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Friday, December 1, 2023

Mixed Action on ETF Country Plays

Today’s tickers: EFA, EEM, DYN & RMBS

EFA – iShares MSCI EAFE Index Fund – One investor appears nervous over a continued slide lower for global stocks and used a put option combination in the index fund tracking Europe, Asia and Far Eastern markets in an effort to profit from a further 10% slide. The iShares ETF is trading at an unchanged $50.89 on Friday while one investor has paid a $980,000 net premium to help reduce the cost of taking a nearby bearish position on the prospects for the fund. If the fund does crash to $45.00 before the option play expires in September, the investor stands to make profits of $4,020,000. The position could be full or partial protection against a long stock position in which case options profits are offset by rising losses as the share price declines. In order to make a profit at expiration the investor must see the share price settle at less than $49.02.

EEM – iShares MSCI Emerging Markets Index Fund – An alternative to the strategy above was offered possibly by the same investor using a put spread in the emerging markets ETF. With the fund having rebounded from about $40.00 per share yesterday, the fund gave of 6.2% of its recovery. This seems to have provoked this investor to seek short-term gains by betting against a further slip in emerging markets. The investor again focused on the September expiration and with shares trading now at $40.63 used the $38.00 and $33.00 strikes to write a credit spread. Instead of buying the higher strike, it appears to have been sold in exchange for puts at the lower $33.00 strike. The purpose is to bank the net premium of 49 cents per contract from making the play. The investor this time faces losses beneath an expiration price $37.51 and see them increase to a maximum of $4.51 per contract in the event markets do face a meltdown over late summer. In order to reach breakeven the shares would need to decline by 7.7% from today’s trading price and to leave the investor facing maximum pain would need to slide by 18.8%.

DYN – Dynegy Inc. – The announcement by Blackstone that it was making a $4.50 a share bid for the power generating company created a groundswell of demand for shares in Dynegy, which rose 60% pennies short of the deal price. Options volume quickly eclipsed the overall reading of open interest at Dynegy when two tranches of 10,000 lot call options were scooped up by speculators wondering whether there was more upside juice for its stock price. An investor had no second thoughts in paying 50 cents for 10,000 calls expiring in September granting the investor buying rights at a fixed $4.00 per share. He shouldn’t lose too much assuming the deal proceeds. But according to the terms of the agreement, Dynegy now has 30 days to shop itself to other buyers, which is likely why the obsession with options today. The call buyer has the right to get bought out at $4.00 although would be sour if the share price at expiration was below the deal price. However, now that the company is on the bidding block, the option owner faces a plausible boon if other parties express a good old-fashioned joust to court management. This investor may be thinking the sky’s the limit looking at the recent performance for Dynegy’s shares, which have trickled down steadily from a peak at $13.00 last Fall. A similar but more aggressive purchase of December options was also evident in hectic trading as an investor scooped up 10,000 more call options this time at the $5.00 strike where premiums ranged between five and 10-cents per contract. A buyer might see unlimited upside potential if willing to spend the relatively small premium. But the cost of the trade may turn to a wasted loss in the event that Blackstone remains the only knight on the scene.

RMBS – Rambus Inc. – The announcement between memory-maker Rambus and graphics-maker Nvidia on certain licensing rights created early demand for shares in Rambus driving its share price to $19.80. And while the stock is still almost 5% higher on the day it appears to be sinking fast and erasing gains. Option investors appear to be selling call options expiring in a week’s time at the $19.00 strike indicating that the surge possibly won’t last. The sold call options could be tied to stock according to Philadelphia floor brokers. Some 10,000 calls have been sold mainly at a 50 cent premium, while at one point the calls reached an intraday high at $1.00 each as Rambus triggered a high at $19.85.

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