Lam Research Options Draw Optimistic Crowd
by Andrew Wilkinson - February 23rd, 2010 5:24 pm
Today’s tickers: LRCX, AZN, BRCD, F, MTG, RSH & FL
LRCX – Lam Research Corp. – Contrarian option players initiated bullish trades on Lam Research Corporation today even though shares are trading 7% lower to $32.79. Investors sold nearly 5,000 in-the-money put options at the March $35 strike for an average premium of $1.71 apiece. Put-sellers are perhaps positioning for a rebound in the price of the underlying stock ahead of expiration next month. Traders keep the $1.71 premium per contract on the sale only if LRCX’s shares rally above $35.00 by expiration day. Short-put sellers receive the premium in exchange for bearing the risk that the puts land in-the-money at expiration and shares of the underlying stock are put to them at an effective price of $33.29 apiece. Optimism spread to the April $35 strike where 1,000 calls were picked up for an average premium of $1.15 apiece. Lam Research’s shares must jump 10.25% from the current value before call-buyers start to accumulate profits above the breakeven share price of $36.15. The increase in demand for options on LRCX today boosted options implied volatility on the stock about 11.1% to 37.54%.
AZN – AstraZeneca PLC – A bearish risk reversal was initiated on pharmaceuticals firm, AstraZeneca, today despite news the firm is raising its 2010 earnings outlook to $5.90-$6.30 per share up from $5.75-$6.15 per share. AstraZeneca improved its 2010 outlook after revealing plans to pay $783 million to settle a tax dispute with United Kingdom regulators. Shares were up earlier in the session, but are currently trading lower by less than 0.10% to $43.51. The pessimistic play involved the sale of 5,000 calls at the July $50 strike for a premium of $0.60 apiece, spread against the purchase of 5,000 puts at the lower July $40 strike for a premium of $1.35 each. The net cost of the reversal transaction amounts to $0.75 per contract. The investor responsible for the trade is perhaps hoping to accumulate profits to the downside should the stock trade beneath the breakeven share price of $39.25 by expiration in July.
BRCD – Brocade Communications Systems, Inc. – The supplier of networking equipment forecast maximum 2010 earnings of $0.58 per share, which underwhelmed analysts expecting $0.60 per share. A plethora of analyst downgrades combined with the lower-than-expected 2010 profit forecast pummeled Brocade’s share price down 23.50% to $5.32 today. BRCD was downgraded to ‘hold’…
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Bank of America Bears Buy Puts
by Andrew Wilkinson - February 8th, 2010 4:14 pm
Today’s tickers: BAC, PBR, F, FXI, NXY, KFT, DELL & HPQ
BAC – Bank of America Corp. – Bearish option traders purchased put options on Bank of America today with shares of the firm trading 3% lower to $14.52. The number of put options purchased at the March $14 strike price surpassed existing open interest at that strike, suggesting many investors are bracing for continued near-term share price erosion. Approximately 33,000 puts were purchased for an average premium of $0.59 apiece at the March $14 strike. Investors picking up the put options perhaps anticipate B of A’s share price could slip beneath the effective breakeven point on the trade at $13.41 ahead of March expiration. The 12% increase in the reading of options implied volatility on Bank of America to 43.74% today points to increased fluctuation in the price of the underlying shares going forward.
PBR – Petroleo Brasileiro SA ADR – The Brazilian oil company’s shares recovered slightly today, rising 0.65% to $39.03, amid higher commodity prices and a rebound in the price of crude oil. Option traders are still initiating bearish trades on the stock though, which suggests today’s modest rebound could be short-lived. One investor purchased a put spread in the January 2011 contract, establishing long-term downside protection. It appears the trader bought 5,000 in-the-money puts at the January 2011 $40 strike for a premium of $6.50 each, marked against the sale of 5,000 puts at the lower January 2011 $30 strike for an average premium of $2.13 apiece. The net cost of the transaction amounts to $4.37 per contract. The parameters of the trade indicate an effective breakeven share price of $35.63, which marks the price at which shares must trade at (or below) before downside protection kicks in for the put-spreader.
