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Saturday, February 24, 2024

Bearish Signals Appear in Japan ETF Options

 Today’s tickers: EWJ, GIS, XING & DLTR

EWJ – iShares MSCI Japan Index Fund – A couple of bearish options trades on the EWJ caught our eye today with shares in the fund dropping nearly 2.0% at the start of the session to an intraday low of $10.42. Shares in the ETF pared some of the morning’s losses this afternoon, and currently stand 0.95% lower on the day at $10.53. The price of the underlying shares at $10.53 represents a 13.0% recovery off of the EWJ’s post-earthquake low of $9.24. One investor appears to have taken a medium-term bearish stance on the fund by selling calls to offset the cost of buying put options. The trader sold 14,250 calls at the June $11 strike for a premium of $0.31 each, and purchased the same number of puts at the lower June $10 strike at a premium of $0.44 apiece. Net premium paid for the spread amounts to $0.13 per contract. The investor profits if the EWJ’s shares decline 6.3% in the next few months to slip beneath the effective breakeven point to the downside at $9.87 by June expiration. Meanwhile, substantial volume in April contract calls today appears to be the work of an investor taking down one leg of a bullish risk reversal initiated last Tuesday. Around 105,000 calls sold today at the April $11 strike for a premium of $0.08 per contract. Most of the volume at that strike likely represents the closing sale of some 102,500 calls that were originally purchased last week. The original transaction involved the sale of 102,500 puts at the April $8.0 strike for a premium of $0.10 each, against the purchase of the same number of calls at the April $11 strike at a premium of $0.14 apiece. Perhaps the trader is less optimistic about the prospects for a near-term rebound in the price of the underlying fund today than he was eight days ago. Over 260,000 option contracts have changed hands on the EWJ as of 1:30pm in New York.

GIS – General Mills, Inc. – Bullish options strategies implemented on General Mills today suggest some traders are hungry for a rally in shares of the branded consumer foods manufacturer. Shares in GIS slipped following the company’s third-quarter earnings report, and are currently down 2.0% to stand at $36.17 just before 12:00pm in New York. The stock is trading lower despite General Mills’ better-than-expected 18% increase in profits in the quarter, and its rosy forecast for next quarter. Concerns regarding higher input costs for grains, meat and dairy, as well as the 1% decline in U.S. sales are likely contributors to today’s pullback in the price of the underlying. But, one big player appears optimistic that a General Mills recovery story is set to unfold ahead of October expiration. It looks like the investor sold 30,000 puts at the October $33 strike for an average premium of $1.12 each in order to buy the same number of calls up at the October $37 strike at an average premium of $1.58 a-pop. Net premium paid to initiate the bullish spread amounts to $0.46 per contract, and positions the trader to make money in the event that GIS shares rally 3.6% over the current price of $36.17 to surpass the average breakeven point at $37.46 by expiration day. Meanwhile, in-the-money calls at the April $36 strike are active, as well. It is possible that some of the volume generated in October $37 strike calls was rolled from the April $36 strike. Another options-optimist seems to have extended his time horizon, rolling approximately 9,000 calls from the April $36 strike to buy the same number of contracts out at the July $36 strike. Options implied volatility on General Mills is down 17.8% at 17.47% post earnings.

XING – Qiao Xing Universal Resources, Inc. – The Chinese resources company attracted near-term bullish options traders to the front month this morning with its shares rising as much as 13.0% earlier in the session to secure an intraday high of $2.34. Investors expecting XING’s shares to rise ahead of expiration day next month scooped up around 1,520 calls at the April $2.5 strike for an average premium of $0.12 per contract. Call buyers stand prepared to profit in the event that shares in Qiao Xing Universal Resources jump 12.0% over today’s high of $2.34 to surpass the average breakeven price of $2.62 before the calls expire next month. More than 2,600 calls traded at the April $2.5 strike thus far today on open interest of 1,164 contracts. Call options were also active out at the June $2.5 strike where some 672 lots changed hands in the first half of the session. Open interest in these longer-dated call options is relatively large at 6,823 contracts and is sufficient to cover volume generated there today. The rise in demand for call options on XING helped lift the overall reading of options implied volatility on the stock 25.5% to 85.93% by 12:45pm.

DLTR – Dollar Tree Stores, Inc. – Shares in the operator of discount variety stores are up 0.80% at $54.07 this afternoon, and some options traders appear to be prepping for the price of the underlying to continue to climb higher in the next couple of months. Bullish players picked up around 1,000 in-the-money calls at the May $52.5 strike for a premium of $3.30 each this morning. Investors long the calls profit if Dollar Tree’s shares increase another 3.2% over the current price of $54.07 to surpass the effective breakeven point to the upside at $55.80 by May expiration day. Demand for DLTR calls spread to the higher May $57.5 strike where some 1,900 calls were picked up at an average premium of $1.17 apiece. Some portion of the contracts purchased at the May $57.5 strike may have been tied to activity in the underlying shares, or to call selling out at the August $57.5 strike. More than 5,450 option contracts have changed hands on Dollar Tree Stores thus far today, with the overwhelming majority of the volume driven by activity in calls. Buyers of the calls benefit from continued bullish movement in DLTR’s shares through expiration.

Andrew Wilkinson

Senior Market Analyst


Caitlin Duffy

Equity Options Analyst

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