FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the China fund have slipped slightly lower today by approximately 2% to $37.75. Expecting little improvement in the price of the underlying shares over the next six months, a few traders were observed selling straddles in the November contract. Some 19,000 puts were sold at the November 38 strike price for a premium of 4.83 each in combination with the sale of 19,000 calls at the same strike for an average of 4.02 apiece. The gross premium pocketed by straddle-sellers amounts to 8.85. Investors will retain the full premium on the trade if FXI shares settle at $38.00 by expiration. Otherwise, the premium will erode down to zero and give way to losses in the event that shares swing in either direction away from the $38.00 level. Traders begin to amass losses at the breakeven point to the upside of $46.85 or starting at the breakeven point to the downside at $29.15. The transaction looks relatively safe because shares of the ETF have stayed above $29.22 since April 1, 2009, and have remained below $46.48 since July 22, 2008.
XHB – SPDR Homebuilders ETF – The homebuilders ETF edged onto our ‘most active by options volume’ market scanner this morning after one option trader was observed taking profits in the September contract. Shares of the fund are currently higher by less than 1% to $12.50. It appears that the trader originally sold short at least 19,000 calls at the September 15 strike price for an average premium of 1.10 apiece between May 6th and May 8th of 2009. Today he has banked profits of around 60 cents per contract as he looks to have closed out the short position by buying back 19,000 calls for 50 cents each. We note that the chunk of calls traded today is just a portion of the 45,000 lots of existing open interest at the September 15 strike. The remaining call options may belong to the same trader or could represent the work of a different investor entirely.
EEM – iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets fund are lower by less than 1% to $33.01. One investor caught our attention by selling a chunk of 40,000 puts short at the July 26 strike price for a premium of 27 cents per contract. The transaction provides the trader with approximately $1,080,000 in premium. Barring a collapse of more than 21% in the share price this investor will maintain the wad of cash in his bill fold, remaining above $26.00 by expiration next month. The short position indicates that this individual would be happy to have shares put to him at an effective price of $25.73 in the event that the puts land in-the-money and the options are exercised.
BNI – Burlington Northern Santa Fe Corp. – The rail transportation company’s shares have declined approximately 1.5% to $75.75 amid a downgrade to ‘neutral’ by an analyst at Goldman Sachs. Option traders took mainly bearish stances on the stock through expiration in January 2010. Some 2,100 puts were scooped up at the January 75 strike price for a hefty premium of 9.44 apiece. Across the tracks on the call side, about 8,300 calls were sold short at the January 80 strike for 7.50 per contract. The investor may be taking either a long-term bullish or a long-term bearish stance on BNI by selling the calls today. If he is bearish on the stock he is hoping the options remain out-of-the-money by expiration. Shares would need to remain below $80.00 for him to retain the full premium on the trade. The potentially unlimited losses inherent in the sale of naked calls would begin to amass at the breakeven point to the upside at $87.50. Conversely, it is possible that the trader is bullish on BNI. If this is the case, the investor is long the stock and has engaged in covered call selling. Writing the calls at the January 80 strike price provides an exit strategy in the event that the calls land in-the-money and the underlying shares are called away from him by expiration. BNI was last trading higher than $81.00 on November 12, 2008.