F – Ford Motor Co. – Shares of the American automaker, whose sales increased 24% year-over-year in the month of January, rallied 3.40% to $11.28 today. Notable options activity on the stock involved long-dated put options in the January 2012 contract. It looks like at least one investor purchased 20,000 puts at the January 2012 $5.0 strike for a premium of $0.58 per contract in combination with the purchase of an equivalent number of shares of the underlying stock. The ‘married-puts’ picked up by options players provide long-term downside protection should Ford’s shares collapse in the next two years. But, the trader(s) are most…
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Investor Initiates Volatility Play on Alcoa Ahead of Earnings
by Andrew Wilkinson - January 11th, 2010 4:13 pm
Today’s tickers: AA, GLD, MGM, NXY, INTC, NDAQ, ANDS, F, EEM, MMR & MELI
AA – Alcoa, Inc. – A short straddle play on the largest U.S. producer of aluminum today implies one investor anticipates Alcoa’s shares will remain range-bound through January’s expiration on Friday. Alcoa’s shares appreciated 1% to a new 52-week high of $17.20 (as of 12:40 pm EDT) during the session. According to one Bloomberg article, the firm may report fourth-quarter profits of $0.06 per share today. The sold straddle strategy also indicates the trader expects lower volatility in the price per share. Perhaps this individual is taking advantage of the typical drop in option implied volatility, which tends to accompany earnings announcements. The investor sold 10,000 calls at the January $17.50 strike for a premium of $0.59 apiece, and sold 10,000 puts at the same strike for about $0.69 each. The gross premium pocketed on the trade amounts to $1.28 per contract. The full $1.28 premium is safe in the investor’s wallet if the contracts expire worthless at a share price of $17.50 on Friday. The short call and put positions established today leave the investor vulnerable to potential losses in the event that Alcoa’s shares swing outside of the breakeven boundaries. Losses accrue if shares edge beneath the lower breakeven price of $16.22, or if shares rise above the upper breakeven point at $18.78.
GLD – SPDR Gold Trust ETF – Shares of the exchange-traded fund, which mirrors the price of gold bullion, may be up more than 1.25% to $112.82 today, but option traders populated various contracts with bearish strategies. A hefty put spread appeared in the June contract. The transaction involved the purchase of 17,000 puts at the June $105 strike for a premium of $3.50 each, marked against the sale of 17,000 puts at the lower June $95 strike for roughly $0.52 apiece. The net cost of the pessimistic play amounts to $2.98 per contract. If the investor is holding a long position in GLD shares, the spread provides downside protection in case shares slip beneath the breakeven price of $102.02, by expiration in June. Additional bearish indications appeared in the September contract. One trader initiated a risk reversal by selling 5,000 calls at the September $130 strike for $4.55 each, spread against the purchase of 5,000 puts at the lower September $100 strike for $3.60 apiece. GLD’s shares must trade beneath…
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Ford Call Options Gone Wild as Bulls Populate January 2011 Contract
by Phil - January 7th, 2010 4:31 pm
Today’s tickers: F, IPG, MBI, DAL, XLF, XHB, CROX, GME, BBBY & NVTL
F – Ford Motor Co. – Yesterday we reported on a short strangle play, which implied the automaker’s shares would likely remain within the realm of $10.00 to $12.00 for the next six months to expiration in June 2010. Today we observed bullish options activity in the January 2011 contract, which points to significantly higher shares for Ford in the next twelve months. The stock rallied again today, gaining 2% to reach a new 52-week high of $11.60 with just under 30 minutes remaining in the session. Bullish indications came in the form of a call spread and plain-vanilla call buying strategies. It looks like one investor purchased a large chunk of 50,000 calls at the January 2011 $17.50 strike for an average of $0.58 apiece. The trader responsible for the transaction benefits from this position only if Ford’s shares explode 56% over the current price to surpass the breakeven point at $18.08 by next January. The parameters of the call spread also implies a significant increase in shares of the motor company by 2011, but the nature of the spread limits upside profit potential, whereas the plain-vanilla call buyer’s profits are potentially limitless. The investor responsible for the spread selected the more conservative January 2011 $15 strike to purchase approximately 6,000 calls for an average premium of $1.06 per contract. The other half of the debit spread involved the sale of the same number of calls at the higher January 2011 $22.50 strike for about $0.20 each. The net cost of the bullish play amounts to $0.86 per contract and positions the investor to accrue profits above the breakeven price of $15.86. Maximum potential profits of $6.64 per contract are available to the trader if Ford’s shares rally a whopping 94% from the current value to $22.50 by expiration in January of 2011.
