Today’s tickers: XLI, C, WFR, DRYS, FXI, AMD & RMBS
XLI – Industrial Select Sector SPDR – One lucky investor who pinpointed the bottom for stocks to within 24 hours appears to have banked gains and rolled the dice again using the basket of stocks representing the industrial sector. On March 5, we recall this investor stepping up late in the day to buy some 250,000 call options at the 18.0 strike when shares in the fund were changing hands at $15.67. The buyer paid a 30 cent premium representing a $7.5 million premium. The next day marked the bottom for stocks and the XLI traded down to around $15.14 before embarking on a largely uninterrupted rally as high as $19.25 today. The well-timed transaction has awoken the option trader who today closed the long call position at the 18 strike in exchange for the same amount of April call options at the 20 strike. Those calls were traded at 1.50 today representing a $37.5 million premium netting the investor a handsome $30 million gain in two weeks. At the same time the investor is staking $11.25 million of those gains on a wager that the rebound for stocks will keep going. In order to ensure he doesn’t lose a penny of that stake, shares in the industrial SPDR would need to rally from the current $19.00 to $20.45 or 7.6% from here. Readers may recall that at the same time another investor snapped up 170,000 calls on the utilities ETF (XLU) when its shares were trading 10% lower than today.
C – Citigroup, Inc. – In contrast to the bullish picture painted by options investors yesterday, today’s playing field is populated with put-buyers even as shares add modest gains of 2% to stand at $3.07. At the in-the-money May 3.0 strike price investors shed 10,000 calls for a premium of 55 cents and scooped up 11,000 puts at a price of 74 cents per contract. One trade in May that diverged from the overall pattern involved a sold straddle at the May 5.0 strike where 5,000 calls and 5,000 puts sold for a gross premium of 2.52. Given that shares seem to have encountered some resistance at the $3.00 level since it first rallied above it on March 18, this straddle-seller must be looking perhaps a gentler rally in the share price. Given his hopes that shares will gravitate towards $5.00 by expiration – in which case he retains the full 2.52 premium –, the investor is selling volatility and looking for it to decline in the event that Citi’s share price rises. Maybe this trader feels that the rock has been lifted from the bank’s chest, allowing it to breathe a bit easier now that fears of nationalization have somewhat subsided. Aside from that tangential trade, the June 2.5 strike price saw 28,000 in-the-money calls sell for 87 cents each while the 2.5 puts saw investors pick up 28,000 for 64 cents apiece. The 5.0 strike price in the June contract had 12,500 in-the-money puts purchased for 2.57 each, but only 7,000 calls were sold by investors at that strike. The rest of the call volume of 11,000 contracts looks to have been purchased for 27 cents each. Perhaps the relatively inexpensive calls have attracted bullish investors who are looking for shares to rise by about 72% to the breakeven point at $5.27 by expiration.
WFR – MEMC Electronic Materials, Inc. – Shares of the global manufacturer and designer of wafer technology has rallied strongly by 11% to $17.86 amid the remote whisperings of a possible takeover of the company. Investors wasted no time piling into calls in the April contract where over 7,400 were purchased at the 20 strike price for a growing premium of 63 cents. Those calls started the day trading for 20 cents and have changed hands at 80 cents by late morning trade. More optimistic traders populated the April 22.5 strike price and bought over 1,200 calls for 24 cents apiece. These investors are hoping for upward price movement to continue and increase by some 27% to the breakeven share price on the trade at $22.74 by expiration at the end of the month.
DRYS – DryShips, Inc. – The wind, which had finally billowed the sails of DRYS and started shares moving in the right direction has reversed course along with its share price, currently off by over 12.5% to $4.82. The negative movement can be attributed to the drybulk carrier’s $1.02 billion fourth quarter loss versus profits for DRYS from the previous year on 6.6% lower revenue. The Greek shipping company is heavily burdened by massive amounts of debt, although it continues to negotiate with its lenders. Option investors favored calls 2-to-1 over puts today but the majority of contracts were sold. At the April 5.0 strike price traders shed more than 2,300 call options for 71 cents. Meanwhile, the April 6.0 strike had 2,000 calls sell for 40 cents apiece and the 7.0 strike witnessed some 2,400 calls sold for 17 cents each. Perhaps investors are banking gains, pessimistic about the company’s ability to “set sail” any time soon.
FXI – iShares FTSE/Xinhua China 25 – Shares of the ETF have rallied 1.5% to stand at 28.97. FXI edged onto our ‘most active by options volume’ market scanner after one optimistic investor initiated a ratio call spread in the April contract. At the April 28 strike price 15,000 in-the-money calls were picked up for 2.15 each while at the April 31 strike 30,000 calls were sold for a premium of 76 cents. The net cost of the spread amounts to 63 cents (1*2.15 – 2*0.76 = 0.63 cents). Thus, this investor stands to make a maximum profit of 2.37 – beginning at the breakeven share price of $28.63 – if shares can rally to $31.00 by expiration. By selling twice as many calls at the upper strike this trader significantly reduced the cost of getting long the contracts at the lower strike. The risk inherent in the trade is that he is now short twice as many calls at the 31 strike price and is therefore exposed to losses if shares should rally too hard. Above the upper boundary the investor would see losses erode in the event that the share price raced ahead to $33.37.
AMD – Advanced Micro Devices, Inc. – The global semiconductor company is flying high today with current gains of 8% to $3.40 as positive economic news regarding the demand for capital-goods lifts the broader tech sector. Option investors drove call volume upwards to 20,000 at the April 4.0 strike price, an amount that represents more than twice the existing open interest at that strike. Over 13,500 lots were purchased at the 4.0 strike for an average price of 21 cents apiece. Bullish investors are hoping to see shares continue to rise by 24% from the current price in order to breach the breakeven point at $4.21 by expiration. Option implied volatility has risen from the low for today of 104% to as high as 115%, although currently volatility has come off slightly to 113%.
RMBS – Rambus, Inc. – Amid gains enjoyed by the broader tech sector, Rambus has added approximately 5% to its share price to arrive at $10.31. The company develops, designs, and licenses chip interface technologies necessary for just about all digital electronics products. Option traders took the positive energy surrounding tech today and channeled it into call buying in the near-term April contract. At the April 11 strike price some 2,000 calls were picked up for 89 cents apiece, but the April 12 strike attracted the most volume with more than 5,400 calls purchased for 59 cents each. Investors bought calls as high up as the April 15 strike where more than 1,100 cost 21 cents per contract. Thus, the overall picture seen from option trades was positive, although some investors are hoping for incredible gains of about 48% from the current price to arrive at the breakeven of $15.21 by expiration.
Senior Market Analyst
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