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Tuesday, February 27, 2024

Vega Trade On DJX Sees Choppy Markets On The Horizon


Today’s tickers: DJX, LNKD & LULU

DJX – 1/100 of the Dow Jones Industrial Average – A massive vega trade initiated in the DJX today sent off ripples across major indices and single-stock names as market makers scrambled to hedge their sales of volatility that occurred due to the trade. The purchase of 30,000 Dec. 2014 $135 calls on the DJX, delta-hedged by a June 2014 $132 collar, is a pure volatility play that makes money if markets grow increasingly choppy going forward. Signs Europe’s crises may be coming to the fore once again could play a role in rising market volatility, which U.S. equities have largely been able to cast aside during the first quarter given positive domestic economic data and strong corporate earnings. The VIX has remained below 25 all year, passing much of its time just above or below the 17-level. For an investor anticipating rough seas up ahead, multi-year lows for the fear index provide an opportunity to lock in vega while it’s relatively cheap rather than wait for Nostradamus’ Armageddon, or more likely, continued turmoil across the pond, to blow volatility through the roof.

LNKD – LinkedIn Corp. – Shares in the social networking site for professionals are up 0.25% this afternoon to stand at $106.65 ahead of the Company’s first-quarter earnings report after the final bell today. Trading traffic in LinkedIn weekly calls suggests some traders are positioning for shares in the name to extend gains following the report. Notable bullish interest is building in the May 04 ’12 $115 strike options where more than 2,000 calls changed hands against open interest of 878 contracts by 12:15 pm in New York. It looks like most of the calls were purchased for an average premium of $3.07 apiece, thus positioning traders to profit should shares in LinkedIn surge 11.0% to surpass the average breakeven price of $118.07 by expiration at the end of the week. A push above $118.07 would bring the shares within 4.0% of the stock’s record intraday high of $122.70, a price at which shares have not traded since the May 19, 2011, IPO.

LULU – Lululemon Athletica, Inc. – High-end athletic apparel retailer, Lululemon Athletica, hit yet another all-time high of $81.09 on Thursday, bringing the stock’s stunning year-to-date rally to more than 70.0%. Bullish bets initiated on the stock during the past five trading sessions have certainly paid off for some strategists holding options that have in some cases skyrocketed in value this week. Last Friday, one trader looking for the stock to rally above $75.00 this week purchased 100 of the May 04 ’12 $75 strike calls for $0.91 apiece. Today, the contracts are deep in-the-money, with those looking to buy the options paying as much as $6.10 apiece for the $75 strike calls. Paper profits available on the position at present are sizable, with premium on the calls up more than 600%. Meanwhile, calls purchased yesterday afternoon are also likely to yield substantial profits for LULU bulls at expiration. Open interest in the May 04 ’12 $80 strike calls indicates traders purchased at least 700 of the contracts for a premium of $0.75 on Wednesday. Call buyers today saw the contracts trade up to an intraday high of $1.51 apiece.


Caitlin Duffy

Equity Options Analyst

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