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Saturday, February 24, 2024

Gold Bugs And Bears Butt Heads In Options-Land

Today’s tickers: EGO, ATML, C & XHB

EGO – Eldorado Gold Corp. – Mixed opinion on the direction shares in Eldorado Gold Corp. are likely to take during the two weeks remaining before September contracts expire prevails this morning as buyers of calls and puts in the front month took their marks. Canadian stocks slumped along with U.S. equities on global growth concerns and fears over the European debt crisis, but all that glitters today is gold and those that mine for the precious metal, as shares in Vancouver-based Eldorado rallied 6.1% to a record-high of $22.12 earlier in the session. The October 2011 gold futures started the day in distinctly positive territory, but are roughly flat in early-afternoon trade to stand at $1,875 per ounce as of 12:30 pm in New York.

Options activity in the front month suggests there are some strategists expecting Eldorado’s shares to hit new highs by the time September contract calls expire, while out-of-the-money put purchases indicate other players are building up bearish positions should the stock lose its footing in the next eight trading sessions. Bullish traders snapped up 2,000 calls at the September $23 strike for an average premium of $0.29 apiece, against previously existing open interest of just 213 contracts. Call buyers profit if EGO’s shares inflate 5.3% to exceed the average breakeven price of $23.29 by expiration day. Meanwhile, put players targeted the September $20 strike, where some 3,900 contracts changed hands against open interest of 221 contracts. It looks like around 3,000 of the put options were purchased for an average premium of $0.20 each. Buyers of the puts may be taking an outright bearish stance on the stock, or hedging long exposure in the name with the options. Investors holding the contracts make money if EGO’s shares fall 10.5% off an earlier high of $22.12 to breach the average breakeven price of $19.80 by September expiration day. Both put and call buyers may benefit from rising levels of implied volatility on the stock, which currently stands 14.1% higher at 48.3%.

ATML – Atmel Corp. – Sizable prints in long-dated contracts suggest shares in the manufacturer of semiconductor products and components may recover substantially by January 2012 expiration. Shares in Atmel dropped 4.2% in the first half of the trading session to stand at $8.20 by 11:45 am ET. The stock currently trades at a 51% discount off its February 9, 2011, 10-year high of $16.80. One bullish player positioning for a rebound in the price of the underlying shares initiated a large debit call spread on the stock. It looks like the trader picked up 10,000 calls at the Jan. 2012 $10 strike for a premium of $0.65 each, and sold the same number of calls up at the Jan. 2012 $12.5 strike at a premium of $0.15 a-pop. Net premium paid for the trade amounts to $0.50 per contract, thus positioning the investor to profit should Atmel’s shares surge 28.0% over the current price of $8.20 to surpass the effective breakeven point at $10.50 by expiration. The call-spreader may walk away with maximum potential profits of $2.00 per contract in the event that shares in ATML jump 52.4% in the next five months to trade above $12.50 by January 2012 expiration. Options implied volatility on Atmel Corp. climbed 13.1% to 68.3% by 12:00 pm in New York.

C – Citigroup, Inc. – The long-term outlook on the fate of Citigroup’s shares over the next four to five months is anything but pretty, according to one options player buying deep out-of-the-money puts on the stock in the first 15 minutes of the trading session. Shares in Citigroup fell as much as 6.3% after the opening bell to touch an intraday low of $26.60, but are off their lows this afternoon, down 2.9% on the day at $27.57 as of 12:35 pm ET. The stock touched a 2-year low of $25.40 on August 23, on the heels of a more than 50.0% drop since the start of 2011. One strategist positioning for the bloodbath to continue purchased at least 5,000 calls at the Jan. 2012 $18 strike this morning at a premium of $1.48 each. The put buyer profits at expiration in 2012 if shares in Citigroup plunge 40.0% from the current price of $27.57 to breach the effective breakeven point on the downside at $16.52. Shares in Citigroup last traded below $16.52 back in the panic-stricken days of March 2009.

XHB – SPDR S&P Homebuilders ETF – Shares in the XHB, an exchange-traded fund that tracks the performance of the S&P Homebuilders Select Industry Index, fell 2.1% to $13.92 this afternoon, but at least one options player is positioning for the price of the underlying to rally substantially by October expiration. The top three holdings in the fund are Bed Bath & Beyond, Pier 1 Imports, and Home Depot, representing roughly 13% of the fund’s holdings. The homebuilders-sector bull bought around 10,000 calls at the October $15 strike for an average premium of $0.40 per contract, against previously existing open interest of 1,136 contracts. Profits are available to the call buyer should shares in the XHB surge 10.6% over the current price of $13.92 to surpass the average breakeven price of $15.40 by expiration day next month. Shares in the XHB last closed above $15.40 back on August 3. Options implied volatility on the fund rose 9.0% to 45.3% by 12:55 pm ET.

Andrew Wilkinson

Senior Market Analyst


Caitlin Duffy

Equity Options Analyst


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