IPG – Interpublic Group of Companies, Inc. – A long straddle strategy initiated on the advertising and marketing company implies one investor expects greater volatility in the price of the underlying through expiration in February. The inherent nature of the long straddle suggests shares of IPG may swing dramatically in the next few weeks. Interpublic’s shares are currently off 2.5% to stand at $7.27 in afternoon trading. The straddle-player purchased about 2,000 puts at the February $7.50 strike for an average premium of…
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Investor Uses Options to Strangle Ford’s Share Price through June 2010
by Andrew Wilkinson - January 6th, 2010 4:14 pm
Today’s tickers: F, WLP, IBN, SWHC, UNG, SNDK, MU, DTV, FDO & MON
F – Ford Motor Co. – A short strangle play in the June contract on Ford suggests shares of the automaker are likely to remain range-bound through the next six months to expiration. Ford’s shares continued to rally during the current session following yesterday’s news that the firm enjoyed a 33% increase in December auto sales over the previous year. Shares reached a new 52-week high of $11.42 today on a 4.20% increase over Tuesday’s close. The sold strangle transaction implies one investor expects the recent boom to dissipate along with option implied volatility. The strangler sold 15,000 puts at the June $10 strike for a premium of $0.80 cents apiece in combination with the sale of 15,000 calls at the higher June $12 strike for $1.10 each. The investor pockets a gross premium of $1.90 per contract, which he keeps if Ford’s share price stays within the confines of the strike prices described through expiration. The premium received provides limited protection should shares swing outside the boundaries. But, the investor faces losses in the event that shares move above the upper breakeven price of $13.90, or trade beneath the lower breakeven point at $8.10 by expiration in June. It is possible the strangle-seller expects to benefit from a move lower in volatility. Option implied volatility on Ford rose significantly by 18.87% over the past 48-hours, from a low of 40.85% on Tuesday morning, to today’s high of 48.56%. Shrinkage in the reading of volatility on Ford may allow the investor to close out the short position at a profit because, as a general rule, declines in volatility weigh down option premiums.
WLP – WellPoint, Inc. – Shares of the health and benefits company reached another new 52-week high of $61.45 today, adding to gains experienced earlier this week. The stock appreciated 5.5% from $58.27 on the final day of 2009, up to $61.45 today, the highest price attained in the past 12 months. Option traders displayed diverse strategies on WellPoint during the trading day. Near-term players banked gains by selling 7,000 calls at the now in-the-money January $60 strike for a premium of $1.70 apiece. One trader rolled 3,500 calls forward to a higher strike by selling-to-close 3,500 lots at the January $60 strike for $2.00 each, and buying up 3,500 calls at the higher February…
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Bullish Bedlam on UnitedHealth in Late-Day Trading
by Andrew Wilkinson - December 16th, 2009 4:04 pm
Today’s tickers: UNH, F, EZCH, FBP, XOP, F, BMY, KFT, UNT, TIVO, ADBE & AMED
UNH – UnitedHealth Group, Inc. – Bullish investors stampeded the health and well-being company in late afternoon trading with shares up 3% to a new 52-week high of $32.25. Frenzied call activity on the stock drove option implied volatility up sharply by 19.5% to 45.17% from an intraday low of 37.37%. One investor was ready for the rally today, and banked profits on a previously established call position. The trader likely purchased about 20,000 calls at the now deep in-the-money December 23 strike price for a maximum premium of 3.00 per contract back on October 8, 2009, when UNH shares were at $24.13. Today the trader sold the calls for an average premium of 8.95 each. It looks like the investor took in net profits on the sale of at least 5.95 per contract for a total of $11.9 million. Next, it appears the trader extended bullish sentiment on the stock by establishing a larger call position. A big chunk of 30,000 calls were picked up at the now in-the-money January 31 strike for an average premium of 2.20 each. Thus, the trader breaks even on the new position if shares surpass $33.20 by expiration next month. Other bullish traders initiated call spreads on the stock. One UNH-bull bought 5,000 calls at the in-the-money January 31 strike for about 2.12 apiece, and sold the same number of calls at the higher January 34 strike for 70 cents premium each. The net cost of the spread amounts to 1.42 per contract and yields maximum potential profits of 1.58 apiece if shares rally up to $34.00 by January’s expiration day.
