Today's tickers: FXI, PALM, CMCSK, EWZ & BAX
FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the China ETF are down more than 2% on the day to stand at $34.57. The ticker symbol jumped onto our ‘most active by options volume' market scanner after one investor was seen populating the November contract. It appears that this individual is bearish on the fund as he sold calls to fund a put spread. The November 40 strike price saw the short sale of 12,000 calls for a premium of 1.82 each which effectively reduced the cost of the put spread to a nickel. The spread involved the purchase of 12,000 puts at the November 32 strike price for 3.45 apiece spread against the sale of 12,000 puts at the lower November 27 strike for 1.58 each. The trader will realize the maximum potential profit available on the spread of 4.95 if shares decline to $27.00 by expiration. The stock must fall approximately 8% from the current price before the investor begins to amass profits to the downside beginning at the breakeven point of $31.95.
PALM – Palm, Inc. – The maker of mobile computing devices was cut to ‘underperform' yesterday at Needham and currently shares are off by 4% to $10.22. Marketing personnel in charge of the release of Palm's new touch-screen smart-phone known as the Pre must be working overtime to generate hype for the new product before it hits the market. The phone will be carried at Best Buy stores and is expected to sell out within one week. The Pre will also be available through Sprint, Radioshack, and the world's largest retailer, Wal-Mart stores, in an effort to boost sales. Option traders appeared cautiously optimistic on the stock with some 3,600 calls purchased at the July 11 strike price for a premium of 1.25 apiece. If investors were to profit by expiration, shares of Palm would need to reverse direction and gain about 19% in order to breach the breakeven point at $12.25. Skipping ahead to the January 2010 contract, one trader established what looks to be a sold strangle. The strangle involves the sale of 5,000 puts at the January 7.5 strike price for 1.34 each along with the sale of 5,000 calls at the January 12.5 strike for a premium of 1.89 apiece. The trader palm's a gross premium of 3.23 on the trade and will retain the full amount if share remain ‘strangled' between the two strike prices described by expiration. The investor does not expect significant upward movement in the stock and does not face losses to the downside unless shares fall below $4.27 over the next eight months.
CMCSK – Comcast Corp. – A large spread trade involving 57,000 options recently traded on shares of Comcast in what appears to be a long call and short put combination of 28,500 lots apiece. Shares in the cable provider have slipped in recent days, which is why the trade appears to be the work of a bull. We can clearly see the January 2010 calls at eth 15 strike were bought at a 1.35 premium, while the same expiration 11 strike puts traded as part of the same package to the middle of the market. However, with shares registering a 52-week low on March 9, at $10.33 we expect that this investor is taking advantage of today's pullback to $13.40 – its lowest price in two weeks – as an opportune moment to enact a bullish call position. During the past two weeks shares touched $16.25 whetting the investor's appetite here for a potential rally. He's using the proceeds from the short put position to defray the cost to just 35 cents, and in the process of so doing is leaving himself open to the prospect of having shares put to him at $11.00. However, the premium from the put sale effectively reduces that cost to $10.00 and so below the share's worst price of the year.
EWZ – iShares MSCI Brazil Index ETF – The Brazil ETF has experienced share price erosion of more than 2% to arrive at the current price of $50.90. The EWZ fund seems to frequently attract traders with a penchant for butterfly spreads, and today is no exception as there are currently two wings and a body established in the near-term June contract. Expecting bearish movement in the stock over the next few weeks, the long butterfly spread was initiated through the sale of 30,000 puts at the June 46 strike price for a premium of 1.05 [body] spread against the purchase of 15,000 puts at the June 49 strike for 1.88 each [wing 1] and spread against the purchase of 15,000 puts at the June 43 strike price for a premium of 55 cents per contract [wing 2]. The transaction incurs a net cost of 33 cents to the investor (2*1.05 – 1*1.88 – 1*55 cents = 33 cents) and yields a maximum potential profit of 2.67 if shares settle at $46.00 by expiration. The trader begins to accrue profits beginning at the upper breakeven point of $48.67 which would be realized if shares were to fall approximately 4% from the current price.
BAX – Baxter International, Inc. – The global healthcare company which develops, manufactures, and markets products for people with chronic and acute medical conditions has enjoyed modest gains in its share price of less than 1% to $48.88. BAX edged onto our ‘hot by options volume' market scanner after one investor took a bullish stance on the stock in the November contract. The trader appears to have initiated a bull call spread by purchasing 8,000 calls at the November 52.5 strike price for a premium of 2.32 each spread against the sale of 8,000 calls at the higher November 60 strike for 55 cents apiece. The cost of the call spread was reduced to just 7 cents after the same individual sold 8,000 puts at the November 42.5 strike for a premium of 1.70 per contract. The parameters of the transaction suggest that the investor – who is short 8,000 puts – is willing to bear the risk that shares are put to him at $42.50 in the event that the stock plummets and the puts land in-the-money. However, he is hoping for shares of BAX to rally as high as $60.00 in which case he will have attained the maximum potential profit available on the spread of 7.43.