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Put Spread Prepares For Possible Near-Term Pullback In Homebuilders ETF

 

Today’s tickers: XHB, GILD & JAZZ

XHB - SPDR S&P Homebuilders ETF – Shares in the XHB, which last week hit a five-year high of $26.10 on the heels of Thursday’s FOMC announcement, are down 1.5% this morning at $25.48 as of 11:25 a.m. ET. One options strategist positioning for the price of the underlying to potentially extend declines in the near term appears to have established a bear put spread in the October expiry. The strategy may be a hedge to protect the value of a long position in the underlying, or could be an outright bearish bet that shares in the XHB are poised to pullback somewhat during the next five weeks. It looks like the trader purchased a 4,000-lot Oct. $23/$25 put spread at a net premium of $0.46 per contract. The spread makes money if shares in the Homebuilders ETF slip 3.7% to breach the effective breakeven price of $24.54, while maximum potential profits of $1.54 per contract are available in the event XHB shares drop 10% to $23.00 at expiration next month. Shares in the Homebuilders ETF have increased roughly 110% since October 2011 as the housing market continues to recover.

GILD - Gilead Sciences, Inc.– The biopharmaceutical company’s shares surged 5.3% to an all-time high of $65.31 this morning on positive analyst comments regarding the drug maker’s HIV and hepatitis C treatments. Earlier this morning an analyst at JPMorgan raised his target share price on Gilead Sciences to $75.00 from $70.00, while an analyst with Deutsche Bank raised her price target to $68.00 from $65.00 on Friday. Options activity on GILD this morning suggests some traders are positioning for shares in the name to extend gains in the near term. Upside call buyers targeted the Sep. $65 and $67.5 strikes, with volume at each strike rising to 2,900 and 1,700 contracts, respectively, by midday. Traders appear to have purchased much of the volume, paying an average premium of $0.63 apiece for the $65 strike calls and an average of $0.16 each for the $67.5 strike calls. Call buyers stand ready to profit at expiration this week should Gilead’s shares settle above average breakeven points at $65.63 and $67.66, respectively. Meanwhile, more than 700 calls have changed hands at the Oct. $70 strike versus open interest of 368 contracts. It looks like open interest in the $70 call was established on Friday by buyers paying an average premium of $0.10 per contract. Traders long the calls at $0.10 have seen the value of their options triple over the weekend, with upside call buyers today paying an average premium of $0.37 per contract.

JAZZ - Jazz Pharmaceuticals, Inc. – Shares in the maker of narcolepsy drug treatment, Xyrem, jumped 17% to a record-high of $56.25 this morning on favorable results in its Xyrem patent case with generic drug maker, Roxane. Today’s move in the price of the underlying adds to sharp gains earlier in the month after the company sold its women’s health arm to Meda AB for $95 million and announced a new patent issue for Xyrem last week. Options players positioning for further upside in JAZZ shares this week picked up front month calls on the stock. Volume is heaviest at the Sep. $50 strike where upwards of 1,300 in-the-money calls changed hands in the first half of the session. Traders buying the $50 calls paid an average premium of $2.49 apiece this morning, and may profit at expiration if shares in the drug maker settle above the average breakeven point at $52.49. Fresh interest is building at the Sep. $55 and Oct. $55 strikes as well. More than 1,000 calls changed hands at the Sep. $55 strike versus previously existing open interest of 141 contracts, while some 720 calls traded at the Oct. $55 strike against 7 open positions. Traders appear to be buying and selling the $55 calls in roughly equal numbers. Overall options volume in excess of 6,400 contracts on JAZZ today is well above the stock’s average daily options volume of around 395 contracts.

 

Caitlin Duffy

Equity Options Analyst


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