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Butterfly Spread Calls For Further Gains In EEM

Posted on the 09 August 2012 by Phil's Stock World @philstockworld

Today’s tickers: EEM, ETFC & S

EEM - iShares MSCI Emerging Markets Index ETF – Shares in the EEM increased roughly 7% in the past two weeks and a large call butterfly spread initiated this morning suggests one options market participant is positioning for the price of the underlying to tack on another 7% in the next six weeks. The one-by-two-by-one limited risk strategy could pay off handsomely at September expiration if shares in the EEM rally to their highest since early-April. Shares in the ETF are currently up 0.50% on the day at $40.55 as of 1:25 p.m. in New York. The butterfly spread was constructed through the purchase of 40,000 calls at each of the Sept. $42 and $45 strikes, marked against the sale of 80,000 calls at the Sept. $43.5 strike, all for a net premium outlay of $0.22 apiece. The trade starts making money in the event EEM shares rally 4% to surpass the breakeven point at $42.22, with maximum possible profits of $1.28 per contract available given a 7.3% move higher in the share price to $43.50. The risk-reward ratio works in the trader’s favor; losses are limited to $0.22 per contract but maximum potential profits are nearly six times that amount should the ETF’s shares settle at the central strike price by expiration next month.

ETFC - E*Trade Financial Corp. – News that online broker, E*Trade Financial Corp., gave CEO Steven J. Freiberg the pink slip was well-received by investors today, with the shares trading up as much as 7.2% to an intraday high of $8.60 in the first half of the session. Options on ETFC are more active than usual Options volume on the e-broker, pushing 9,000 contracts just before midday in New York, is more than two times the average daily volume for the stock. Calls are far more active than put options with a call-to-put ratio hovering around 7-to-1. Fresh interest building in short-term upside calls today suggests some traders are positioning for shares in ETFC to extend gains this week and next. Upwards of 4,300 calls changed hands at the Aug. $9.0 strike versus open interest of 2,651 contracts. Most of the calls in play were purchased for an average premium of $0.06 apiece and may be profitable at expiration next week in the event that E*Trade’s shares rally another 6.5% over the current price of $8.51 to top the average breakeven point at $9.06.

S - Sprint Nextel Corp. – Trading traffic in short-dated Sprint call options this morning indicates some traders are positioning for shares in the wireless provider to continue to print fresh 52-week highs as the week comes to a close. The stock, which has doubled since May, jumped 7.6% earlier in the session to touch a new 52-week high of $4.96. Buyers of around 3,000 Aug. $5.0 strike calls for an average premium of $0.03 each today may profit at expiration if shares in Sprint can top $5.03, the highest since July 2011. Traders may lose the $0.03 premium paid for the contracts this morning if the $5.0 strike calls expire worthless at the end of the week. Sprint’s shares are well off their highs of the session at present; up 3.25% on the day at $4.76 as of 12:15 p.m. ET.

Caitlin Duffy
Equity Options Analyst

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