Option Activity Alert: EEM, MRVL, BCSI, XRT

EEM – iShares MSCI Emerging Markets Index ETF – A number of large-volume spreads on the emerging markets fund this morning signal investor pessimism on the sector through February expiration. Shares of the EEM, an exchange-traded fund designed to measure equity market performance in the global emerging markets, fell 0.50% to $47.62 by 12:20pm in New York. Three-legged bearish spreads, wherein investors sold out-of-the-money calls to partially finance the purchase of put spreads, are popular with strategists populating the EEM today. The larger of two similar bearish plays involved the sale of 15,500 calls up at the February $52 strike for a premium of $0.05 each, purchase of the same number of puts at the February $47 strike at a premium of $0.96 apiece, and the sale of 15,500 puts at the lower February $43 strike for premium of $0.19 each. The net cost of the transaction amounts to $0.72 per contract and positions the responsible party to profit should shares in the EEM decline another 2.80% from the current price of $47.62 to breach the effective breakeven point to the downside at $46.28 ahead of February expiration day. Maximum potential profits of $3.28 per contract are available to the trader should shares in the ETF drop 9.7% lower to trade below $43.00 before the contracts expire next month. A like-minded tactician established a similar spread, but sold call and put options at closer-to-the-money strikes to further reduce the premium required to take a bearish stance on the fund. This options player sold 14,000 of the February $50 strike calls, picked up 14,000 puts at the February $47 strike, and sold the same number of puts at the February $43 strike. The trader paid a net premium of $0.24 per contract and breaks even on the spread if the EEM’s shares decline 1.80% to trade below $46.76 ahead of expiration. Maximum potential profits of $1.76 per contract pad the investor’s wallet should shares dip below $45.00 at expiration next month. Selling calls at the February $50 and $52 strikes reduces the cost of the bearish spreads, but is not a riskless tactic to employ. Investors are on the hook to deliver huge quantities of the underlying stock if the calls land in-the-money by expiration day. But, this is a risk they are willing to take perhaps because shares of the fund have not traded above $50/$52 since the middle of 2008.

MRVL – Marvell Technology Group, Ltd. – Options investors are placing near-term bearish and longer-term bullish trades on the semiconductor company today with shares in Marvell currently down 3.15% to arrive at $21.21 as of 12:50pm. Pessimists purchased roughly 3,000 puts at the January $21 strike for an average premium of $0.25 per contract. Put buyers start to profit if shares in the name decline another 2.2% from the current price of $21.21 to breach the average breakeven point at $20.75 ahead of expiration this week. Bearish sentiment spread to the February $21 strike where another 1,100 put options were picked up for an average premium of $0.68 a-pop. Investors holding these contracts make money if shares in MRVL drop 4.2% to trade below the average breakeven price of $20.32 ahead of February expiration day. Meanwhile, it looks like another investor is taking a bullish stance on the semiconductor maker in the May contract. The trader purchased 500 calls at the May $23 strike for a premium of $1.19 each, and sold the same number of calls up at the May $26 strike at a premium of $0.44 apiece. The net cost of the spread amounts to $0.75 per contract, thus positioning the investor to profit if shares in Marvell surge 12.0% to surpass the effective breakeven price of $23.75 by May expiration. Maximum potential profits of $2.25 per contract are available to the optimistic player if shares jump 22.6% to exceed $26.00 ahead of expiration day in four months time.

BCSI – Blue Coat Systems, Inc. – The provider of internet security products and services popped up on our ‘hot by options volume’ market scanner within minutes of the opening bell after bearish players scooped up in- and out-of-the-money puts in the February contract. Blue Coat’s shares are down 2.3% as of 11:20am in New York to stand at $30.29. Investors expecting the price of the underlying stock to continue to slide purchased roughly 850 in-the-money put options at the February $31 strike for an average premium of $1.75 each. Put buyers at this strike make money if BCSI shares fall another 3.4% from the current price of $30.29 to breach the average breakeven point on the downside at $29.25 ahead of February expiration. Pessimists picked up another 1,000 puts at the lower February $30 strike at an average premium of $1.30 apiece. Trading traffic in Blue Coat puts is heaviest at the February $29 strike where more than 1,140 of the options were purchased for an average premium of $0.95 a-pop. Investors holding these contracts are poised to profit in the event that shares in Blue Coat Systems plunge 7.4% to trade below the breakeven price of $28.05 by expiration day next month. Put volume generated at each of the strikes this morning is far greater than levels of previously existing open interest in each case.

XRT – SPDR S&P Retail ETF – Fresh positioning in February contract put options on the retail ETF this morning indicates some investors see shares of the fund extending losses in the near-term. Shares of the XRT, an exchange-traded fund designed to track the performance of the S&P Retail Select Industry Index, are down 0.95% at $46.53 this afternoon. One pessimistic player picked up 5,000 puts at the February $45 strike for a premium of $0.49 apiece within the first ten minutes of the trading session. The put buyer stands prepared to profit should shares in the XRT plunge 4.3% from the current price of $46.52 to trade below the effective breakeven point at $44.51 ahead of February expiration. Shares in the XRT last dipped below $44.51 back on November 17, 2010.

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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