Bank of America Bear Cleans Up
by Option Review - May 28th, 2010 5:41 pm
Today’s tickers: BAC, FXY, VALE, ATPG, CAT, EBAY, CSCO, KG, NE & AGN
BAC – Bank of America Corp. – Activity in out-of-the-money call options on Bank of America in the first half of the trading session appears to be the work of an investor taking profits on the closing purchase of a previously established bearish short call position. BAC’s shares surrendered 1.85% today to stand at $15.88 as of 2:45 pm (ET). It looks like the investor originally sold 20,500 calls at the November $24 strike for an average premium of $0.37 per contract back on April 28, 2010, when shares of the underlying stock were trading at a volume-weighted average price of $17.73 each. In the past four weeks since the initial sale of the calls, Bank of America’s shares declined 12.12% down to the current price of $15.88. The call seller was properly positioned to benefit from share price erosion, and today was able to buy back the same call options for just $0.10 apiece. Thus, the closing purchase of the calls yields net profits of $0.27 per contract to the responsible party.
FXY – CurrencyShares Japanese Yen Index Fund – A sizeable debit call spread enacted on the FXY, an exchange-traded fund designed to reflect the price of the Japanese Yen, indicates one options strategist is expecting shares of the underlying fund to rally sharply by expiration in January 2011. Shares of the fund are currently up 0.18% at $109.14 as of 1:52 pm (ET). The investor purchased 8,709 calls at the January 2011 $110 strike for a premium of $4.40 apiece, and sold the same number of calls at the higher January 2011 $125 strike for $1.00 in premium each. The net cost of the transaction amounts to $3.40 per contract, thus dictating a breakeven price – above which profits start to accumulate – of $113.40. Shares of the FXY must rally at least 3.90% from the current value of $109.14 before the responsible party starts to make money. Maximum potential profits of $11.60 per contract are available to the spread trader if shares jump 14.53% from the current value of the fund to $125.00 in the next eight months to expiration. It does not appear the fund’s share price has ever exceeded the current 52-week high of $115.40, attained back on November 30, 2009.
VALE – Vale S.A. – Shares of the world’s largest…
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Option Trader Prescribes Bullish Risk Reversal on CVS
by Option Review - November 19th, 2009 5:43 pm
Today’s tickers: CVS, LIZ, ITMN, MA, V, RF, KG, HW, WSM, AEP & NTAP
CVS – CVS Caremark Corp. – Shares of the pharmacy retail chain are up 1.5% to $31.11 perhaps due, in part, to the ‘buy’ rating it received at UBS today. Optimistic options activity took place in the December contract as one investor initiated a bullish risk reversal. It appears the trader sold 4,400 puts at the December 31 strike for an average premium of 94 cents apiece in order to finance the purchase of the same number of calls at the higher December 32 strike for 63 cents each. The investor pockets a 31 cent credit on the trade, which he retains in full as long as shares remain above $31.00 through expiration. Additional profits accumulate if CVS’s shares rally above $32.00.
LIZ – Liz Claiborne, Inc. – A 15,000-lot covered call in the January 2011 contract on Liz Claiborne today suggests shares are likely to recover, albeit at a glacial pace. Shares of the apparel and accessories retailer suffered a 5% decline to $4.55 during the trading session. One investor effectively purchased shares of the underlying stock for $3.30 apiece by selling 15,000 calls at the January 2011 5.0 strike for a premium of 1.25 each. Thus, the trader stands ready to accrue gains of 51% if shares of LIZ appreciate to $5.00 by expiration. The long-term positioning of the covered call play provides several advantages to the investor. One advantage is that the call options do not expire for another 13 months, which leaves ample time for LIZ’s shares to appreciate up to the strike price of $5.00. The 15,000-lot call transaction represents nearly 50% of the total existing open interest on LIZ of 31,502 contracts. Note that shares last traded above $5.00 yesterday at approximately 10:35 am (EDT).
ITMN – InterMune, Inc. – A bull call spread on the biotechnology company today suggests shares could rally significantly by expiration in April 2010. Bullish options activity on the stock belies the more than 3% decline in ITMN’s shares during the session to $10.94. The call spread involved the purchase of 3,750 calls at the April 15 strike for an average premium of 2.25 each, marked against the sale of the same number of calls at the higher April 25 strike for 75 cents apiece. The net cost of the transaction amounts to 1.50 per…
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Emerging Markets Heading Down, Say Option Traders
by Option Review - October 16th, 2009 4:14 pm
Today’s tickers: EEM, POT, JAVA, BARE, SHAW, EWZ & KG
EEM – iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets exchange-traded fund are down 1.25% to $40.77 as we head toward the closing bell this afternoon. One bearish option trader exchanged 70,000 contracts in the January 2010 contract to protect against potential declines in the EEM through expiration. It appears the investor sold 35,000 calls at the January 41 strike for an average premium of 2.34 apiece. A chunk of 25,000 of those call options were spread against the purchase of 25,000 puts at the same January 41 strike for a premium of 3.00 per contract. The remaining 10,000 calls were spread against the purchase of 10,000 puts at the lower January 34 strike for 81 pennies each.
POT – Potash Corporation of Saskatchewan, Inc. – The Canada-based potash producer rose more than 2.5% to $96.72 despite the overall bearish trend for the larger marketplace today. Plain-vanilla call buying suggests bullish investors are hoping POT’s shares continue on the up-and-up through the end of 2009. Approximately 4,000 calls were picked up at the November 100 strike for an average premium of 3.05 apiece. More optimistic individuals looked to the December 105 strike to get long of some 6,200 calls for about 3.02 per contract. Investors holding the December 105 strike calls are now positioned to accumulate profits if shares of POT rally at least 12% from the current price to breach the breakeven point at $108.02.
JAVA – Sun Microsystems, Inc. – Call-selling and put-buying in the January 2010 contract suggests investors expect JAVA’s shares could experience further declines before the year is over. Shares fell less than 0.5% to $9.13 during the trading session. It appears traders sold 4,500 calls at the in-the-money January 9.0 strike for 40 cents apiece. Perhaps these individuals are throwing in the towel on JAVA, salvaging whatever premium they can in case the stock falls below $9.00. Additional bearishness took place at the January 7.5 strike where investors bought more than 16,000 puts for an average premium of 16 cents per contract. Perhaps put-buyers are long shares of the underlying stock. If this is the case, downside protection from the put options will kick in if shares plummet 20% to $7.34 by expiration in January.
BARE – Bare Escentuals, Inc. – The cosmetics and skin care products company popped…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.