Today’s tickers: TROW, BDK, EWZ, AMZN, PLD, MON, POT, XLF & WFC
TROW – T. Rowe Price Group, Inc. – Shares of the financial services company have risen by 6% to $29.01 amid broad market gains for financials. TROW appeared on our ‘hot by options volume’ market scanner after one investor sold 16,300 calls at the July 35 strike price for a premium of 1.90. This trade was enacted for one of two plausible reasons. It could be pure naked selling in which case the investor takes in the 1.90 premium afforded by today’s 6% increase in the underlying share price. The trader is then left short 16,300 calls which he would need to buy back at some point in the future before expiration. Another explanation could be that this trade is a covered call. If this is the case, the investor purchased shares of the underlying stock and sold the calls to create an exit strategy. If shares were to rise through $35.00 by expiration this investor would enjoy the 1.90 in premium plus an additional 20% gain on shares of the underlying.
BDK – The Black & Decker Corporation – Shares of the global manufacturer and marketer of power tools and home improvement goods have increased by more than 5% to $32.20. Shares are gaining amid improvements in other durable goods companies today as well as on the coattails of news regarding BDK’s increasingly large debt offering. The company has upped the size of the offering to $350 million from the previously announced $250 million, according to one news source. Option traders responded by picking up calls in the April and May contracts. At the April 35 strike price some 5,400 calls were scooped up for an average premium of 70 cents. Reflecting even more optimism, investors looked to the May 40 strike where over 2,100 calls were bought for an average of 66 cents apiece. Investors seem to be looking for BDK to put the $350 million in borrowed funds to good use in the hopes that such action will spur shares to continue to move higher.
EWZ – iShares MSCI Brazil Index Fund – The Brazil ETF has added more than 2% to its share price today and currently stands at $38.12. A butterfly spread established in the near-term April contract caught our attention. The investor constructed the butterfly by purchasing the wings and selling the body. At the April 40 strike price 10,000 calls were purchased for 1.22 each (wing 1) while at the April 42 strike price 20,000 calls were sold for 58 cents per contract (the body). Finally, 10,000 calls were purchased at the April 44 strike for a 30 cent premium apiece (wing 2). The net cost of the trade amounts to 36 cents (1.22 [wing 1] + 0.30 [wing 2] = 1.52; 1.52 – 2*0.58 [the body] = 0.36 cents). The parameters of the butterfly spread indicate that this investor stands to gain a maximum profit of 1.64 if shares can rally to $42.00 by expiration. In order to pocket the full 1.64, shares would need to rise by 10% from the current price, which although a tall order, leaves the investor with a combination of close to 5:1 in terms of risk-reward in the event that Brazilian shares spend the next 45 days rallying.
AMZN – Amazon.com, Inc. – Shares of the online retailer and tech-sector bellwether have experienced a 3% rally to $73.81, helping to lead gains in technology shares today. AMZN jumped onto our ‘most active by options volume’ market scanner after one optimistic trader established a bull call spread in the July contract. However, the trade is also a well constructed combination that could benefit if Amazon’s current quarter earnings don’t shine as well as some analysts are starting to whisper they might. In addition to the call spread the investor sold an amount of Amazon shares and will benefit if sales lead to a fizzle in the share price. At the July 85 strike price 15,000 calls were purchased for 5.15 apiece while the July 105 strike had 15,000 calls sell for 1.35 per contract. In isolation the net cost of taking this bullish stance amounts to 3.80 and yields a maximum potential profit of 16.20 if shares can rally all the way up to $105.00 by expiration. Given the hedging structure of this trade, the investor needs a larger jump than would be required under a plain vanilla call spread to see the spread pay off, since the short stock position drags against the profits. Option implied volatility on AMZN has come off slightly since yesterday’s reading of 71% to the current value of 67%.
PLD – Prologis – Earlier we noted heavy call buying accompanying a strong rise in shares of Prologis, the REIT that owns, operates, and develops industrial properties in North America, Europe, and Asia. Shares are 28% higher at $6.75. We questioned investors’ rationale given a rating agency downgrade of Prologis European Properties (PEPR), but have since learned that this is a separately listed entity on Euronext and invests in the Prologis fund. Hence, what appeared to be bad news for PLD has in fact no bearing on its activities. Investors were seen picking up calls in the April contract. At the April 7.5 strike price more than 6,300 calls were purchased for an average premium of 44 cents. An additional 3,000 calls were traded at the April 15 strike price for 5 cents each. Option implied volatility has jumped from 152% this morning to the current value at 178%.