F – Ford Motor Co. – A late afternoon, large-volume put spread on the U.S. automaker is likely the work of an investor locking in gains enjoyed during Ford’s recent share price rally. Shares reached a new 52-week high of $9.64 during the trading session. The option trader looked to the March 2010 contract to purchase 18,000 puts at the March 9.0 strike for 62 cents apiece, spread against the sale of the same number of puts at the lower March 7.0 strike for 16 cents premium each. The net cost of the protective play amounts to 46 cents per contract. If the investor is indeed holding a long position in the underlying, the value of that…
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Gloomy Put Options Posturing on Financials ETF
by Andrew Wilkinson - November 2nd, 2009 4:06 pm
Today’s tickers: XLF, ETFC, CF, HGSI, EEM, BEBE, SMH, VRTX, HGSI, F & LDK
XLF – Financial Select Sector SPDR – A large bearish spread in the June 2010 contract suggests one investor feels the need for downside protection through expiration. Shares are slightly up this afternoon by about 0.25% to $14.09. The trader purchased 20,000 put options at the June 14 strike for an average premium of 1.91 apiece. He financed the long position by selling 20,000 puts at the June 11 strike for 74 cents each, and by selling another 20,000 puts at the lower June 10 strike for 51 cents premium. The net cost of the transaction amounts to 66 cents per contract. The investor responsible for the three-legged spread is possibly holding a long stock position in the XLF. The put options might then serve to protect the value of the position in the event that shares decline beneath the effective breakeven point at $13.34 by expiration. The fact that the trader is short two times as many puts indicates this investor expects a pullback but not a collapse beneath the lower strike price of $10.00.
ETFC – E*Trade Financial Corp. – The Wall Street Journal reported that ETFC withdrew its application for funding through the Troubled Asset Relief Program (TARP) because the company’s “recent capital-raising and debt-reduction efforts negates the need for the money.” E*Trade raised $150 million by selling stock in the third quarter out of some $765 million of sold stock this year. The seemingly bullish news that the company no longer plans to participate in the capital-purchase program did not do much for the current share price, which slipped 6% lower to $1.37. Our scanners picked up on interesting options activity this afternoon that may or may not have been inspired by today’s news. It appears 95,000 put options sold at the January 1.0 strike for about 5.5 pennies apiece. One may infer the transaction represents bullish sentiment on ETFC if the sale of the put options is fresh activity. If this is the case, the trader pockets the 5.5 cents premium, and expects shares to remain above $1.00 through expiration. However, the sale could also be the work of an investor closing out a long put position given the already high reading of open interest at the small number of available strike prices.
CF – CF Industries Holdings, Inc. – The…
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General Electric Sees Bears Jump to Options Defense
by Andrew Wilkinson - September 24th, 2009 4:32 pm
Today’s tickers: GE, EEM, SLV, F, VALE, FCX, M, ABX & C
GE - The more than 3% decline in shares of GE today inspired bearish options activity to unfold in the November contract. One investor chose to employ a put spread by purchasing 5,500 puts at the November 16 strike for 67 cents apiece, spread against the sale of the same number of contracts at the lower November 13 strike for 14 cents each. The net cost of the pessimistic play amounts to 53 cents per contract. If the investor is long shares of the underlying stock, downside protection on the put play will kick in if shares decline beneath the breakeven price of $15.47 by expiration day. The strike prices selected by the trader indicate that while he is bracing for further declines in the stock, he does not expect GE to decline much beneath $13.00 in the next few months. – General Electric –
EEM - The EEM jumped higher on our ‘most active by options volume’ market scanner following bullish options action in the January contract. Shares of the ETF are currently down 2% to $37.85. The investor responsible for the transaction looked to the January 38 strike to purchase 6,500 calls for an average premium of 2.78 apiece. The calls were spread against the sale of 6,500 in-the-money puts at the same strike for which the trader received 2.91 each. The risk reversal results in a net credit of 13 cents to the investor. The credit is retained by the trader if shares settle at $38.00 by expiration day. Additional profits will accumulate if shares of the ETF rally through $38.00. – iShares MSCI Emerging Markets Index –
SLV - Large-volume chunks of calls traded on the silver exchange-traded fund today by one investor who appears to be taking a bullish stance in the face of a more than 3.5% decline in shares to $15.96. The trader looked to the near-term October 16 strike to purchase 30,000 calls for an average premium of 65 cents apiece. The purchase was spread against the sale of the same number of calls at the January 2011 18 strike for a premium of 2.35 each. The transaction results in a net credit of 1.70 to the investor. Perhaps this individual expects the near-term calls to land in-the-money by expiration. If this occurs, he may exercise the options and take delivery of…
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Stock Market Crash – Year One Review III – March Madness!
