Today’s tickers: BRCM, BNI, EMC, RIO, GM, VIX, XLF, BAC & ARNA

BRCM – Broadcom Corp. Class A – Shares are currently off by 3% to $20.01 for Broadcom, which is engaged in semiconductors for wired and wireless communications. Options activity was largely contained to the May contract. One investor established a put spread by purchasing 7,500 puts at the May 20 strike for 2.00 each, and selling 7,500 puts at the May 18 strike for a premium of 1.15 apiece. The net cost of the trade amounts to 85 cents and yields a maximum potential profit of 1.15 if shares fall to $18.00 by expiration. Further evidence of investor bearishness on BRCM came in the form of 5,000 sold calls at the May 20 strike price for a 2.00 premium per contract. Apparently investors agree that, at least in the near-term, the current $20.01 share price is due for a decline. Option implied volatility has jumped from Friday’s reading of 64% to the current value of 70%.

BNI – Burlington Northern Santa Fe Corporation – When you need your share price to rise in the face of a 4.3% equity market decline you could do one of two things. First, have Goldman Sachs upgrade the company or second, find someone to suggest out loud that your shares might be bought by legendary investor, Warren Buffett. Sadly, neither seems to have worked for the operator of one of the largest railroad networks in North America, which has seen its shares dip slightly by 2% to stand at $60.71. BNI was upgraded to ‘buy’ from ‘neutral’ at Goldman Sachs amid rumors about a possible purchase of the company by Berkshire Hathaway. Option traders reflected the bullish upgrade by purchasing calls in the April contract. At the April 65 strike price 3,300 calls were scooped up for an average price of 1.50, while at the higher April 70 strike more than 3,200 calls were bought for a 55 cent premium. In order for the April 70 calls to turn profits for optimistic traders, shares would need to rally by 16% to the breakeven share price of $70.55 by expiration.

EMC – EMC Corporation – The IT support company has experienced a share price decline of about 3.5% to $11.17. EMC edged onto our ‘most active by options volume’ market scanner after some large volume trades were initiated in the April and May contracts. It appears that one investor purchased a strangle by picking up 22,500 calls at the April 12 strike price for 33 cents each, and by buying 22,500 puts at the April 11 strike for 46 cents. This investor paid a net cost of 79 cents for the trade and is hoping for volatility to increase on the stock and for the share price to move in either direction in order to profit from the strategy. Profits begin to amass outside of the breakeven points located at $12.79 on the upside and at $10.21 on the downside. Option implied volatility, which largely determines option prices, has risen from 57% at the start of today to the current value of 62%. Further along in the May contract is appears that a similar strategy has been established. A bought strangle was put into play by the purchase of 6,000 calls at the May 12 strike price for 65 cents paired with the purchase of 6,000 puts at the May 11 strike for an 80 cent premium. The net cost of the strangle amounts to 1.45 and yields wider breakeven barriers, which would require a more dynamic shift in the share price. The trade begins to be profitable starting at $13.45 on the upside and at $9.55 on the downside.

RIO – Companhia Vale do Rio Doce ADS – The metals and mining company has seen its share decline by more than 7% to $13.05 amid broad declines in the market, as well as for commodity prices. It appears that one investor does not see shares rebounding any time soon as he initiated a sold strangle in the May contract. At the May 14 strike price 8,300 calls were shed for 96 cents each, while 8,300 puts were also sold at the May 12 strike for 96 cents apiece. The gross premium pocketed on the strategy amounts to 1.92 and is fully retained by the investor if shares remain within the strike prices selected. Other traders took a more bullish stance on RIO and were seen picking up call options. At the May 16 strike price 3,300 calls were bought for 43 cents each, while at the May 18 strike 15,000 calls appear to have been purchased for 18 cents.

GM – General Motors – An unusual showing of hardball or a sign of biting reality from the Obama administration over the weekend left investors with few positive strands to cling on to as the trading week got underway. The difference in the treatment between the banking system and automakers has served reminder to equity investors that despite the mal-management in both sectors, the government recognizes that it still has work to do before the financial landscape is ready to allow a grand auto rollout headed by an altogether new and responsible management team in the auto-sector. GM’s share price took a 20% haircut to $2.87 by lunchtime while options implied volatility rallied to 228% from 178% on Friday. Options trading was a mixed bag even after the company iced the words of the auto task force with its own agreement that change over 60 days was exactly what was needed even if it has to dip into bankruptcy proceedings. Around 5,000 April expiration put options were bought for around 10 cents a piece while both 2.0 and 3.0 strike protection saw an equal amount or two-way action on volume of 25,000 between the two. One call trader sold several thousand call options at the April expiration at the lowest possible 1.0 strike while purchasing the same amount at the May expiration. The net cost was around a nickel, which basically allows this investor a cheap play on upside should GM rise to the restructuring challenge successfully.

