Option Activity Alert: EQIX, XLF, XING, AVP

EQIX – Equinix, Inc. – A large bullish butterfly has taken up residence in June 2011 contract calls this afternoon. It looks like the investor responsible for the spread’s construction expects shares in the provider of global data center services to rally significantly in the next six months to expiration. EQIX shares are currently down slightly by 0.25% to arrive at $79.72 as of 1:00pm in New York. The firm is scheduled to present at Citigroup’s Global Entertainment, Media and Telecommunications Conference in Phoenix, Arizona, on January 5, 2011. The bullish player purchased 15,000 calls at the June 2011 $85 strike for a premium of $5.50 each, sold 30,000 calls at the June 2011 $100 strike at a premium of $1.50 apiece, and picked up 15,000 calls at the higher June 2011 $115 strike for a premium of $0.60 a-pop. The net cost of the spread amounts to $3.10 per contract, or a total of $4.65 million. The legs of the butterfly spread represent fresh positioning in June contract calls on Equinix, as there are less than 170 contracts comprising previously existing open interest at each of the strikes described. Establishing the bullish spread prepares the investor to make money if the price of the underlying stock rallies 10.5% to trade above the effective breakeven point at $88.10 by expiration day in June. Maximum potential profits of $11.90 per contract, or total gains of $17.85 million, are available to the options strategist should shares in Equinix surge 25.4% in the next six months to settle at $100.00 at expiration. The trader only ever risks losing $3.10 per contract on the transaction, but stands prepared to accrue 3.8 times that amount, or $11.90 apiece in the best case scenario. Shares in Equinix traded as high as $105.01 as recently as October 5, 2010, and reached a 52-week high of $110.57 just under one year ago on January 6, 2010. The butterfly spread positions the investor to bank serious profits if the trade comes good before the call options expire in June. Equinix is slated to report fourth-quarter earnings after the market closes on February 9, 2011.

XLF – Financial Select Sector SPDR ETF – A large-volume debit put spread initiated in the March 2011 contract on the financials ETF suggests one strategist is bracing for the price of the underlying fund to pullback in the first few months of 2011. Shares of the XLF, an exchange-traded fund designed to track the performance of the Financial Select Sector of the S&P 500 Index, slipped 0.20% to $15.98 by 12:10pm in New York. The put player may be utilizing the spread to hedge a long position in the underlying shares. Alternatively, the investor could be taking an outright bearish stance on the financial sector through March expiration. The trader scooped up 30,000 puts at the March 2011 $15 strike for a premium of $0.39 apiece, and sold the same number of puts at the lower March 2011 $13 strike at a premium of $0.09 each. Net premium paid to initiate the spread amounts to $0.30 per contract. Thus, the investor is poised to profit, or realize downside protection, if shares of the fund plunge 8.00% from the current price of $15.98 to breach the effective breakeven point on the spread at $14.70 by expiration day next year. Maximum potential profits of $1.70 per contract are available to the put spreader should shares in the XLF fall 18.6% to trade below $13.00 ahead of expiration in March. Finally, it looks like the majority of put open interest at each of the strikes was generated by like-minded investors. Large numbers of March 2011 $15 strike put options have been purchased, while a great deal of put selling has taken place at the lower March 2011 $13 strike during roughly the same time period.

XING – Qiao Xing Universal Resources, Inc. – Call options are in high demand at Qiao Xing Universal Resources today with shares in the Chinese resources company rallying as much as 33.5% during the session to reach an intraday high of $2.47. Investors expecting shares to continue to appreciate in the near-term purchased more than 1,200 call options at the January 2011 $2.5 strike for an average premium of $0.12 each. Call buyers at this strike are prepared to make money should XING’s shares increase another 6.05% to surpass the average breakeven point to the upside at $2.62 by January expiration. Longer-term optimists scooped up approximately 1,800 calls at the June $2.5 strike for an average premium of $0.29 a-pop. Investors holding these contracts make money should shares in Qiao Xing Universal Resources jump 12.95% over today’s high of $2.47 to exceed the average breakeven price of $2.79 by expiration in June. More than 6,320 option contracts, nearly all of them calls, changed hands on XING thus far in the session. Volume generated today is more than twice the number of options representing overall previously existing open interest on the stock of 3,046 contracts.

AVP – Avon Products, Inc. – It looks like investors are ditching downside protection on the manufacturer of cosmetics and beauty products today, with shares in Avon Products trading higher by as much as 1.4% during the session at an intraday high of $29.34. An investor or investors who appear to have purchased large numbers of January 2011 contract put options back on December 8, 2010, seem to be rolling out of the positions today. Put sellers may be signaling that Avon’s shares are unlikely to suffer significant declines ahead of January expiration day. One trader sold 9,000 puts at the January 2011 $28 strike for a premium of $0.25 this morning. These contracts were probably purchased back on December 8 for a premium of $0.75 each, when shares in Avon Products were trading around $29.17. Another 2,334 puts hit the bid at the higher January 2011 $29 strike for a premium of $0.65 apiece. Approximately the same number of put options were purchased at that strike back on December 8 for an average premium of $1.15 each. It is unclear whether put players were originally buying the contracts to protect the value of a position in the underlying stock, or as a directional play to benefit from bearish movement in the price of AVP shares. Premium on the puts has eroded substantially since the contracts were picked up earlier this month. Investors are taking in what premium is left on the table by selling the contracts today.

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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