Option Activity Alert: JPM, ARIA, EWZ, PSS

JPM – JPMorgan Chase & Co. – Volume in options traded on the financial services firm spiked in the final hours of the session after two big butterfly spreads were initiated in longer-dated call options. It looks like long-term bullish investor responsible for the transactions expects to see JPMorgan’s shares rebound in the next three to seven months. JPM’s shares are down 1.95% at $39.30 with 15 minutes remaining in the trading session, but fell as much as 2.60% earlier today to touch an intraday low of $39.04. The larger of the two bullish butterfly spreads utilized February 2011 contract calls. The investor paid a net premium of $1.12 per contract on the transaction, picking up 20,000 calls at the Feb. 2011 $40 strike, selling 40,000 calls at the Feb. 2011 $45 strike, and buying 20,000 calls at the higher Feb. 2011 $50 strike. Parameters of this spread dictate an effective breakeven share price of $41.12, above which the investor starts to make money, as well as maximum potential profits of $3.88 per contract if shares surge 14.5% over the current price of $39.30 to settle up at $45.00 at expiration. The trader could lose up to a maximum of $1.12 per contract or $2.24 million, but stands ready to accrue maximum potential profits of $3.88 per contract or $7.76 million. The smaller of the two butterflies was constructed with longer-dated June 2011 contract call options. This spread’s proportions are different than the larger call ‘fly in that the lower wing is twice as wide as the upper wing. The investor picked up 9,000 calls at the June 2011 $40 strike, sold 18,000 calls at the central June 2011 $50 strike, and bought 9,000 calls up at the June 2011 $55 strike, all at a net cost of $2.49 per contract. Maximum potential profits of $7.51 per contract are available to the bullish player if JPM’s shares jump 27.2% over the current share price to settle at $50.00 at June expiration. Options implied volatility on JPMorgan is up 7.9% to stand at 31.01% as of the close this afternoon.

ARIA – Ariad Pharmaceuticals, Inc. – Shares of the pharmaceuticals firm engaged in developing therapies to treat solid tumors and hematologic cancers bucked the overall market trend this afternoon, rising as much as 1.90% to touch an intraday high of $3.73. The firm’s CEO reportedly presented at the Lazard Capital Markets Healthcare Conference earlier today in New York City. Ariad appeared on our ‘hot by options volume’ market scanner after one bullish player sold 3,750 puts at the May 2011 $2.5 strike to pocket a premium of $0.40 per contract. The put seller keeps the full premium received on the transaction as long as ARIA’s shares exceed $2.50 through expiration day in May. The investor expects shares to trade above $2.50, but is apparently willing to have shares of the underlying stock put to him at an effective price of $2.10 apiece in the event that the put options land in-the-money at expiration.

EWZ – iShares MSCI Brazil Index Fund – Options traders concerned that the pullback in emerging markets is just getting warmed up initiated bearish strategies on the Brazil fund today. Shares of the EWZ, an exchange-traded fund that tracks the performance of publicly traded securities in the aggregate in the Brazilian market as measured by the MSCI Brazil Index, are down 3.25% at $74.41 as of 3:00 pm in New York trading. One nervous options player appears to have picked up a ratio put spread, buying 5,000 puts at the March 2011 $74 strike for a premium of $6.30 each, and selling 10,000 lots at the lower March 2011 $65 strike at a premium of $2.95 a-pop. The net cost of the transaction amounts to $0.40 per contract and provides downside protection – should the investor hold a long position in the underlying fund – if shares of the EWZ slip beneath the effective breakeven price of $73.60 by March expiration. The trader is protected in the event that shares plummet 12.65% from the current price of $74.41 and trade down to $65.00 ahead of expiration day. Of course, by selling twice as many lower-strike put options, the investor could suffer losses, but shares of the EWZ would need to plunge 24.2% from the current price to trade below the lower breakeven point at $56.40 before losses start to accumulate to the downside in this case. Market uncertainty regarding future share price moves for the EWZ are reflected in the 8.1% increase in the fund’s overall reading of options implied volatility to 32.94% this afternoon.

PSS Collective Brands, Inc. – Shares of the operator of Payless ShoeSource rallied as much as 3.9% at the start of the trading day to hit an intraday high of $16.13 on news the firm plans to continue to expand internationally by taking its children’s shoe brand, Stride Rite, to mainland China next year. The rally in Collective Brands’ shares has cooled significantly as of 1:15 pm in New York with shares up a lesser 0.45% to stand at $15.60. Options strategists populating PSS today are positioning for shares to continue higher by initiating bullish risk reversals in the January 2012 contract. It looks like traders employing this tactic sold 2,500 puts at the January 2012 $15 strike for a premium of $2.65 each in order to buy the same number of calls at the higher January 2012 $17.5 strike at a premium of $2.65 apiece. The trade is essentially free and prepares investors to make money if Collective’s shares jump 12.2% over the current price of $15.60 and trade above the effective breakeven point at $17.50 by expiration day. Selling the put options at the Jan. 2012 $15 strike suggests traders are willing to have shares of the underlying stock put to them at that price if the puts should land in-the-money by expiration.

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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