Options Brief: Strangle Player Sees Range-Bound Shares for Comcast

Emerging markets bear with butterfly wings dominates EEM puts in afternoon trading

Today’s tickers: EEM, ETFC, CVA, CSCO, CMCSK, XLI, CATM, AXL & ASML

EEM – iShares MSCI Emerging Markets Index ETF – An enormous bearish put butterfly spread comprised of 240,000 put options cast a gloomy shadow over the emerging markets fund late in afternoon trading. Shares of the EEM, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the MSCI Emerging Markets Index – an index created to measure equity market performance in the global emerging markets, are down 0.35% at $37.21 as of 3:30 pm (ET). The massive bearish transaction on the fund suggests one big player is bracing for a potential 19% pullback in the price of the underlying shares by June expiration. The butterfly spread spans the June $25/$30/$35 strikes, with 60,000 puts picked up at the June $25 strike for a premium of $0.11 each [wing 1] and another 60,000 puts purchased at the higher June $35 strike for a premium of $0.88 apiece [wing 2]. The body of the butterfly involved the sale of 120,000 puts at the central June $30 strike for a premium of $0.27 a-pop. The net cost of the spread amounts to $0.45 per contract. The EEM’s shares must slip beneath the upper breakeven price of $34.55 before the investor starts to make money ahead of June expiration. Maximum available profits of $4.55 per contract pad the investor’s wallet if shares of the underlying fund fall 19.35% from the current price to settle at $30.00 at expiration. Shares of the EEM last traded below $34.55 back on August 19, 2009, and touched a 52-week low of $30.12 back on June 23, 2009. The investor responsible for the giant transaction only ever risks losing $0.45 per contract, but stands ready to amass more than 10 times that amount – $4.55 per contract – if shares nose-dive down to $30.00 ahead of expiration day next month.

ETFC – E*Trade Financial Corp. – A massive three-legged options combination play initiated on financial services firm, E*Trade Financial Corp., suggests one investor sees shares of the provider of online brokerage services trading within a narrow range through expiration in January 2011. ETFC shares are up 2.05% at $1.49 as of 2:30 pm (ET). The big options player initiated a sold strangle, selling 30,000 calls at the January 2011 $2.0 strike for $0.21 apiece and shedding 30,000 puts at the lower January 2011 $1.5 strike for $0.34 each, to take in a gross premium of $0.55 per contract. The third-leg of the transaction involved the purchase of 30,000 puts at the July $1.0 strike for a premium of $0.04 each. Thus, the investor pockets a net premium of $0.51 per contract, and keeps that amount as long as shares of the underlying stock trade within the range of the strike prices described ($1.50 – $2.00) through expiration day in January 2011. The long put stance in the July contract suggests, perhaps, that the trader responsible for the combination play is wary of the potential for ETFC shares to shift lower in the next couple of months. The puts yield downside protection – if the investor hold a long position in the underlying shares – or profits – if no long stock position is held – should E*Trade’s shares plummet 35.5% to breach the effective breakeven point to the downside at $0.96 by July expiration.

CVA – Covanta Holding Corp. – The owner and operator of ‘energy-from-waste’ and other renewable energy production businesses in the Americas, Europe and Asia popped up on our ‘hot by options volume’ market scanner today after one trader looks to have invested in a chunk of married put options on the stock. Covanta’s shares are down 1.5% at $15.22 as of 2:45 pm (ET). The long-term optimistic investor picked up approximately 5,000 puts at the December $15 strike for an average premium of $1.71 apiece, and simultaneously purchased a large underlying stock position with shares trading at around $15.47 each. The married puts secure downside protection on the long underlying stock position and increase the effective price paid per share to an average value of $17.18 apiece. Thus, the trader is hoping to see Covanta’s shares rally above $17.18. However, the puts act as an insurance policy against losses in case the price per share falls below the breakeven point at $13.29 ahead of December expiration. The cautiously optimistic individual perhaps enacted the married-put stance today because Covanta’s shares touched down to a low of $14.62 on Friday, which is just $0.41 greater than the current 52-week low on CVA of $14.21 (5/25/09), but failed to break-through Friday’s low during the current session. Perhaps the trader sees the current share price as a relative bottom for the stock, and expects shares to rebound up from this point. Covanta’s shares rallied up to a 52-week high of $19.57 back on January 15, 2010.

