SPG – Simon Property Group, Inc. – The real estate investment trust (REIT) has experienced a significant rally of more than 9% to $42.16 today and was added to the ‘conviction buy’ list at Goldman Sachs. SPG appeared on our ‘most active by options volume’ market scanner after one investor established a long butterfly spread in the July contract. The purchase of 5,000 puts at the July 20 strike for 90 cents apiece (wing 1) and the purchase of 5,000 puts at the July 40 strike for 6.70 each (wing 2) were spread against the sale of 10,000 puts at the July 30 strike price for a premium of 2.80 per contract (body). The net cost of the transaction amounts to 2.00 (0.90 [wing 1] + 6.70 [wing 2] – (2.80*2 [body]) = 2.00).
This investor will gain the maximum potential profit of 8.00 if shares settle at $30.00 by expiration. This strategy implies that he is hoping shares will fall from the current level through the breakeven point located at $38.00, at which point profits begin to amass to the downside. Should shares continue to rally rather than plummet, the most this trader can lose is the 2.00 he paid for the strategy. In order to reel in the full 8.00 of potential profits, shares would need to decline by 29% from the current price.

AMR – AMR Corporation – American Airlines parent corporation, AMR, has experienced a huge share price rally as the stock jumped by more than 16% today to $4.90 after the company revealed narrower than expected first-quarter losses. AMR continues to struggle in this recessionary climate, but looks for travel demand to rise by the middle of the year. Option investors welcomed the better-than-expected results and were seen taking bullish stances on the company.
At the May 5.0 strike price, 10,800 calls were purchased for an average premium of 70 cents per contract. One investor sold 6,850 puts at the May 4.0 strike price for 30 cents apiece in order to fund the purchase of 6,850 of the calls picked up at the May 5.0 strike. Finally, bullish investors looking to fly higher selected the May 6.0 strike where more than 3,400 calls were coveted for an average premium of 28 cents. Shares would need to continue on the up-and-up and gain another 22% in order for the May 6.0 strike calls to land in-the-money by next month’s expiration.

EEM – iShares MSCI Emerging Markets ETF – Shares of the emerging markets ETF have remained relatively flat today and currently stand at $27.20. One investor initiated a reversal in the May contract perhaps to protect from downside movement in the stock. We believe it is likely that this trader is long of shares of EEM and is protecting himself on the downside while hoping for upside gains. At the May 28 strike price, 35,000 calls were sold for a premium of 1.49 apiece in order to fund the purchase off 35,000 puts at the same strike for 1.69 per contract. The net cost of the trade amounts to 20 cents and yields a breakeven point to the downside at $27.80. We have observed cautious traders populating the Brazil ETF (EWZ) as well as in the EFA today indicating that some are bracing for downward movement in the near-term. Another trade of note on the EEM today was a ratio put spread in the May contract. An investor looking to profit from downward movement purchased 5,000 puts at the May 26 strike price for 96 cents each and then sold 10,000 puts at the May 24 strike for 46 cents. The net cost of the trade amounts to 4 cents and yields a maximum potential profit of 1.96 should shares decline all the way to $24.00 by expiration.

MDR – McDermott International, Inc. – The global engineering and construction company claimed the top spot on our ‘hot by options volume’ market scanner this morning amid a 2% rally in shares to $16.23. Option traders concentrated their efforts on calls and drove the call-to-put ratio to 19, which indicates that 19 calls were traded to every put in action on the stock. Investors took bullish positions on MDR by purchasing more than 4,400 calls at the April 17.5 strike price for an average premium of 15 cents each, just a couple of days shy of expiration. Shares would need to rally by about 7% in order for the near-term contracts to land in-the-money by Friday. Traders also looked to the May 17.5 strike and picked up more than 2,100 calls for 1.20 apiece. Ultra-bullish individuals dominated the May 20 strike and bought more than 7,400 calls for about 44 cents per contract. For these optimists to breakeven by next month’s expiration shares would need to rise by 26% to a share price of $20.44. Option implied volatility is up sharply for MDR to the current value of 88% from yesterday’s reading of 77%.

EFA – iShares MSCI EAFE Index ETF – Shares of the ETF are up slightly by less than 0.5% to $40.40 and the EFA edged onto our ‘most active by options volume’ market scanner after one investor initiated a strangle in the May contract. It appears that this trader sold 13,000 puts at the May 35 strike price for a premium of 41 cents apiece and simultaneously sold 13,000 calls at the May 45 strike for 29 cents each. The gross premium enjoyed on the trade amounts to 70 cents and will be retained in full as long as the share price remains ‘strangled’ between the two strike prices described above. This investor looks to have positioned this play based on the fact that shares have risen from the March low of $31.69 up to the current price and he does not see shares falling back through $35.00 (the lower strike price) by expiration next month. The upper strike price was selected because shares have not breached $45.00 since December of 2008, and thus, he feels his 70 cent premium is safe within the parameters of this trade. The investor would face losses, however, if shares were to move outside of the breakeven points at $34.30 to the downside and at $45.70 to the upside.

EWZ – iShares MSCI Brazil – Some large volatility plays are showing up in the June contract of this ETF indexed to the performance of leading Brazilian companies. Aside from a rude three-day interruption at the start of April, shares have hugged a 45 –degree uptrend since March when they rallied from $31 to $45 yesterday. One investor appears convinced that the 45% gain is likely to falter and even expects a relapse to test the resolve of the bulls during the summer. A large put butterfly was established centered on the 30 strike involving at least 56,000 contract overall, but the trader might be increasing the size as we speak. It appears that with shares today trading at $43.35 a butterfly was bought using the 20 and 40 strikes as the wings. The net premium appears to be 1.65 and the trade’s success depends on the EWZ falling back towards $30.00. If the fund’s shares were trading at the body of the ‘fly by June’s expiration, the strategy would pay off a maximum gain of 8.35 per contract. Profits would begin to build beneath a share price of $38.35. Elsewhere the June contract saw a 12,500 combination go through involving matched amounts of the 34 put versus the 42 calls. The transaction was marked as a spread, but it’s unclear whether the calls were sold to fund a bearish stake in the expectation of a similar price decline or whether the investor bought or sold volatility, which today is marked at 155% on the fund.

IP – International Paper Co. – Shares have surged in global paper and packing company, International Paper received a boost after the market closed Tuesday with a Deutshce bank upgrade. The analyst cited pulp demand in China and other key metrics indicating the decline in box demand might be easing. Shares have jumped by around one quarter today at $8.91 as investors have the analyst’s $11.00 target fixed in their sights. Call demand was apparent with investors creating fresh positions at the May 9.0 strike where almost 7,000 calls changed hands with the current premium paid at 1.10. Investors also bought May 10.0 calls while stretching higher in July to the 10.0 and 11.0 strikes. Option implied volatility rose by around 16% to stand at 116%. Recently the company rejigged its debt load favorably, which allowed shares to leave a 52-week low of $3.93 in the rear-view mirror.

M – Macy’s, Inc. – One investor was seen getting bullish on the retailer today, taking advantage of the relatively cheaper call premiums induced by the more than 4% decline in shares to $11.60. Perhaps this trader sees better times ahead for the department store as he selected the August 12.5 strike price to purchase 15,000 calls for an average premium of 2.05 apiece. In order for these contracts to land in-the-money by expiration, shares will need to experience a rally of about 25% to breach the breakeven point at $14.55. Macy’s share price has not been above $14.55 since October of 2008.