Today’s tickers: EBAY, HUM, EEM, FXI, C, XLV, GM & LVS
EBAY – Ebay Inc. – With its shares struggling to regain breakeven territory today and down 2% at $11.89, a large buyer of protective put options has emerged scooping up 20,000 contracts guaranteeing selling rights should the shares slip to $7.50 by January 2010 expiration. The investor paid a 67 cent premium to for 20,000 options potentially covering 2 million shares valued at almost $24 million at its current share price.
HUM – Humana, Inc. – The health benefits company has become a hot-bed for options activity today, and its shares have jumped 10% to $25.30 in response to news of a potential buy-out situation fresh from the rumor-mill. Although little information is currently available in terms of specifics, it has been reported that it would “take a behemoth of a company to acquire Humana”, as they are currently the second-largest provider of health benefits that is backed by the United States Medicare program. Investors have witnessed major acquisitions lately, such as Pfizer’s buy-out of Wyeth and the more recent Merck/Schering-Plough agreement. Thus, traders wasted no time reacting to the bullish musings surrounding Humana and options volume amassed steadily this afternoon. Calls were traded six times to every put and the frantic activity boosted call premiums and implied volatility higher. Some investors were seen banking gains by selling calls in the March contract at the now in-the-money 25 strike price, where about 5,000 sold for as much as 1.90. Further along, at the March 30 strike price, about 9,300 calls were purchased for an average premium of 60 cents. Shares would need to rally an additional 21% from the current price in order to reach the breakeven point at $30.60 by next Friday. In the April contract bullish investors were seen buying calls at the 30 and 35 strikes. Traders shelled out 1.14 for each of the 2,000 calls purchased at the April 30 and 57 cents for each of the 1,800 coveted at the April 35 strike price. It is likely that until a buyer – and more importantly a buy-out price – is announced traders will continue to trade heavily in HUM and send implied volatility even higher than the current reading at 106% up from 86% this morning. Investors have left much on the table for speculators here since the Obama budget announcement caused selling across the sector meaning that shares have plenty of room to the upside for anyone wanting to point to a higher deal price.
EEM – iShares MSCI Emerging Market ETF – Shares are up slightly at $23.32 for the day. In the January 2010 contract, it appears that one investor established a sold straddle at the 22 strike price by selling 20,000 calls for a premium of 4.42 while also banking a premium of 3.90 for the sale of 20,000 puts. The gross premium accumulates to 8.32 for the trade and yields breakeven points at $30.32 on the upside, and at $13.68 on the downside. The full 8.32 premium is retained by this investor if shares can settle at $22 at expiration. The premium will erode down to zero and give way to losses should shares swing in either direction and surpass a breakeven point. Interestingly, a similar straddle was sold on the FXI (iShares FTSE/Xinhua China 25) ETF in the January 2010 contract. One trader was seen selling volatility at the 25 strike price by shedding 20,000 calls for 5.12 and 20,000 puts for 5.00 each. This investor raked in a gross premium of 10.12 for the straddle and faces breakeven points at $35.12 on the upside and at $14.88 on the downside. The 10.12 premium is safe in the bank if shares settle from the current price of $26.54 (up 2% on the day) to $25 by expiration next year. Otherwise, this investor would face losses beginning at either of the breakeven points described.
C – Citigroup, Inc. – Shares have continued to rally today and have gained 7% to stand at $1.80 following this week’s 77% overall increase in price. Option traders appear optimistic as evidenced by the rash of call buying taking place, where currently the call-to-put ratio is at 5.5, representing 5 calls traded for every put. In the near-term March contract some investors are hoping for an additional 40% rally in shares to $2.50 as some 15,000 calls have been purchased for 7 cents each. Optimism spread to the April contract where 8,000 calls were bought for 18 cents each at the 3.0 strike price. In order to profit from such positions, shares would need to jump by 76% from the current price in order to reach the breakeven point at $3.18 by expiration. One investor provided parameters for his bullishness on Citigroup by establishing a call spread in the June contract. At the June 4.0 strike price 7,100 calls were purchased for 20 cents apiece, while at the June 6.0 strike 7,100 calls were sold for 9 cents each. The net cost of the spread amounts to 11 cents and yields a maximum potential profit of 1.89 if shares can surge upward by 233% to $6.00 by expiration in June. By holding a short position at the 6.0 strike, this investor is effectively capping his bullishness at the upper strike. Most notably today, one investor has isolated himself from the masses of traders populating the near-term contracts by getting bullish in the January 2010 contract. This trader paid a hefty premium of 75 cents to purchase 14,000 calls at the January 2.5 strike price in a move that allows him time to watch how Citigroup fares over the next 10 months. It seems that if Citigroup can prove itself by jumping the $2.50 hurdle by next year, the investor would happily get long of the stock by exercising his options at expiration.
XLV – Health Care Select Sector SPDR – Shares of XLV have improved 1.75% to $23.75. The ETF edged onto our ‘most active by options volume’ market scanner early in the trading day after one investor made protective plays in the April contract. It looks like this trader sold 3,000 puts at the April 22 strike price for a premium of 47 cents apiece in order to close out an existing position given that open interest at that strike is approximately 3,000. Utilizing the 47 cent premium, this investor then purchased 7,500 puts at the higher April 23 strike for 82 cents each. Perhaps the rationale for rolling the protection up to the 23 strike stems from the fact that shares of the XLV traded below $23 for the past two weeks until the recent rallies of the past few days. It is possible that this investor is long the stock and wisely anticipating that gains made this week are subject to rapid reversal. Maybe protection is a good way to go as this recessionary period is nowhere near the light at the end of the tunnel as yet.
GM – General Motors – Despite the turnaround from positive to negative moves in financials today, shares of GM are still up 18% at $2.59. Option traders were observed getting bullish in the June contract, with about 12,000 calls purchased for 33 cents each. Shares will need to rally by another 28% from the current price in order to reach the breakeven point at $3.33 by expiration in June. Seemingly absurd optimism by one investor at the June 9.0 strike price came in the form of 5,000 calls purchased for 8 cents each. Either this trader is privy to information that GM has invented the first fuel-free flying car, or the plan is to bank gains on today’s purchase by selling surging premiums driven by a sizeable rally in the underlying share price over the next 3 months.
LVS – Las Vegas Sands Corp. – The owner and developer of casino resorts around the world has rallied 25% to $2.22, and it has received a vote of confidence by an analyst at Bernstein Research. According to a story released this morning, the current share price – which once touched the clouds at a high of $84.28 within the past 52-weeks – fails to capture LVS’s ability to survive the current economic depression. Bernstein’s analyst rates LVS at “outperform” and recommends an $8 price target, citing improving conditions in Las Vegas as well as other areas where LVS currently operates. Option traders reflected this ‘I Will Survive’ attitude by purchasing calls across various contracts. One investor hoping for a continued rally purchased 2,000 calls for 30 cents apiece at the March 2.5 strike price. Profits will amass if shares can rally by another 26% to $2.80 by next Friday. The most bullishness was seen in the April contract where investor scooped up over 3,000 calls at the 5.0 strike price for 25 cents each. These optimists must love the adrenaline rush gambling provides when the odds are clearly against them because the trade commands a delta indicating a 28% chance that these calls will land in-the-money by expiration. Calls were picked up as far out as the January 2011 contract where patient bulls picked up 1,300 lots for 1.19 apiece, and gave LVS just under two years to surpass the 2.5 strike price.
Senior Market Analyst
Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.