Business Magazine

Put Spreader Prepares For Possible Market Rout

Posted on the 11 November 2011 by Phil's Stock World @philstockworld

EFA - iShares MSCI EAFE Index Fund – A massive put spread on the EFA, an exchange-traded fund made up of stock in multinational companies such as Nestle, Novartis and BP, to name a few, suggests one big options player is prepared should equities stumble over the next few months. Shares in the index developed as an equity benchmark for international stock performance rallied 2.5% to $51.80 this afternoon as stocks across the board look to end the week on a positive note. The put spread initiated on the fund may serve as a life preserver for its owner if (when) the next negative headline from Europe rocks markets once more. The investor purchased 55,000 puts at the Jan. 2012 $49 strike for a premium of $2.27 each, and sold the same number of puts at the lower Jan. 2012 $43 strike at a premium of $1.07 apiece. Net premium paid to initiate the spread amounts to $1.20 per contract, or a total of $6.6 million. The spread positions the trader to profit in the event that shares in the ETF fall 7.7% to breach the effective breakeven point on the downside at $47.80 by January expiration. Maximum potential profits of $4.80 per contract are available on the spread – that amounts to a cool $26.4 million – should shares in the EFA tumble 17.0% over the next few months to trade below $43.00 at expiration. Shares in the fund slumped to a 52-week low of $45.45 as recently as October 4, but have not traded below $43.00 since May 2009.

KMX - CarMax, Inc. – A flurry of put activity on CarMax, Inc. pushed the used car retailer onto our ‘hot by options volume’ market scanner this morning. Shares in the Richmond, Virginia-based company rose 0.80% to $28.60 in the first half of the session. It looks like one investor binged on KMX puts, perhaps to take an outright bearish stance on the stock through the end of the year, or to provide varying degrees of downside protection on a long position in the underlying shares. The investor purchased roughly 200 puts at the Dec. $28 strike, the closest to-the-money available in the expiry, for a premium of $1.10 each. Buying continued at the Dec. $26 and $27 strikes, where the trader picked up more than 650 puts at each strike at average premiums of $0.56 and $0.80, respectively. Put volume generated in the feeding frenzy is greatest at the Dec. $25 strike, with 2,500 contracts having changed hands for an average premium of $0.40 apiece. Finally, the investor bought more than 400 puts at the Dec. $24 strike for a premium of $0.30 per contract. The put buyer may profit if shares in CarMax pull back during the next five weeks to December expiration. Profits, or downside protection, will have kicked in at each strike selected if shares in KMX plunge 17.1% to breach the effective breakeven point on the lower Dec. $24 strike put options, at $23.70. CarMax is scheduled to report third-quarter earnings on December 21, several trading sessions after the December options expire.

ONNN - ON Semiconductor Corp. – Bullish options trading is notable in a number of beaten-down chipmakers today, including ON Semiconductor Corp., which saw its shares rally nearly 5.0% to $7.80 this afternoon. At least one investor is positioning for shares in the name to continue to climb as 2011 draws to a close. ONNN’s shares gained some ground already in November, having previously lost nearly half of their value during the past six months, sliding from $11.80 in May down to as low as $6.54 in October. Investors exchanged more than 8,700 calls at the Dec. $8.0 strike this morning, against open interest of just 17 contracts. It looks like one investor purchased the majority of the calls for an average premium of $0.39 a-pop. The trader may profit at expiration if shares in ONNN rally another 7.6% over the current price of $7.80 to surpass the effective breakeven point at $8.39.

Caitlin Duffy
Equity Options Analyst

Email This Post
 Email This Post  
Put Spreader Prepares For Possible Market Rout
Twitter  
Put Spreader Prepares For Possible Market Rout
LinkedIn  
Put Spreader Prepares For Possible Market Rout
del.icio.us   Google+  


You Might Also Like :

Back to Featured Articles on Logo Paperblog

These articles might interest you :

  • Ryan Navion B

    Ryan Navion

    @ San Carlos, CA May 2018 The Navion four-seat aircraft was originally designed and built by North American Aviation in the 1940s. It was later built by Ryan... Read more

    The 23 June 2018 by   Htam
    PHOTOGRAPHY, SOCIETY
  • 5 Reasons Most New Venture Creators Need A Co-Founder

    Reasons Most Venture Creators Need Co-Founder

    It seems like every entrepreneur I meet these days is quick to proclaim themselves a visionary, expecting that will give more credibility to their startup... Read more

    The 23 June 2018 by   Martin Zwilling
    BUSINESS, CAREER
  • Shakespeare on Tyranny

    Shakespeare Tyranny

    Stephen Greenblatt is a literary critic and historian whose insights into philosophy and the contemporary world are genuinely and consistently profound. Read more

    The 23 June 2018 by   Dlittle30
    SOCIETY
  • The Prescient Wisdom of Douglas Adams

    Prescient Wisdom Douglas Adams

    The Hitchhiker's Guide and the other four books of the trilogy ( it's complicated) have been a part of my life for almost forty years now, mostly in recordings... Read more

    The 23 June 2018 by   Vickilane
    CREATIVITY, PHOTOGRAPHY
  • Blueberry, Lime & Coconut Friands

    Blueberry, Lime Coconut Friands

    I fell in love with Friands a few years ago when I discovered a fabulous recipe on What Katie Ate. It is the single recipe which inspired me to want to buy her... Read more

    The 23 June 2018 by   Mariealicerayner
    FOOD & DRINK, RECIPES
  • 5 Refreshing Summer Drinks for Your Children

    Refreshing Summer Drinks Your Children

    Summers are here and so are the scorching heat rays from the sun as well as dry, hot and sweltering weather conditions. This is causing a great deal of havoc... Read more

    The 22 June 2018 by   Travelrasoi
    TRAVEL
  • Creative Writers to Avoid - The I Can Only Trust You to House My Valuables Scam.

    A few weeks ago, I was blogging about a famous singer. I wasn't careful and Tweeted to a catfish Twitter account. The next day, I had a private message. Read more

    The 22 June 2018 by   Lizmckeown1955
    BOOKS, CREATIVITY

Magazines