CSCO – Cisco Systems, Inc. – A bullish risk reversal on the maker of routers and switches indicates one investor is preparing for a rally in the price of the underlying stock by July expiration. Cisco’s shares commenced the current trading session in the red, but rebounded in afternoon trading to stand 0.55% higher on the day at $23.59 as of 2:20 pm (ET). The optimistic options player appears to have sold 12,000 puts at the July $22 strike for a premium of $0.68 apiece, and purchased the same number of calls at the higher July $27 strike for $0.20 each. The investor pockets a net credit of $0.48 per contract on the transaction, which he keeps as long as Cisco’s shares trade above $22.00 through expiration day. Additional profits accumulate should shares of the telecommunications equipment maker surge 14.45% over the current price to surpass $27.00 by July expiration.

CMCSK – Comcast Corp. Class A Special – A short strangle enacted on the provider of cable and communications services today implies one options strategist sees shares of CMCSK trading within a specified range through June expiration. As of 12:20 pm (ET), shares of the underlying stock are up 0.50% to $16.32. The strangle-strategist shed 2,000 calls at the June $17 strike for a premium of $0.30 each in combination with the sale of 2,000 puts at the June $15 strike for an average premium of $0.375 apiece. Gross premium pocketed on the transaction amounts to $0.675 per contract. The investor keeps the full amount of premium as long as CMCSK shares trade within the boundaries of the strike prices described through expiration. The short stance taken in both call and put options on the stock expose the strangler to losses if shares rally above the upper breakeven price of $17.675, or if shares slip beneath the lower breakeven point at $14.325, by expiration day in June.

XLI – Industrial Select Sector SPDR – Shares of the XLI, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Industrial Select Sector of the S&P 500 Index, are trading 0.25% lower at $29.35 just before 12:30 pm (ET). One pessimistic options trader populated the fund with bearish sentiment by purchasing a plain-vanilla debit put spread in the September contract. The investor picked up 4,000 puts at the September $28 strike for a premium of $2.05 each, and sold the same number of puts at the lower September $23 strike for $0.80 apiece. The net cost of the bearish spread amounts to $1.25 per contract, thus yielding maximum potential profits of $3.75 to the responsible party if shares of the fund fall more than 21.6% to $23.00 by expiration. The trader starts to make money as long as shares decline 8.85% from the current value to breach the average breakeven price of $26.75 by expiration day in September.

CATM – Cardtronics, Inc. – The implementation of a ratio call spread on the provider of automated teller machine (ATM) management and equipment-related services indicates one options players is expecting Cardtronics’ shares to rally significantly by December expiration. CATM’s shares are currently up 2.25% to $13.25 as of 12:00 pm (ET). The bullish investor responsible for the ratio spread utilized a total of 6,000 call options in the transaction, which is nearly three times greater than total existing open interest on the stock of 2,079 contracts. The trader purchased 2,000 in-the-money calls at the December $12.5 strike for a premium of $3.40 apiece, and sold 4,000 calls at the higher December $17.5 strike for $1.50 in premium each. Net premium paid for the spread amounts to just $0.40 per contract. The investor makes money above the effective breakeven price of $12.90, and stands ready to accrue maximum potential profits of $4.60 per contract should shares of the underlying stock surge 32% up from the current price of $13.25 to settle at $17.50 by expiration day in December.

AXL – American Axle & Manufacturing Holdings, Inc. – Bullish options players dominated trading activity on auto parts supplier, American Axle & Manufacturing Holdings, Inc., in the first half of the trading session. Shares of the underlying stock are up 2.30% to $8.45 as of 11:55 am (ET). Investors expecting AXL shares to appreciate ahead of June expiration purchased at least 4,000 calls at the June $10 strike for an average premium of $0.335 per contract. Call-buyers make money if the auto parts manufacturer’s shares rally at least 22.30% over the current price to exceed the average breakeven point to the upside at $10.335 by expiration day next month.

ASML – ASML Holding NV – The provider of advanced technology systems for the semiconductor industry enticed near-term optimistic options players during the first trading day of this week despite the 0.90% decline in the price of the underlying stock to $28.64 as of 12:15 pm (ET). Plain-vanilla debit call spreads transacted in the June contract indicate one or more traders expect ASML shares to rally ahead of expiration day. Roughly 6,000 in-the-money calls were picked up at the June $27.5 strike for an average premium of $2.07 apiece, and spread against the sale of about 6,000 calls at the higher June $30 strike for an average premium of $0.73 each. The net cost of the bullish spread amounts to $1.34 per contract. The transaction yields maximum potential profits of $1.16 per contract to the trader or traders long the debit spread if shares of the underlying stock rally 4.75% to exceed $30.00 by expiration day in June.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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