XLF – Financial Select Sector SPDR – They say that time is a great healer, but it would appear that the trade du jour represents a rather plucky play on the prospects for financial share prices. A massive lot of approximately 100,000 calls was purchased at the near-term June 13 strike price for a premium of 21 cents apiece this morning. While such a trade might appear to be bullish, it was actually the work of an investor who was initially short the calls. Shares of the financials ETF are currently up slightly by less than 0.5% to $12.46. After investigating the trade we gathered that the trader had likely sold the calls short back on May 5, 2009, for a premium of 43 cents apiece. At the time shares in the XLF closed at $11.55. He held the short calls up until today when he closed out the position by buying them back for 21 cents. The trader incurs a net profit of 22 cents per contract or an approximate grand total of $2,200,000 and that’s despite the fact that the XLF has rallied 7.8% in the meantime.
EMR – Emerson Electric Company – The St. Louis-based technology company appeared on our ‘hot by options volume’ market scanner after one investor was seen closing out a short position in the June contract to reestablish it elsewhere. Shares of the firm have climbed just over 1.5% today to $35.21. It appears that this trader originally sold short some 4,694 calls at the June 33 strike price for a premium of between 1.60 and 2.20 apiece back on April 7, 2009. It would seem that the trader was not bullish enough on the stock when he sold the calls. Today he bought back the calls at the in-the-money premium of 2.70 per contract. Closing out the position at the current market price resulted in a net loss of between 50 cents and 1.10 each. In order to make up for the losses incurred and to get more bullish on EMR, the trader reestablished a short position of 4,694 calls at the September 36 strike price for which he received 2.55 per contract. The calls will land in-the-money if shares rally higher by just 39 cents from the current price. Perhaps the investor should have selected a higher strike price to avoid getting stuck with losses nearer to expiration.
AA – Alcoa, Inc. – Aluminum futures are on the rise in Shanghai fueled by increasing investor optimism that the global recession may be easing slightly. Aluminum jumped to its highest since November 20, 2008. Shares of Alcoa have enjoyed a nice run-up in the latter portion of this week and are higher today by 4% to $11.12. The stock has climbed more than 123% since touching down to a 52-week low of $4.97 on March 6, 2009. We observed a few traders following in the footsteps of yesterday’s call spreaders as they look to profit from further bullish movement in the stock. It appears that approximately 8,000 calls were purchased at the October 12.5 strike price for a premium of 1.17 and spread against the sale of some 8,000 calls at the higher October 17.5 strike for about 26 cents each. The net cost of the spread amounts to 91 cents and once again proves that the early bird truly does catch the worm – yesterday’s call spreaders who targeted the same strike prices paid just 79 cents. Today’s investors stand ready to accrue maximum potential profits of 4.09 if Alcoa’s shares rise up to $17.50 by expiration in five months time.
BIIB – Biogen IDEC, Inc. – Shares of the global biotechnology firm are off by more than 3% to stand at $51.44 today. Investors in the company are likely eager to learn who won seats on the company’s board after the shareholders meeting was adjourned yesterday without definitive results. Option implied volatility on the stock reflects the uncertainty and is higher today at 40% from Thursday’s reading of 38%. It appears that one option investor has sold volatility by enacting a short 2,500 lot strangle in the October contract. The transaction involved the sale of 2,500 puts at the October 40 strike price for a premium of 1.28 apiece as well as the sale of 2,500 calls at the higher October 65 strike for 88 cents each. A gross premium of 2.16 is pocketed by the investor and retained in full as long as shares remain strangled between the two strike prices described by expiration. The chunk of change enjoyed by the trader appears safe in the bank as BIIB’s shares would need to swing massively to breach either breakeven point on the trade. Losses would begin to accrue if the stock is higher by about 31% to breach the breakeven point to the upside at $67.16. Additionally, losses would also be realized if shares were to decline by 26% to the breakeven point to the downside at $37.84.