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Daily Options Intelligence Report

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Dollar bulls power−up with ETF index call options ahead of FOMC

Wed, Nov 4 2009, 18:01 GMT
by Andrew Wilkinson

Interactive Brokers LLC

UUP – PowerShares DB U.S. Dollar Index Fund – There was huge volume today in this exchange traded fund that tracks the American dollar’s index value ahead of this afternoon’s FOMC statement, which is likely to leave monetary policy unchanged and point to an ongoing situation in which interest rates remain accommodative for as long as the eye can see. Such an outlook for the dollar at a time of modest recovery has created a weak fundamental backdrop for the greenback. So today’s 155,000 call options bought for tiny premiums ranging between 10-15 cents per contract smacks of a large institution placing a sizeable gamble that change might be in the air either in what the Fed says this afternoon or for a more general change of heart towards the dollar before expiration on November 20. The dollar index on which this ETF is based is lower today and close to its weakest point in the current environment. With the price of the fund trading at $22.54, the investor needs to see a dollar rally lift the index and boost the price of the ETF beyond $23.15 by expiration in order to not lose money. A sharp turnaround in the fortune of the dollar today would automatically boost the index and therefore the value of this sizeable set of trades.


NWL – Newell Rubbermaid Inc. – Shares of the global marketer of consumer and commercial products edged 1% higher today to $14.28, but options activity on the stock suggests shares may continue to trend upward. Rubbermaid-bulls bought nearly 5,000 calls at the November 15 strike for an average premium of 34 cents apiece. Another 2,000 calls were coveted at the December 15 strike where investors shelled out 60 cents per contract. NWL’s shares were trading at around $15.50 on October 22, 2009, before the market buckled and sent the stock back down to $13.96. Apparently call-buying investors expect shares to rebound to at least the breakeven price of $15.60 by expiration in December. The sudden demand for options drove implied volatility 20% higher to the current reading of 48% -- the highest level since July 30, 2009.

HNZ – H.J. Heinz Company – A stampede of bullish investors flooded the November contract on the condiment company today as shares of the ketchup maker rallied 1.5% to $40.58. Traders scooped up approximately 6,000 call options at the November 41 strike for 44 cents premium apiece. The mad-dash for out-of-the-money calls suggests investors expect Heinz’s shares to continue on the up-and-up through expiration. Traders long the calls may amass profits if shares trade above the breakeven price of $41.44. The sharp increase in demand for HNZ calls boosted option implied volatility from an intraday low of 20% to a high of 22.62%.

EWZ – iShares MSCI Brazil Index ETF – A bearish butterfly spread was initiated in the December contract on the exchange-traded fund today despite the more than 2% rally in shares to $72.71. The lower wing of the spread was positioned at the December 60 strike where 10,000 puts were purchased for 1.02 apiece. The upper wing was placed at the December 70 strike where another 10,000 puts were bought for an average premium of 3.44 each. Finally, the central December 65 strike housed the body of the butterfly, which involved the sale of 20,000 puts for about 1.93 per contract. The net cost of the trade amounts to just 60 cents and provides maximum potential profits of 4.40 per contract if shares of the EWZ settle at $65.00 by expiration next month. The butterfly spread strategy allows the bearish investor to reduce potential risks and maximize potential profits. The investor has positioned the trade in such a way that he faces a reward-to-risk ratio of more than 7-to-1.

Published on  Wed, Nov 4 2009, 18:02 GMT