by Phil - September 10th, 2009 5:51 pm
We left off in Part II with our Feb 23rd Big Chart Review.
Even though I said: "Once again we are in a market that environment that reminds me of the Simpsons episode where Homer jumps over a gorge, crashes, is taken up by a helicopter (Ben) smashing against the wall along the way only to fall all the way from the top again. Pain, pain and more pain every time we try to get long" – we still weren’t fully prepared for the devastation that was to follow as the Dow fell from 7,500 to 6,500 in the next 10 days. My commentary on the environment the next day was:
According to Cap, someone on the YHOO message board was counting the number of times CNBC talking heads said "nationalization" this morning and, as of 8:15, they were up to 300 times. Sadly, this is the fear-mongering that is driving the markets to new lows while Cramer continues to keep his sheeple out of protective ETFs like SKF. So you have the man’s network telling you financials are going to zero while dog and pony boy tells his minions to sell ALL the financials, causing them to go to zero - even though they could hold on and protect themselves with conta-funds, if Cramer didn’t spend 3 days a week convincing his viewers contra-funds are poison. I’ve never seen anything like this outside of a racketerring investigation. Speaking of racketeering - Dennis Kucinich nailed it when he pinned that charge on Paulson and company back in November.
Our wall of worry continues to be a steep one. After yesterday’s failure we do not expect too much out of today, we’ll be happy to just see a bottom at this point but it’s looking a little more likely that we’re heading into a capitulation event that can take us down to frightening levels. The 60% line is a line the markets dare not cross but, as I pointed out yesterday, we already lost the SOX and the Nikkei, with the Hang Seng and the BSE hanging on by a thread. Let’s take these levels very seriously, if the administration can’t turn it around this week – the downward momentum can easily pick up steam.
I’ll spare you the details other than to say we DIDN’T turn it around that week and the downward momentum DID pick up steam. I was at war with…
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Will They Hold It Wednesday?
by Phil - August 26th, 2009 8:25 am
This is getting very interesting!
As we expected in yesterday’s morning post, the morning pump was a great selling opportunity and we had a very good time riding the gentle dip we got in intra-day trading. The Dow hit it’s high for the day at 10:03 and by 10:09 I had an alert out to members to ignore the consumer confidence number and go more bearish on the Dow, buying back the Sept $95 puts we sold Monday for a quick 20% profit. We also grabbed the OIH $105 puts for $2.30 that made a nice buck during the day (43%) and we entered a couple of spreads on ERY at 10:57, well ahead of oil falling off a cliff in the afternoon.
Great call by David at the Oxen Group on making DUG his long of the day yesterday with a perfect buy in at $15.10 and hitting the 4% goal for that day trade. It was David’s call that inspired us to pick up the very profitable (and much riskier) ERY trades, which were also an idea of his from an earlier trade so mega Kudos to the Oxen Group!
We got a second rally on low volume around noon and my 12:09 comment to Members was: "Still a very good time to look at some of those long put plays we discussed in yesterday’s morning post" so I guess you can say we were still pretty bearish at that 9,600 line on the Dow. Keep in mind that the top of our prior trading range was 9,100 on the Dow so the 5% rule off that mark takes us to 9,555, which was where I predicted we’d close. We had a good chance to press our long DIA covers higher but we feared the overnight stick and we went with a 1/2 cover on our long puts, selling the DIA $95 puts for $1.75 just in case we have another crazy pre-market pump.
As you can see from David Fry’s S&P charts, we are "outside the box," very much as we were in June but note that we held that level (S&P 950) for quite a while before getting a 10% correction into early July. I’m not getting the feeling that we have enough energy to sustain us up here that long but, the way things have been going, we kept all of Monday’s bear covers in longer time-frames because as Chantale…
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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...
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