Today’s tickers: EWZ, X, EEM, VIX, DGX, AMR & XHB

EWZ – iShares MSCI Brazil Index Fund – The Brazil ETF has rallied more than 2% to $52.19 today, and we observed one investor initiating a bullish calendar spread on the fund. The trader appears to have purchased 10,000 calls at the near-term June 55 strike price for 1.30 each spread against the sale of 10,000 calls at the January 2010 55 strike price for a hefty premium of 5.20 apiece. The investor garners a sweet credit on the trade of 3.90 and is likely looking to exercise his right to call shares of the fund to him in the event that the June 55 strike calls land in-the-money by expiration. EWZ shares would need to rally by at least 5% in order for the calls to land in-the-money.

X – United States Steel Corporation – Shares of the integrated steel producer have jumped more than 7% to $30.60 amid reports that U.S. raw steel production rose 3.7% last week to 1.06 million tons up from 1.023 million tons just one week prior. Although raw steel production in the U.S. is still down about 51.3% as compared to last year’s tonnage, option traders reacted positively to the slight increase reported by taking bullish stances on the stock. The near-term June 31 strike contract saw about 2,750 calls purchased for a premium of 1.75 apiece. But, the more interesting trade took place in the July contract. A bull call spread was initiated by the purchase of 7,000 calls at the July 33 strike price for 2.10 each spread against the sale of 7,000 calls at the higher July 40 strike for an average of 65 cents apiece. The net cost of the trade amounts to 1.45 and yields a maximum potential profit to the investor of 5.55 if shares can rally up to $40.00 by expiration. This optimistic individual will begin to amass profits if shares rise by about 6% to the breakeven point at $34.45.

EEM – iShares MSCI Emerging Markets ETF – The emerging market ETF has experienced a share price rally of more than 2% to $32.44 today prompting some traders to shed downside protection. Out of the more than 31,000 puts sold at the December 31 strike price for a premium of 3.45 apiece, 28,300 of the contracts were shed by one investor. Such a trade suggests that the individual does not see shares declining through the breakeven point to the downside at $27.55 by expiration. If shares were to fall through the breakeven point the investor, who is now short 28,300 puts, would face losses from further bearish movement in the fund and would likely be delivered against. It is more likely, however, that the trader expects shares to remain above $31.00 in which case he retains the full premium enjoyed on today’s sale. In the event that the puts land in-the-money by December’s expiration, the investor would likely have shares put to him at an effective price of $27.55 apiece.

VIX – CBOE Volatility Index – Markets maybe efficient but investors really do have a knack of getting things badly wrong on occasion. Tomorrow marks the expiration of options on VIX futures and the reading of investors’ collective positioning reads like a bad school report card. To be fair, option buyers use the volatility index to protect against both adverse movements in the market as well as increases in the level of fear as quantified by the reading of options implied volatility. Still there are plenty of speculators out there who try to accurately predict the settlement price of the VIX as we had towards expiration. A recent thawing in credit markets has provoked a rise in treasury yields, which in turn has been taken as a sign of improving economic health. Today’s news that several large investment houses wish to repay their collective TARP holdings of $45 billion is another sign allowing investors to breathe easier. A little over one third of the more than 2.1 million option contracts open on the VIX futures that are set to expire tomorrow are call options, which in this case means investors had been banking on higher rather than lower volatility. What’s shocking is that within the overall number of call positions on the VIX of close to 687,000 only 2,400 contracts are currently set to expire in-the-money or with any intrinsic value attached to them. Meanwhile around 46% of the open put positions totaling some 440,000 contracts are set to land in the money tomorrow assuming a close beneath 30.0 for the VIX. The miss on the call side of the options universe here is staggering. For sure, many of those calls could have been sold short in expectation of declining volatility, while many calls might also have been associated with combination plays. But still, this brief analysis highlights the spring board rally for stocks as overly pessimistic conditions fade. As they do, watch for investors to over do the volatility decline. As we keep noting, we’re still not out of the woods yet.

DGX – Quest Diagnostics, Inc. – The provider of diagnostic testing appeared on our ‘hot by options volume’ market scanner amid rumors reported by one news source regarding renewed takeover speculation. Shares of the clinical testing business are currently up more than 1% to $51.68. Investors looking for near-term bullish movement in the stock selected the June 55 strike price and purchased more than 2,900 calls for about 70 cents apiece. Traders will begin to see profits on the call options if shares can rally by about 8% to the breakeven price of $55.70 by expiration. More than 8,400 contracts have exchanged hands on DGX which represents approximately 30% of the existing open interest on the stock of 28,085 lots. Option implied volatility jumped as high as 29.5% from the opening value of 26%.

AMR – AMR Corporation – The operator of American Airlines attracted bullish attention from option traders amid modest gains of less than 1% in shares to $5.05. Perhaps optimism stems from the 3.2% increase in airline service satisfaction which happens to be the first rise in six years as reported by a University of Michigan study. Maybe those individuals who continue to fly regularly have boosted ratings because the improvement in satisfaction is concurrent with continued declines in the number of passengers flying. Ratings may continue to rise as the Federal Aviation Administration (FAA) expects domestic patronage to fall about 8.8% this year. Option traders boosted the call-to-put ratio on AMR to approximately 50-to-1 implying that some 50 calls exchanged hands for each single put option in play. The just in-the-money June 5.0 strike price witnessed more than 8,000 calls coveted for an average premium of 57 cents apiece. Further along, the higher July 6.0 strike price saw some 4,200 calls bought for 47 cents per contract. Optimism spread to the August contract where the 6.0 strike price had 4,300 calls purchased for 70 cents while uber-bulls targeted the August 7.0 strike price and scooped up 5,000 calls for about 38 cents apiece. Option implied volatility has declined significant since last Friday’s reading of 103% to the current value of 82%.

XHB – Homebuilders Select Sector SPDR – Shares of the homebuilders ETF have remained relatively flat and currently stand at $12.80 amid gloomy housing reports released today. New housing projects slowed to a near glacial pace in April as new construction of single-family homes and apartments plummeted 12.8% to a record-low annual rate of 458,000. XHB jumped onto our ‘most active by options volume’ market scanner as investors traded some 52,000 calls at the June 15 strike price. One trader appears to have purchased 29,300 calls for 15 cents apiece at the June 15 strike while simultaneously selling shares of the underlying fund at a price of $12.59 per share. This stop-loss strategy provides the investor the option to call the shares back to him, offsetting a short stock position should the calls land in-the-money by expiration. The investor has taken a bearish stance on the homebuilders ETF by selling short the stock and protecting himself against potential bullish movement in shares by expiration this month in hopes that builders’ shares will resume a downwards move to more than offset the cost of the protective call.