Option Activity Alert: EWW, JNPR, SLXP, HNZ

EWW – MSCI Mexico Investible Market Index Fund – Large prints in call and put options on the Mexico ETF caught our eye this morning with shares in the EWW, an exchange-traded fund designed to correspond to the price and yield performance of publicly traded securities in the aggregate in the Mexican market, trading 0.55% lower on the session at $61.92 as of 12:30pm in New York. It looks like one or more big options traders sold a straddle in the front month and initiated a short strangle in the March contract. The straddle-strategist looked to the February $62 strike to sell 15,000 calls for a premium of $1.13 each, and sold the same number of in-the-money puts at that strike for a premium of $1.43 apiece. Gross premium pocketed on the transaction amounts to $2.56 per contract. The investor keeps the full amount of premium received as long as shares settle at $62.00 and both the call and put options expire worthless at expiration. Some portion of premium is safe in the investor’s wallet as long as shares in the EWW do not stray too far above or below the $62.00 level. But, the short stance in both call and put options at that strike expose the trader to losses in the event that shares rally above the upper breakeven price of $64.56, or slip beneath the lower breakeven point at $59.44, before the options expire next month. In longer-dated options, a sizeable 7,000-lot strangle involving March $61 strike puts and March $63 strike calls was sold for a gross premium of $3.16 per contract. The investor responsible for the strangle walks away with the full amount of premium pocketed on the transaction if shares in the EWW trade within the boundaries of the strike prices described through expiration day in March. Premium received erodes down to zero and gives way to losses should shares in the ETF exceed the upper breakeven price of $66.16, or if shares trade below the lower breakeven point at $57.84, ahead of expiration in a couple of months time. Strangle and straddle sellers may benefit from subsiding levels of implied volatility as well as the passage of time.

JNPR – Juniper Networks, Inc. – Shares in Juniper Networks are down slightly by 0.10% to stand at $34.85 this morning, but it looks like a number of options traders are initiating bullish stances on the stock ahead of the firm’s fourth-quarter earnings report after the final bell. Investors are trading more than 2.2 put options on Juniper for each single call option in play thus far in the session, but many of the puts are being sold by traders expecting shares to rise in the near future. Approximately 1,100 in-the-money puts sold for an average premium of $1.53 at the February $35 strike. Put sellers at this strike pocket the premium and keep the full amount received if Juniper’s shares trade above $35.00 through February expiration. The same bullish strategy was employed at the March $35 strike where some 1,775 in-the-money puts sold for an average premium of $1.91 a-pop. More optimistic traders sold roughly 1,500 deeper-in-the-money put options up at the March $36 strike at an average premium of $2.54 per contract. Investors short the higher-strike puts walk away with the full amount of premium as long as the puts expire worthless at expiration due to sufficient appreciation in the price of JNPR shares. The premium received on the transaction provides limited protection from losses should the trades work against bullish players ahead of expiration day. But, the put sellers are obliged to have shares of the underlying stock put to them in the event that the contracts are trading in-the-money and are exercised at expiration. Options implied volatility on the stock is lower by 6.7% to stand at 37.09% as of 11:35am.

SLXP – Salix Pharmaceuticals, Ltd. – Put options on the specialty pharmaceutical company engaged in developing and commercializing prescription drugs used to treat gastrointestinal diseases are active this morning. It looks like one investor picked up a debit put spread on Salix ahead of a few key events; the result of the FDA’s review of SLXP’s supplemental New Drug Application for XIFAXXAN 500 mg on March 7, and the firm’s fourth-quarter earnings release after the market closes on that same day. Shares in Salix Pharmaceuticals are currently up 0.65% to arrive at $41.93 as of 11:50am in New York. The put player may be utilizing the spread to hedge a long position in the underlying shares, or could be placing an outright bearish bet on the stock ahead of March 7 results. The trader picked up 1,450 puts at the March $40 strike for a premium of $3.00 each, and sold the same number of puts at the lower March $35 strike at a premium of $1.45 apiece. Net premium paid to initiate the spread amounts to $1.55 per contract. Thus, the investor stands prepared to profit should shares in SLXP fall 8.3% from the current price of $41.93 to breach the effective breakeven point on the spread at $38.45 ahead of March expiration. Maximum potential profits of $3.45 per contract are available to the trader should shares in the name plunge 16.5% to trade below $35.00 before the options expire in March. All 2,900 puts involved in the transaction represent fresh positioning given the lack of existing open interest at either strike. The firm’s overall reading of options implied volatility is lower by 10.2% as of 11:55am to stand at 40.44%.

HNZ – H.J. Heinz Co. – The ketchup maker popped up on our ‘hot by options volume’ market scanner within the first 20 minutes of the session due to bullish activity in June contract call options. Shares in Heinz are currently down 0.20% to stand at $49.17 as of 11:10am. One investor hoping shares of the condiment producer rally to a new 52-week high in the next 5 months purchased 1,500 in-the-money calls at the June $49 strike for a premium of $1.80 apiece. The call buyer stands ready to make money should HNZ’s shares increase 3.3% over the current price of $49.17 to exceed the effective breakeven point at $50.80 before the contracts expire in June. The stock last traded up at a 52-week high of $50.77 on December 17, 2010. H.J. Heinz Co. is scheduled to report third-quarter earnings before the market opens on February 24, 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.

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