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Daily Options Intelligence Report

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Gold miners ETF attracts bullish option plays

Wed, Nov 11 2009, 06:18 GMT
by Andrew Wilkinson

Interactive Brokers LLC

GDX - Market Vectors Gold Miners ETF – Shares of the gold ETF that invests in shares of precious metals mining companies are up 0.5% to $49.53 with one hour remaining in the trading session. Option implied volatility has come down from 54% to 46% recently as gold’s price has surged. Nearer-term investors sought downside protection on the fund, whereas long-term traders initiated bullish plays. Investors hoping to lock in gains experienced during the recent run-up in the price of gold purchased 4,000 puts at the January 2010 47 strike for 3.05 apiece. Further along, at the March 2010 44 strike, another 6,000 puts were picked up for an average premium of 3.10 per contract. Finally, long-term bullishness took the form of a call spread in the January 2011 contract. It appears one investor purchased about 5,000 calls at the January 50 strike for an average of 9.52 each, marked against the sale of the same number of calls at the higher January 55 strike for 7.55 each. The net cost of the optimistic play amounts to 1.97 per contract. The trader stands to accrue maximum potential profits of 3.03 each if shares of GDX rally 11% over the current price to $55.00 by expiration in January 2011.

S - Sprint Nextel Corp. – Shares of the wireless communications company surrendered a portion of gains experienced during yesterday’s 20% rally to an intraday high of $3.43. The stock rebounded due to news that Clearwire Corp. is set to receive $1.56 billion. Sprint Nextel owns more than half of Clearwire, and is one of a number of companies contributing cash to the Kirkland, Washington-based firm. Sprint’s shares are currently down 5.5% to $3.24 with 80 minutes remaining before the closing bell. We observed a number of bearish transactions take place in the January 2010 contract this afternoon. One trader initiated a bearish risk reversal. The investor sold 5,000 calls at the January 4.0 strike for 16 cents apiece in order to partially finance the purchase of the same number of put options at the lower January 3.0 strike for 25 cents each. The net cost of the transaction amounts to 9 pennies per contract. Another investor threw in the towel on Sprint today. It appears some 25,000 calls were sold at the January 4.0 strike for 16 cents each. The open interest of 30,094 call contracts at that strike leads us to believe the transaction was likely a closing sale.

XHB - SPDR S&P Homebuilders ETF – The closing sale of a large chunk of call options in the December contract indicates near-term pessimism on the homebuilders exchange-traded fund. Shares of the XHB are trading nearly 1% lower to $14.78 in late-afternoon trading. It looks like one investor no longer expects to profit from a bullish options play established back on November 4, 2009. The trader originally purchased approximately 30,000 calls at the December 16 strike for 31 cents apiece. Today he sold all 30,000 calls for just 27 cents, taking a 4 cent loss on the trade, to avoid potentially greater losses ahead of expiration in December. Perhaps the investor decided to cut his losses now in case shares of the XHB fall further over the next month. 

BZH - Beazer Homes USA, Inc. – Shares of the single-family home builder and seller are soaring 15% higher this morning to $5.40 after posting fourth-quarter profit of 84 cents per share. The positive earnings report is excellent news for investors of Beazer as the firm reported devastating losses of $12.29 per share in the same quarter last year. Dismal housing market conditions were offset by federal tax credits for new-home buyers, attractive interest rates, and a slight 2.4% increase (year-over-year) in new orders from continuing operations. These mitigating factors helped the homebuilder earn $33.8 million in the fourth-quarter. Option implied volatility contracted 28% from yesterday’s closing value of 118% to an intraday low of 85%. Early morning call volume at the November 5.0 strike is probably the work of investors taking profits by selling into the rally.

CRI - Carter’s, Inc. – Children’s clothing retailer, Carter’s Inc., postponed earnings last month because it required additional time to review its accounting for margin support provided to wholesale customers. Today, the firm announced it must restate results for fiscal years 2004 through 2008, and revealed its more recent financial statements are no longer considered reliable. Shares slumped 11% as of 10:15 am (EDT) to $21.46 on the news. Investor uncertainty, as measured by option implied volatility, started the trading day higher by about 14% to 66%. Currently, volatility has come off to stand at 60%.

ERTS - Electronic Arts, Inc. – Option implied volatility on the video game software company plummeted 17.50% to 41.30% following yesterday evening’s second-quarter earnings report. Electronic Art’s shares are off nearly 6% to $18.40 because earnings per share of 6 cents failed to meet average expectations of 7 cents per share. Approximately 15,000 option contracts changed hands on ERTS by 10:25 am (EDT). 

Published on  Wed, Nov 11 2009, 06:31 GMT