Option Activity Alert: HIG, EWZ, MBT, XOP

HIG – Hartford Financial Services Group, Inc. – Options traders are placing bullish bets on the insurer this morning in order to prepare for the price of the underlying stock to continue higher over the next several months. HIG’s shares are currently up 3.6% to stand at $23.06 as of 11:30 am in New York. Investors employed a number of different bullish tactics using both call and put options expiring in March of 2011. Plain-vanilla call buyers scooped up approximately 3,500 contracts at the March 2011 $24 strike for an average premium of $1.58 apiece. Investors long the calls make money if HIG’s shares surge 10.9% over the current price of $23.06 to surpass the average breakeven point at $25.58 ahead of March expiration. Other optimistic options strategists targeted the March 2011 $21 strike and sold roughly 7,669 puts to take in an average premium of $1.22 a-pop. Put sellers keep the full premium received on the transaction as long as Hartford’s shares trade above $21.00 through expiration day next year. Investors initiating the sale of the put options are apparently happy to have shares of the underlying stock put to them at an effective price of $19.78 each in the event that the put options land in-the-money at expiration. The insurer’s shares have traded above $21.00 since the start of September 2010. Finally, debit call spreaders picked up approximately 1,700 calls at the March 2011 $24 strike for an average premium of $1.57 each, and sold about the same number of calls up at the March 2011 $28 strike at an average premium of $0.48 apiece. The average net cost of the transaction amounts to $1.09 per contract. Investors employing this strategy start to profit if shares in Hartford Financial rise 8.8% to exceed the average breakeven point on the spread at $25.09. Maximum potential profits of $2.91 per contract are available to these traders in the event that shares of the underlying stock jump 21.4% in the next four months to trade above $28.00 by March expiration. HIG’s shares rallied up to a 52-week high of $30.46 back in April. Options implied volatility on the insurance firm is down 6.1% to stand at 38.03% as of 11:50 am.

EWZ – iShares MSCI Brazil Index ETF – One Brazil-bull staked a claim in December contract call options within the first 30 minutes of the session to position for the price of the underlying fund to extend gains ahead of expiration this month. Shares of the EWZ, an exchange-traded fund designed to correspond to the price and yield performance of publicly traded securities in the aggregate in the Brazilian market – as measured by the MSCI Brazil Index, are up 2.3% to trade at $76.57 as of 12:00 pm in New York. The investor responsible for the bullish play appears to have initiated a ratio call spread, buying 2,000 calls at the December $78 strike for a premium of $1.27 each, and selling 4,000 calls at the higher December $80 strike at a premium of $0.57 apiece. The net cost to the trader reduces down to $0.13 per contract, thus positioning him to profit should shares of the EWZ rise roughly 2.0% to trade above the effective breakeven price of $78.13 by December expiration day. Maximum potential profits of $1.87 per contract pad the investor’s wallet in the event that, at expiration, shares of the underlying fund have jumped 4.5% to $80.00. The ratio of twice as many short calls at the higher strike suggests the investor expects limited upward movement in the fund’s shares, at least in the near-term, because of the potential to lose money above a certain point. The trader faces losses if shares rally above the upper breakeven price of $81.87, but this scenario requires shares to climb 6.9% and break above their current 52-week high of $81.77.

MBT – Mobile TeleSystems OJSC – Russia’s largest mobile phone operator popped up on our scanners this morning due to call and put action in the March 2011 contract. It looks like investors expecting MBT’s shares to remain range-bound over the next four months are building up interest in short straddles. Shares of the cell phone communications services provider are currently up 0.75% to stand at $21.13 as of 12:50 pm. Mobile TeleSystems said earlier this week that subscribers fell 0.2% to 105 million in the month of October. Short-straddlers appear to have sold 4,500 calls for a premium of $1.60 apiece and 4,500 puts at a premium of $1.40 each at the March 2011 $21 strike. Gross premium pocketed on the sale amounts to $3.00 per contract. Investors keep the full premium received on the transaction if MBT’s shares settle at $21.00 at expiration. Traders relinquish the full premium pocketed on the straddle-strategy and start to incur additional losses should shares rally above the upper breakeven point at $24.00, or if shares slip beneath the lower breakeven price of $18.00, ahead of March expiration. Investors seem to have employed the same strategy by selling a 2,425-lot straddle at the same March 2011 $21 strike back on November 16, 2010, to pocket gross premium of $3.45 per contract. The overall reading of options implied volatility on MBT edged 3.9% lower by 1:00 pm to stand at 31.35%.

XOP – SPDR S&P Oil & Gas Exploration & Production ETF – The sale of a large chunk of out-of-the-money put options on the XOP this morning is a sign of investor optimism on the sector. Shares of the XOP, an exchange-traded fund designed to track the performance of an index that represents the oil and gas exploration and production sub-industry portion of the S&P Total Stock Market Index, are trading 2.65% higher this afternoon at an intraday- and new 52-week high of $49.53 as of 1:20 pm. The near-term bullish player sold 25,000 puts at the December $47 strike to pocket premium of $0.45 per contract. The put seller keeps the full $0.45 premium received on the transaction as long as XOP’s shares exceed $47.00 through expiration day in a few weeks time. The trader expects shares of the underlying fund to trade above $47.00, but is obliged to have the stock put to him at an effective price of $46.55 should the put contracts land in-the-money at expiration. Options implied volatility on the fund plunged 12.7% to 24.42% in early afternoon trading.

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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