VIX – CBOE Vix index – With stock markets sitting with legs dangling over the precipice; it appears investors are plucking up the courage to jump. Equities have had no reason so far Monday to rebound and the tone has turned sour after a revealing weekend in which, so far there are no winners. One warning sign that few investors picked up on last week was the failure of volatility to break beneath an index reading of 40 in the face of a rising tide of investor confidence. That reading has been the floor for some time now as investors remain wary of giving insurance away in the face of few signs of economic recovery. Today the VIX has risen to 45.56 for an 11% gain on the session. It appears that one investor is banking on more of the same and if we’re reading the tape correctly as a three-legged spread appeared involving 10,000 volatility contracts at each. On the put side, the investor appears to have created a credit put spread by selling May options at the 40 strike for a 2.20 premium in the hope that they will expire worthless. Put another way the investor hopes volatility remains above this 40 floor. However, in the event it slips should the economy heal itself quickly, the investor bought the same amount of puts at the 30 strike for a paltry 10 cent premium. This limits overall losses in the event the investor is wrong. The third trade leg involves 10,000 call options at the 47.5 strike, which traded to a mid-market premium of 2.95, which we are assuming were bought. To us it appears that hoping that implied volatility will remain locked within the 40-47.5 strikes is too narrow and that rather, this investor is looking for further upside gains for implied volatility. In turn that looks bad for equity market prospects.

XLF – Financial Select Sector SPDR – Option investors were seen selling calls and buying puts in the XLF today as shares have dipped more than 6% to $8.56. At the April 9.0 strike price investors shed 8,400 calls for 54 cents apiece, while the April 10.0 had 8,100 calls sell for 22 cents each. Pessimistic investors looking for downside protection on the ETF were seen purchasing 27,000 puts at the April 8.0 strike price for an average 45 cent premium apiece. The in-the-money April 9.0 strike had 7,700 puts picked up for 87 cents each. The outlier of the April contract was the 7.0 strike price where investors felt comfortable selling 11,000 puts for 19 cents. Perhaps traders do not see shares falling through $6.81 by expiration in April, and thus were taking in the richer premium experienced with today’s share price decline. Put buying continued into the May contract where the 8.0 strike price witnessed more than 8,300 puts purchased at 75 cents each.

BAC – Bank of America Corp. – Shares are off by more than 14% to stand at $6.29. Taking advantage of cheaper call premiums with the share price decline, investors were seen establishing bullish trades in the April contract. At the April 7.0 strike more than 11,600 calls were purchased for 66 cents each, while the April 8.0 strike had some 30,000 calls picked up for a 38 cent premium. Traders were realistically bullish, however, as calls at the higher April 10 strike price were sold 7,900 times for 11 cents each. This indicates that while traders are hoping for a rebound in the near future, they are not expecting any miracles and thus shed contracts that are currently too far out-of-the-money. The decline in shares also prompted put buying. At the April 6.0 strike price 7,200 puts were purchased for 65 cents each, while the now in-the-money 7.0 strike witnessed 5,800 puts bought for 1.16 apiece. Finally, the August 10 strike price was a popular destination where traders picked up calls and puts. Investors picked up 7,300 deep in-the-money puts for a premium of 4.72, while 6,500 calls at the same strike were purchased for 1.02 each.

ARNA – Arena Pharmaceuticals, Inc. – Shares of the clinical-stage biopharmaceutical company have experienced a 34% decline to $2.97 after disappointing results were released regarding the company’s experimental obesity drug. In a 3,100-patient study of Arena’s drug, lorcaserin, patients experienced an average of 5.8% loss in weight after a two year period. However, when the weight loss was adjusted to take placebo patients into account the percentage dropped to just 3.6%. While this is statistically significant, the percentage fails to meet the FDA’s alternative efficacy criteria of 5% placebo-adjusted weight loss, according to one media source. Option traders pushed ARNA to the top of our ‘hot by options volume’ market scanner this morning by trading in the April and July contracts. A slump in implied volatility matches the activity of option traders who sold options at surrounding strike prices creating something of a strangle combination. At the April 2.5 strike price some 8,500 puts were sold for an average premium of 20 cents apiece. Meanwhile, investors were also actively selling calls at the April 5.0 strike price where nearly 10,000 lots were shed for 25 cents each. While the majority of the 20,000 calls traded at the April 5.0 strike were sold, some traders were looking for a rebound by picking up more than 6,000 calls for 15 cents. Further along in the July contract, traders were seeking a significant rebound in shares by purchasing more than 5,500 calls at the July 5.0 strike price for an average premium of 71 cents. In order for these optimists to turn a profit by expiration in July, shares would need to experience a 92% rally from the current price to the breakeven on the trade at $5.71.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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