Option Activity Alert: EEM, GG, ARUN, XLI

EEM – iShares MSCI Emerging Markets Index ETF – Options volume on the EEM has topped 525,000 contracts in the first two hours of the trading session after one big emerging-markets bull banked substantial profits on a previously established position, and extended his optimistic view on the fund through May expiration. Shares in the EEM are down one penny on the session to stand at $49.86 as of 11:15am in New York. It looks like the strategist accumulated upside exposure on the ETF during the month of March, buying a 100,000-lot April $50/$52 call spread for an average premium of $0.20 per contract on March 8th and 9th, when shares in the fund were hovering around $43.89. The subsequent 13.5% rise in the price of the underlying since the transaction was initiated lifted premium on the calls, allowing the options trader to sell the 100,000-lot call spread for $0.46 per contract this morning. The call-spreader pockets average net profits of $0.26 per contract, or around $2.6 million, on this leg of the transaction. Next, the EEM-optimist constructed a fresh debit call spread in the May contract, buying 100,000 calls at the May $51 strike at a premium of $0.80 each, and selling the same number of calls at the higher May $53 strike for a premium of $0.22 a-pop. Net premium paid to initiate the transaction amounts to $0.58 per contract. Thus, the trader is poised to profit in the event that shares in the EEM rally 3.4% over the current price of $49.86 to surpass the effective breakeven point— and a new 52-week high— of $51.58 by expiration day next month. Maximum potential profits of $1.42 per contract, or $14.2 million, are available to the investor should shares in the ETF surge 6.3% to trade above $53.00 by May expiration. Finally, the sale of two sizable chunks of in-the-money April contract call options generated big gains for another EEM-bull this morning. It looks like the options trader originally bought 21,000 calls at each of the April $47 and $48 strikes for premiums of $0.92 and $0.46, respectively, back on March 23, 2011. The investor appears to have sold both positions today for $2.83 and $1.92 per contract, raking in total net profits $3.37 per contract on the closing sales.

GG – Goldcorp, Inc. – Call options on the Canadian gold mining company are active this afternoon with shares in the world’s second-largest gold producer by market value rallying 3.8% to a new two-year high of $51.09 on a new record high in the price of the precious metal. Near-term calls on Goldcorp are the most active, with overall trading patterns indicating that around 4 call options are changing hands on the stock for each single put option. Investors picked up roughly 2,000 in-the-money calls at the April $50 strike for an average premium of $1.12 apiece. Trading traffic is heaviest at the higher April $52.5 strike, where call volume has exceeded 17,900 contracts as of 12:45pm in New York. It looks like bullish investors purchased approximately 10,300 calls at that strike for an average premium of $0.34 each. Call buyers make money if GG’s shares jump 3.4% to surpass the average breakeven price of $52.84 ahead of April expiration day. Goldcorp is slated to report first-quarter earnings after the closing bell on April 28, 2011.

ARUN – Aruba Networks, Inc. – Shares in the distributed enterprise networks company fell as much as 8.15% at the start of the session to touch down at an intraday low of $30.86 after rival Meru Networks revealed disappointing guidance for the first quarter. While ARUN’s shares are falling in sympathy with those of Meru Networks today, it looks like one bearish options player expects shares in Aruba Networks to extend losses through May expiration. The investor initiated a bear put spread, buying 5,000 puts at the May $31 strike for a premium of $2.40 each, and buying the same number of puts at the lower May $26 strike at a premium of $0.70 apiece. The net cost of the spread amounts to $1.70 per contract, and positions the put player to profit should shares in ARUN drop 5.05% off of today’s low of $30.86 to breach the effective breakeven point at $29.30 by expiration day. Maximum potential profits of $3.30 per contract are available to the put-spreader should shares in Aruba plummet 15.75% to trade below the lower strike price of $26.00 within the time remaining to expiration. The May contract put options expire the day following ARUN’s third-quarter earnings report after the close of trading on May 19, 2011.

XLI – Industrial Select Sector SPDR ETF – One bearish options player purchased a large-volume put spread on the Industrial SPDR ETF within the first 5 minutes of the opening bell this morning. It looks like the trader is positioning for the price of the underlying to pull back ahead of May expiration. Shares in the XLI, an exchange-traded fund that tracks the performance of the Industrial Select Sector of the S&P 500 Index, are currently flat at $38.03 as of 11:50am. The pessimistic player picked up 15,500 puts at the May $37 strike for a premium of $0.68 each, and sold the same number of puts at the lower May $34 strike at a premium of $0.19 apiece. Net premium paid to initiate the spread amounts to $0.49 per contract. The investor responsible for the transaction starts making money in the event that the fund’s shares drop 4.0% from the current price of $38.03 to breach the effective breakeven point on the spread at $36.51 by expiration day next month. Maximum potential profits of $2.51 per contract pad the investor’s wallet if shares in the XLI plunge 10.6% to trade below $34.00 at 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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