Option Activity Alert: XLE, TM, MHS, QCOR

XLE – Energy Select Sector SPDR ETF – Options volume on the XLE jumped following the opening bell this morning with most of the activity concentrated in April contract puts. It looks like one big player kicked things off in the first 20 minute of the session by unraveling a massive bear put spread on the fund. Shares in the XLE rose sharply today, gaining as much as 1.95% in early afternoon-trade to hit $75.27 by 12:20pm. The trader responsible for the largest put spread print certainly seems to have a keen sense of timing, initiating the debit put spread near the XLE’s top, and taking the spread down this morning ahead of the intraday move higher. The investor appears to have initiated the spread back on February 28, 2011, when shares in the XLE reached a session-high of $78.69. The big player sat with the trade, watching shares hit fresh highs as uncertainty over turmoil in the Middle East and its effect on the price of oil continued to flourish, until the price of XLE shares started their decline on March 7. The fund’s shares fell 7.2% to today’s low of $73.03 in the 3 weeks since the trade was established, pushing the long-leg of the puts in-the-money. Today, the trader anticipated the bounce higher in XLE shares and ditched the bearish position by selling at least 66,000 in-the-money puts at the April $75 strike for a premium of $2.79 each, and buying the same number of the lower April $70 strike puts at a premium of $1.00 apiece. Given an approximate purchase price on the original spread of around $0.98 per contract on February 28, it looks like the put player walks away with net profits of $0.81 per contract by taking the trade down this morning. The unraveling of the transaction may be a sign this trader believes shares in the XLE are set to rise higher, at least through April expiration.

TM – Toyota Motor Corp. – The devastating earthquake in Japan spurred options trading in some large Japanese companies as well as on the iShares MSCI Japan Index ETF today, lifting options implied volatility in each as the full impact of the tragedy on the world’s third-largest economy remains clouded. Shares in the world’s biggest automaker are down 2.0% at $85.72 this afternoon. Toyota and its affiliates reportedly halted production at three factories. Put players are most active in the front month, with more buyers on the scene than sellers, although traders appear to be doing both today. Implied volatility on Toyota is up 13.4% at 27.84% just before 1:00pm in New York. Shares in Tokyo-based Sony Corp. are lower by 2.8% to arrive at $33.30, with volatility standing 8.1% higher on the session at 30.08%. Puts are more active than calls, with some traders positioned to see the price of the electronics company slide lower. Other investors were seen selling near-term put options at the nearest-to-the-money strike price available in the March and April contracts. Finally, the EWJ, an ETF that tracks the performance of publicly traded securities in the Japanese market, saw demand for near-term puts rise along with implied volatility. Options volume on the ETF remains fairly low, with a total of 11,950 contracts traded on the fund overall as of 1:05pm. Volatility on the fund is currently up 11.3% at 20.82%.

MHS – Medco Health Solutions, Inc. – A long-term bullish strategist dabbled in October contract call and put options on the health care company today, initiating a three-legged transaction to position for shares in Medco Health Solutions to rise ahead of expiration. Shares in MHS are down slightly by 0.05% to stand at $61.42 just after 12:00pm in New York. It looks like the investor sold 2,500 puts at the October $55 strike in order to partially offset the cost of buying the 2,500-lot October $65/$70 call spread, all for a net premium of just $0.10 per contract. The options player starts making money on the trade if shares in Medco rally 6.0% over the current price of $61.42 to surpass the effective breakeven price of $65.10 ahead of October expiration day. Maximum potential profits of $4.90 per contract are available to the three-legged bull if shares in the name jump 14.0% to trade above $70.00 by October expiration. Finally, the sale of around 2,000 deep in-the-money puts at the October $65 strike for a hefty premium of $7.28 each appears to be another sign of bullish sentiment on MHS in options-land today. Put sellers at this strike keep the premium pocketed on the trade if shares in Medco Health Solutions increase 5.8% to trade above $65.00 through expiration in seven months.

QCOR – Questcor Pharmaceuticals, Inc. – Shares in the drug maker were on the rise earlier today, but reversed course as the morning wore on to stand 1.5% lower on the session at $13.52 as of 11:15am in New York. Bearish options traders populating the July contract appear to be positioning for the price of the underlying to continue its downward trajectory going forward. The stock reached a 52-week high of $16.67 during the first trading week of 2011, but fell as much as 27.05% off the high to touch its year-to-date low of $12.16 on February 24, 2011. Questcor’s shares seemed to be on the mend since then, rallying up to a high of $14.10 today. However, options traders are signaling that QCOR’s shares may fall substantially in the months to come. More than 3,400 in-the-money put options changed hands at the July $14 strike this morning on open interest of just 403 contracts. It looks like over 2,800 of those put options were purchased for an average premium of $2.34 a-pop. Put buyers profit in the event that the drug maker’s shares drop 13.8% off the current price of $13.52 to breach the average breakeven point to the downside at $11.66 by July expiration day. Questcor is slated to report first-quarter earnings after the closing bell on April 28, 2011.

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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