Human Genome sees large volatility play in late trade

HGSI – Human Genome Sciences, Inc. – Option plays executed late in the trading session drew our attention to biopharmaceutical company, Human Genome Sciences, Inc. Shares of HGSI are currently off slightly by less than 0.25% to $18.80. The first transaction appears to be the work of an investor expecting volatility on Human Genome Sciences to decline. The trader initiated a sold straddle by selling 20,000 calls at the October 19 strike for 80 cents each, in combination with the sale of 20,000 puts at the same strike for 80 pennies apiece. The gross premium pocketed by the investor amounts to 1.60 per contract for a total of $3,200,000. The total amount of premium on the straddle strategy is retained by the trader as long as the stock settles at $19.00 by expiration next month. Perhaps the investor is selling into today’s higher volatility reading of 123% from 106% at the start of the week. We note that the transaction could be interpreted in another manner. It is possible that this investor is bearish on HGSI and thus executing a reversal play. If this is the case, the trader sold 20,000 calls for 80 cents in order to buy 20,000 puts for 80 cents each. If the trade was a bearish risk reversal, the investor offset the cost of getting long the put options by selling the calls and put on the trade for free. Profits to the downside will increase for the trader if shares decline beneath $19.00 by expiration.

AET – Aetna, Inc. – The health care benefits company popped onto our ‘most active by options volume’ market scanner after one investor shed a large chunk of call options in the November contract. A number of health care benefits/insurance firms experienced share price declines today perhaps after the Senate Finance Committee rejected two amendments to put a public health-insurance option into the committee’s health-system reform proposal on Tuesday. Shares of AET are trading 1% lower to $27.96. Approximately 20,000 calls were sold short at the November 31 strike for an average premium of 92 cents apiece. The investor responsible for the sale may have executed the trade for a number of reasons. One possibility is that the trader is long the stock and adding income to his portfolio by selling covered calls. Another viable explanation is that the investor is short the stock and bearish on Aetna, in that he does not expect a great deal of upward movement in the stock through the month of November. If this is the case, the trader receives the 92 cent premium in exchange for bearing the risk that shares rise above $31.00 by expiration. The investor faces losses if shares rally 14% from the current price and surpass the breakeven point at $31.92.

DTV – The DIRECTV Group, Inc. – Subscription television provider, DIRECTV, attracted a bearish investor to options land this afternoon, despite a 1.5% rise in shares to $27.86. The trader looked to the November contract to shed calls in favor of put options on the stock. It appears he sold 7,500 calls at the November 28 strike for 1.20 apiece in combination with the sale of another chunk of 7,500 in-the-money calls at the lower November 27 strike for 1.70 per contract. The premium received on the sale of the options was used to finance the purchase of 15,000 puts at the November 23 strike for 25 cents apiece. The investor pockets a net credit of 1.20 per contract. The full credit is retained by the trader as long as the call options land out-of-the-money by expiration. Finally, additional profits will accumulate if shares of DTV decline beneath $23.00.

EEM – iShares MSCI Emerging Markets Index – A massive chunk of put options purchased on the emerging markets fund this afternoon flies in the face of the 1.5% rally in shares during the session to $39.20. Approximately 95,000 put options were purchased at the November 35 strike for an average premium of 73 pennies per contract. Perhaps the investor responsible for the trade is long the stock and wary of potential declines in the fund through expiration in November. Downside protection provided by the puts may kick in if shares of the EEM decline 13% from the current level to breach the breakeven point to the downside at $34.27. We note that shares of the emerging markets ETF have remained higher than $34.00 since July 20, 2009.