VIX – CBOE Volatility index – Summer’s here – you can tell by the fact that volatility is on the wane again that investors are winding down for the summer season. The market’s fear gauge has slipped back again and stands at a level not seen since last September. Today the VIX is trading at 27.45 as most investors see less need to pay higher premiums for protective strategies. Meanwhile, signs of recovery have created the impression that a market rally might feed on itself and has prompted many investors to write options recently. There hope is that as implied volatility erodes the fact that premiums will deflate would afford profits by buying those same options back later. However, the noise coming out of the Chicago Board Options Exchange today is over a July call spread using VIX options that relies on a market swan dive over the coming 41 days before it would earn profits. One trader spent an $850,000 premium on buying 20,000 July calls at the 45 strike while selling the same amount of 55 strike calls, thus lowering the overall premium to 42.5 cents. The VIX hasn’t traded above 40 since April 21 and we’re wondering what this guy knows that no one else does.
EEM – iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets ETF have rallied more than 2.5% today to $34.47. The fund has enjoyed a nice run up over the past four months, gaining more than 72% since March 2, 2009, when shares were trading at $19.95. A trade observed in the September contract indicates that at least one investor is crossing his fingers for continued bullish movement in the stock through expiration in September. The trader targeted the now in-the-money September 34 strike price and sold 10,000 puts for 3.10 apiece in order to finance the purchase of 10,000 calls for 2.77 a pop. The investor receives a credit of 33 cents for the transaction. He will add to today’s profits if the EEM can continue to climb higher.
XLU – SPDR Utilities Select Sector ETF – The utilities ETF has experienced a more than 2.5% increase in shares to $28.02. The XLU ticker symbol jumped onto our ‘most active by options volume’ market scanner after one investor sunk his teeth into a chunk of put options in the September contract. The trader appears to have purchased about 35,000 put options for an average premium of 1.35 apiece at the September 27 strike price. Perhaps this individual is long shares of the underlying and is looking to lock into recent gains on the fund by protecting his position from potential downward price movement. Downside protection will kick in if shares decline below the breakeven point at $25.65 by expiration day in September.
EWT – iShares MSCI Taiwan Index ETF – One investor expects very little near-term movement in the price of the Taiwan fund as he was observed establishing a sold strangle on the ETF today. Currently shares of EWT are higher by more than 1.5% to $10.48. The strangle was initiated through the simultaneous sale of 10,000 puts at the July 10 strike price for a premium of 36 cents apiece and the sale of 10,000 calls at the July 11 strike for 26 cents each. The gross premium pocketed on the trade amounts to 62 cents and yields very little leeway for error. Shares must settle between $10.00 and $11.00 by expiration for the investor to retain the full 62 cent premium. This individual is now exposed to losses if he has miscalculated the “window of opportunity” and shares either rise through the breakeven point to the upside at $11.62 or fall beneath the breakeven point to the downside at $9.38 by expiration next month.
