China Bulls Still Eye Upside

iShares FTSE/Xinhua China 25 Index Fund (FXI) - Shares of the exchange-traded fund have remained relatively flat on the day, although the stock is currently off slightly by less than 0.5% to stand at $41.74. FXI jumped higher on our ‘most active by options volume’ market scanner this afternoon after one investor initiated a large-volume reversal in the September contract. It appears that the trader sold 17,000 puts short at the deep in-the-money September 50 strike price for 8.30 apiece and spread the sale against the purchase of 17,000 calls at the same strike for 15 cents each. The net credit received on the transaction amounts to 8.15 or $13,855,000. In order to retain the full credit, shares of the FXI would need to explode about 20% higher to surpass the $50.00 level by expiration. The short put position leaves the investor vulnerable to having shares of the underlying put to him at an effective price of $41.85 in the event that

Macy’s, Inc. (M) - Shares of the retailer have dipped more than 3.5% to $15.40 ahead of earnings scheduled for release on Wednesday. Option traders active in the November contract this morning seem to expect Macy’s share price to remain roughly within the $14 - $19 range by expiration. Investors were seen selling about 3,500 puts short at the November 14 strike price for an average premium of 1.35 each, while the higher November 19 strike had 4,400 calls shed for 75 cents apiece. The transactions were not spread against one another, but the short selling of both calls and puts effectively mimics a short strangle. Investors employing such a strategy are expecting shares to remain ‘strangled’ within the strike prices described in order to retain the premium enjoyed on today’s sale. Additional short selling of some 1,200 put options was observed at the November 15 strike price for 1.75 per contract. Shares of Macy’s must remain higher than $15.00 by expiration in order for traders to retain the full 1.75 premium received for the transaction.

Citigroup, Inc. (C) - After leaping on Friday to a three month high, shares at Citi are up again today, although below Friday’s best point. Currently its shares are trading at $4.03. Early-bird optimists bought August 5 strike calls, which would require a 25% jump in the space of the coming two weeks. There is also still a great deal of interest at the same expiration 4 strike puts where 27,000 contracts have traded between 19 and 28 cents so far. Option implied volatility has once again eased as the share price rebounds and has lost 7.6% to 73% today.

Freddie Mac (FRE) - The mortgage-finance company under government control surged 81% to $1.34 during today’s trading session after reporting its first profit in two years and revealing it will not currently require more U.S. Treasury aid. Our attention was drawn to the September contract where investors appear to be picking up long straddles. The September 2.0 strike price had approximately 10,500 calls purchased for 15 cents apiece in combination with the purchase of 10,500 puts for an average premium of 96 cents each. Investors purchased the straddles at a net cost of 1.11, and are apparently expecting greater volatility in the price of FRE shares through expiration. Profits will begin to amass for traders in the event that shares rise another 132% through the breakeven point to the upside at $3.11 or decline 34% to fall beneath the breakeven point to the downside at $0.89.

Priceline.com, Inc. (PCLN) - Implied volatility on the online travel company contracted more than 24% to the current reading of 39% after the firm reported that third-quarter profits may be as high as $2.85 per share. The stock jumped 13.5% to $148.86 today on the improved earnings guidance. Option traders exchanged more than 25,300 option contracts on PCLN today, which is nearly 23% of the existing open interest on the stock of 110,542 lots. Notable bullish call buying was seen at the August 150 strike price where more than 1,000 calls were scooped up for an average premium of 3.56 apiece. Investors long these calls will begin to realize profits if shares can rally another 3% to breach the breakeven point at $153.56 by expiration.

Subscribe by RSS Subscribe by Email