MON – Monsanto Company – The global provider of agricultural products has slipped by 1% to stand at $81.90 per share. The St. Louis-based company appeared on our ‘most active by options volume’ market scanner after one investor initiated a credit spread in the May contract. At the May 95 strike price it appears that 5,500 calls were sold for a premium of 2.05 while 5,500 calls at the May 105 strike were purchased for 65 cents apiece. This investor apparently does not see shares rising through the breakeven point of $96.40 by expiration. The trader is now short 5,500 calls at the lower strike, and in return for bearing the risk that shares rally he has received a net credit of 1.40. The full credit is retained as long as both strikes described land out-of-the-money at expiration. If shares do rise through $95.00, this investor’s losses are capped at a maximum of 8.60 if shares jumped all the way to the upper strike at $105.00.
POT – Potash Corporation of Saskatchewan, Inc. – The integrated fertilizer and feed products company is up by about 0.5% to $82.20 after dipping slightly at the opening bell. The call-to-put ratio of 6.87 indicates that option investors favored trading calls more than 6 times to every put option. The skewed ratio is due to a pair of bull call spreads established in the April and June contracts. In the near-term April contract, one investor purchased 12,800 calls at the 90 strike price for 2.95 apiece and simultaneously sold 12,800 calls at the 95 strike for 1.90 each. This investor paid a net cost of 1.05 for the spread and is hoping to see shares surge by about 11% from the current price in order to breach the breakeven point at $91.05. Should such a rally come to fruition this trader stands to realize a maximum profit of 3.95 if shares rise to $95.00 by expiration. Further along in the June contract, a super-bullish call spread was initiated by the purchase of 5,000 calls at the June 110 strike price for 3.49 each and spread against the sale of 5,000 calls at the June 140 strike for 55 cents apiece. The net cost of the spread amounts to 2.94 and yields a maximum potential profit of 27.06 should shares soar by approximately 70% to the upper strike at $140. While such a drastic move seems improbable, shares need only rally by 37% in order to breach the breakeven share price of $112.94 by expiration.
XLF – Financial Select Sector SPDR – Shares of the banking ETF have experienced a 3.5% rebound to $8.66 after yesterday’s broad declines in financial stocks. Some investors were seen looking for further upside as evidenced by the establishment of a bull call spread in the May contract. At the May 11 strike price 10,000 calls were purchased for 27 cents apiece while at the May 13 strike price 10,000 calls were sold for a 7 cent premium. The net cost of the trade amounts to 20 cents and yields a maximum potential profit to the investor of 1.80 if shares can rally to $13.00 by expiration. In contrast, the near-term April contract saw some bears lumbering about as seen by the purchase of 12,000 puts at the April 8.0 strike price for 43 cents. Apparently some investors are not willing to let down their guard just yet.
WFC – Wells Fargo & Co. – Shares are up by 5% to $14.05 amid gains in the financial sector. WFC caught our eye because of some interesting put activity in the April and May contracts. It appears that a ratio put spread was established with the purchase of 20,000 puts at the April 15 strike price for 2.35 each, against the sale of 40,000 puts at the April 10 strike for 50 cents per contract. The net cost of the bearish play amounts to 1.35 and yields a maximum potential profit of 3.65 if shares decline to $10.00 by expiration. The investor faces two breakeven points. Since the trade has a net cost, shares in WFC would need to breach $13.65 before he makes any money. Profits grow should shares fall to $10.00 but diminish thereafter and are wiped out by the time shares reach $6.35, beneath which losses accelerate courtesy of the net short put. This pessimistic put spread is in stark contrast with the apparent optimism seen by the sale of 8,200 puts at the April 12 strike price for 1.33 each. Further along, it looks like traders are beginning to see the sun shine through the gloom of April showers as a bit of optimistic action was observed. The sale of 4,500 puts at the May 10 strike for 1.22 each along with the sale of 8,000 puts at the May 7.5 strike price for 50 cents apiece indicates that traders are shedding their armor. Of note, however, was the purchase of 4,000 puts at the May 5.0 strike price for 19 cents each, which appears to be spread against the contracts at the 7.5/10 strikes. The 4,000 puts purchased so far out-of-the-money may merely represent inexpensive insurance on the position in case shares more than halve by expiration.