 60 cents, which gives this investor plenty of wiggle room in the event that boom or bust just happens to prevail. The strategy works nicely if by expiration the share price continues its predictable oscillation allowing the premium seller to hold on in entirety. If, however, shares edge lower the investor has to dig in his pocket assuming a break below $8.40 or beyond $10.60. Option implied volatility on the options jumped by around 25% to 20% on Wednesday.

VIX – CBOE Volatility index – Futures on the underlying VIX index are higher by 10% in the August contract and 6% in September, where the index is currently predicted to rise to 29.15. Further maturities have gained to a lesser degree in price as the entire volatility curve adjusts upwards to what some investors interpret today as an increased fear over the health of the U.S. economy. The November VIX future reflects only one third of the gain of the front month contract and stands at 30.40. The S&P 500 index is at its worst point of the day having tumbled by 2.5%. one investor appears to be moving expectations for market weakness out further into the early winter months through use of an options combination that will benefit if another summer market rout for stocks forces the volatility curve to blows higher still. The investor appears to have sold September call options on the VIX at the 45 strike for 75 cents and gone long of the same strike using the November expiration at $1.20 per contract. Around 10,000 contracts changed hands in the spread. The investor may well be looking for the spread between the Sep and Nov futures to widen out from its current 1.15 differential, which could even happen in the event the stock market rally resumes and nearby fears subside leaving residual doubts underpinning deferred contracts.

BP – BP Plc – One investor appears to be taking advantage of today’s broad shunt lower for the market to take a bullish stance on shares of recovering oil-giant, BP. Its shares are lower by 3.4% to $38.73, which has allowed this option strategist to hone in on call options expiring in January 2012. Using a bullish spread combination the investor has lowered the cost of exposure to the stock should the Gulf of Mexico spill become a distant memory throughout 2011. The investor paid $3.10 to acquire 1,900 calls at the $50.00 strike and partially reduced the layout by selling the same amount at the $55.00 strike for a premium of $1.95, leaving a net payable premium of $1.15 and well below half the outright cost of the lengthy lower strike calls. Should BP’s share price completely recover its losses, this investor is looking to take a 10% share price increase on board through this limited-gain strategy. A rise of 8.9% in the reading of option implied volatility comes ahead of a tropical storm that has caused engineers to temporarily pack-up their drilling equipment before attempting to completely seal off the Macondo Well.

AMT – American Tower Corp. – Looking back at the historical options activity on American Tower at the end of May when its shares were trading at $40.99 one investor appears to have sold puts in exchange for calls. In today’s options activity it appears that the investor is reversing this bullish play with its shares having recanted from the upper strike price target. Today’s sell-off in stocks highlights the pullback from a recent gain to $47.50 for this stock, for which a bullish strategy seems to have paid off well. Ahead of the two-month rally in its stock, an investor sold 10,000 put options at the $35 strike expiring in January 2011 and bought the same number of $45 strike calls with the same expiry. Each contract was worth $2.00 at the time. Today the short put position appears to have been covered at 70 cents while the calls traded at $4.00 each. The position was effectively cost nothing to implement was today sold for a gross $3.30 gain.

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