Option Activity Alert: Citigroup, PetSmart, iShares MSCI Emerging Markets Index

EEM – iShares MSCI Emerging Markets Index ETF – The failure of the dollar to continue the downward trajectory seen over the last couple of months has caused some emerging markets bulls to lock in profits and brace for stormier seas ahead. Shares of the EEM, an exchange-traded fund designed to track the performance of the MSCI Emerging Markets Index – an Index that measures equity market performance in the global emerging markets, had come up more than 23.6% since August 25 to reach a 52-week high of $48.62 yesterday. But, options activity on the fund today indicates one big player is prepared in case the majority of recent gains in the EEM evaporate over the next several months. Earlier in the session shares of the ETF fell, but have subsequently recovered this afternoon to stand 0.25% higher on the day at $47.80 as of 12:15 pm in New York. The put player was quick to act this morning, initiating a large-volume put spread within the first 15 minutes of the trading session. It looks like the trader purchased 21,700 puts at the March 2011 $46 strike for a premium of $2.46 each, and sold the same number of puts at the lower March 2011 $41 strike at a premium of $1.08 apiece. The net cost of the transaction amounts to $1.38 per contract. Thus, the investor is protected in case the price of the underlying fund falls 6.65% to trade below the effective breakeven point on the spread at $44.62 by March 2011 expiration. The parameters of the put strategy allow for a substantial 14.2% correction in the emerging markets fund’s shares to $41.00 by expiration day in March.

PETM – PetSmart, Inc. – The provider of products and services for the lifetime needs of pets popped up on our ‘hot by options volume’ market scanner today after one investor dabbled in December contract call and put options. Shares in PetSmart are up 0.65% to stand at $38.78 just before 1:00 pm in New York. It looks like the trader initiated a long strangle in order to position for PETM’s shares to move significantly by expiration day next month. The transaction may be an earnings play ahead of the firm’s third-quarter report on November 17, 2010, after the final bell. The investor appears to have purchased 1,500 calls at the December $40 strike for a premium of $1.00 per contract, and 1,500 puts at the lower December $35 strike at a premium of $0.60 apiece. The net cost of the strangle play amounts to $1.60 per contract and positions the investor to make money as long as shares move sufficiently in either direction ahead of December expiration. The trader profits if shares in PetSmart rally 7.3% to surpass the upper breakeven price of $41.60, or should shares plunge 13.9% lower to breach the lower breakeven point at $33.40, by expiration day. PetSmart, Inc. was rated new ‘buy’ with a target share price of $50.00 at Nomura on Tuesday.

C – Citigroup, Inc. – A large-volume calendar spread on Citigroup was initiated right out of the gate this morning by an investor who appears to be extending bullish sentiment on the stock using longer-dated call options. Citigroup’s shares are up 2.1% at $4.39 as of 1:08 pm this afternoon. It looks like the investor sold 100,000 calls at the January 2011 $4.5 strike for a premium of $0.21 each in order to buy the same number of calls at the March 2011 $4.5 strike at a premium of $0.32 apiece. The trader paid a net $0.11 per contract to execute the calendar spread and is prepared to make money should Citigroup’s shares rally 5.0% over the current price of $4.39 to exceed the effective breakeven point to the upside at $4.61 by March expiration. Open interest at the January 2011 $4.5 strike is sufficient to cover volume generated in the spread, but the 100,000 calls purchased out at the March 2011 $4.5 strike is more than 4.6 times greater than the 21,664 contracts representing open interest at that strike.

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.

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