Today's tickers: GSI, USB, XLF, FXI, EWW, VIA/B & CTSH
FXI – iShares FTSE/Xinhua China 25 Index (ETF) – Since our report on FXI this morning, activity has really heated up on the index representing 25 of China's largest and most liquid companies available to US investors. One investor appears to have initiated a 25,000 lot straddle at the March 27 strike price by purchasing 25,000 puts for 1.95 apiece as well as buying 25,000 calls for approximately 1.67 each. The net cost to the trader amounts to 3.62. Shares are currently up over 1% at $26.91, and it seems that this trader has locked-in to today's volatility reading of 54% and hoping for the FXI to grow more volatile by expiration in March. Breakeven locations representing the points at which profits can be earned on the straddle are at $23.38 on the downside, and at $30.62 on the upside. If shares stray outside of either of these points profits are unlimited, however, this investor can also yield earnings on the straddle if volatility rises and drives up premiums at the March 27 strike.
GSI – General Steel Holdings Inc. – The manufacturer of hot rolled carbon and silicon steel sheets has seen a rally in share price of 4% today to $2.98, just 53 cents above its 52-week low of $2.45. One option trader has used the sale of calls in the September contract in order to finance the purchase of puts in the June contract. At the September 5.0 strike price, 6,500 calls were sold for 45 cents apiece, while at the June 2.5 strike, 6,500 puts were purchased for 85 cents each. The net cost to the investor is 40 cents. At first glance, it appears that this trader is expecting shares of GSI to continue declining below a breakeven of $2.10 – a new low – at which point he would start to profit from long puts. However, while today's trade was not tied to stock, it does have hallmark signs of being a risk reversal – buying near term protection in June and having shares called from him later on in the year in September. Thus, we speculate that this trader could be long of the stock and that he is using puts for protection through a rough patch through June, ever hopeful of having the stock called from him come September's expiration at a share price of $5.00.
USB – US Bancorp – Shares of the financial holding company continue their decline today and are currently off by over 6% to $12.78. The rumor mill contends that USB may not be able to sustain its dividend given current harsh economic conditions. Option traders waved goodbye to calls today in the February contract, with over 4,700 calls sold at the 12.5 strike price for an average premium of 78 cents apiece. At the February 15 strike, about 8,400 calls were shed for a premium of 12 cents each. The bearishness seen in February is in stark contrast to the activity observed in the June contract. If what we are seeing is purely and options play (i.e. the trade is not tied to stock), then it appears that one investor sold 3,000 puts at the June 10 strike price for a premium of 1.50 in order to finance the purchase of 3,000 calls at the June 20 strike price for 80 cents apiece. This medium-term bullishness is indicated by the fact that this investor would reap unlimited profits above the 20 strike price – in addition to the 70 cent premium pocketed today at expiration. Despite the credit this trader takes today it is done at the risk of having the underlying shares put to him should prices dip below the 10 strike price.
XLF – Financial Select Sector SPDR – Call sales are abundant on the banking index today as shares have slipped 1.75% to $9.04. Option traders were very active in the soon-to-expire February contract, and were seen shedding out-of-the-money calls throughout the morning. Most notable was the February 10 strike price where nearly 19,000 calls were sold for an average price of 10 cents apiece. The trades at the 10 strike reflect pessimism on the XLF—that shares are not likely to rally by 10% in order for the calls to land in-the-money by the end of next week. Surrounding the 10 strike were call sales observed at the February 9.0 strike, where 4,500 in-the-money calls sold for 41 cents apiece, and the February 11 strike price, where about 1,200 calls were shed for just 3 cents each. Further entrenching the overall bearish stance on the XLF today was the presence of 1,100 puts purchased at the February 9.0 strike for 39 cents apiece. With a breakeven of $8.61, these put purchasers will profit from continued downward movement in the financials index.
FXI – iShares FTSE/Xinhua China 25 Index (ETF) – Chinese shares are up by about 1.5% to $26.85 today amid news that the Chinese government's $585 billion stimulus package aimed at machinery, construction, and infrastructure appears to be working. Some traders appear to be less confident on the sustainability of Chinese growth prospects in the short-term, as evidenced by 2,000 puts purchased at the March 23 strike price for 74 cents each. These out-of-the-money puts require shares to drop by at least 18% to a breakeven of $22.26 in order to reap profits by expiration. Most notable, however, was one far-term bullish trader who sold 2,000 puts for a premium of 7.00 at the January 25 strike price set to expire in 2011. With time on his side and the apparent initial success of the Chinese stimulus package in his back pocket, this investor is optimistic that shares will remain above $25 in two years. By pocketing the premium today, this trader is accepting the risk of having the shares put to him at the 25 strike price. The effective purchase price is then reduced to $18 thanks to his standing ready to take delivery, for which he reaps a 7.0 premium today.
EWW – iShares MSCI Mexico – As one of America's best and not to mention most conveniently located manufacturers, Mexico has buckled under the strain recently as the American government tries to get its house in order. The chart pattern for Mexican stocks looks unsurprisingly like that of the S&P 500 index. An option trader appears to have sold large amounts of puts expiring in June today in trading that could be a sizeable bet that Mexico will benefit from an exhalation of volatility when the government's plans kick-in. With shares in the ETF trading up at $27.20 today some 22,000 puts were sold at a premium of around 2.70 while 15,000 puts were sold at 3.10. In the case that these were both simply short put positions the investor stands willing to buy if assigned at the strikes by expiration, but would be taking in the stock at prices discounted by the value of today's premium. The 52-week low for the shares stands at $22.83.
VIA/B – Viacom Inc. Class B – Shares of the global entertainment company have rallied by over 1% today to $16.50. VIA popped up on our 'hot by options volume' markets scanner after a large volume of calls were traded by one investor. 20,000 calls were sold at the September 22.5 strike price for an average premium of 1.075. If this individual is buying the shares and writing covered calls, then he is probably somewhat bullish on the stock. He pockets the 1.07 premium per contract today, and has effectively written his exit strategy at the 22.5 strike price. Should the underlying shares be called away from him at expiration in 7 months time, he will have made an approximate 35% gain on the shares in addition to the premium snagged with today's sale. If this investor does not own underlying shares the picture is a bit different. It would seem that the trader is taking advantage of today's optimism and call premium increase by selling the 20,000 calls and reeling in the 1.07 premium in hopes that any rally fizzles out.
CTSH – Cognizant Technology Solutions Corp. – The custom IT consulting and technology services company's shares have rallied today by over 1.5% to $21.10 after strong fourth quarter results were reported. CTSH's earnings rose nearly 17% in the fourth quarter, and surpassed analysts' expectations. Option traders on the prowl for calls appear to have bought heavily in the March contract. At the March 22.5 strike price, about 10,000 calls were scooped up for an average price of 92 cents each, while at the March 25 strike, over 3,100 calls were purchased for 32 cents apiece. If shares can continue on their upward climb and reach the breakeven price of $23.42, the 22.5 calls will prove profitable. As for the March 25 calls, shares would need to rally by 17% to a breakeven of $25.32 in order for these bulls to make bank by expiration.
Senior Market Analyst
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