Today’s tickers: GDX, F, PGNX, DIA, XLF, IWO, IWD
GDX – This morning’s epochal breach of the $1,000 mark in gold prices paid in kind to miner stocks today. Call volume in the Market Vectors Gold Miners Fund, an ETF correlated to the Amex Gold Miners Index, and whose components include gold heavies Barrick, Goldcorp and Newmont mining, reached an all-time high today as shares gained 3% to $55.30. With the 12-percentage point spread between historic and implied volatility driving premiums higher, it makes sense to see option traders seeking bullish and leveraged exposure to the gold complex, while controlling trade costs, through call-spread activity. While long call-spreads typically moderate any upside share-price expectation via the sale of a higher-strike call, the fact that today’s GDX spreads occurred at out-of-the-money, front-month strikes suggests there’s still plenty of fast money to take in before contracts expire next Thursday. Today’s trader bought calls at the 57 strike for 70 cents, it seems, selling the 59 calls concomitantly for 20 cents. The resulting 50-cent debit on the trade still requires another $2.00 gain for the ETF by next Thursday just to break even.
F- Shares in the Ford Motor Company dipped 5% to a new 52-week low today of $5.40, following in step with losses in the big automakers on back of sore oil prices and shoddy consumer sentiment. With call-side premiums sharply lower, it was little surprise to see some pragmatic contrarians scoop up March 6.0 calls at a dime apiece, revisiting the calls in the June contract where they fetched 40 cents. But with the 67% implied volatility reading tagging all-time highs according to our record, we were interested to see the April trading activity suggest a taste for long volatility positions rather than short. It looks like traders are positioning for even more share-price whiplash in Ford than they are already showing via the 5/6 strangle, which at a combined premium of 45 cents becomes profitable for the buyer with a break to the upside past $6.45 or down below $4.55.
PGNX – Yesterday’s calamitous decline in Progenics followed a failed clinical trial for a pipeline colon drug that sent option traders buying not just front-month but also May puts with aplomb, confidently expecting an FDA ix-nay on the drug in late-April. Traders yesterday were paying as much as $3.30 for the right to sell Progenics shares for $7.50 apiece in May. Today its shares have stabilized somewhat and recouped about 7% of their value, as some option bargain hunters have taken an opposite tack on the implications of the late-April ruling by buying May call spreads between strikes 5.00 and 10.00. In this instance, the trader likely bought the 5.00 strike for $1.48 and funded the trade in part via the sale of higher-strike calls for 48 cents. The resulting $1.00 debit requires Progenics to trade at least as high as $6.00 by May’s expiration, while the shorted higher-strike call caps the upside.
DIA –Implied volatility in the so-called “Dow Diamonds” ETF is resting at levels not seen since the late-January lows, as shares in the fund, which is tied to the performance of all 30 Dow industrial components, trade 2% lower at $119.06. A bearish expectation for Dow developments in April was in evidence via put buying at the April 118 strike, which was bought for $3.10 – a position implying a drop below the 52-week low of $115.77 for the fund by April. The trader in question here may have looked to offset the trade costs while compounding the bearish view by shorting call spreads at the 123 and 124 calls strikes in April. A short spread position here would involve the sale of 123 calls at 2.22 and purchase of puts at $1.82, resulting in a 40-cent credit on the trade against the supposition that both calls may expire worthless in April.
XLF – Financial Select Sector SPDR - This morning’s news of the default of Carlyle Capital, a division of the U.S. private equity Carlyle Group, elicited a fresh wave of protection-seeking in the sector. The development sparked a 3.5% drop in the value of the financial sector ETF to $23.89 and heavy buying in March 25 and April 24 puts, with selling in like amounts in March 26 and April 25 calls. Implied volatility is a full 14-percentage points higher than historic volatility, suggesting more than a third more price risk to financial issues over the next 30 days.
IWO –It looks like a spate of collar activity in the March and May contracts has driven option activity in the Russell 2000 Growth Index Fund to 9 times the normal level of activity. Shares in the fund, whose small-cap growth components include priceline.com and Illumina, are trading 1.7% lower today. With collar strikes in the March contract at 68 and 72, and at 60 and 78 in May, this strategy would look to protect an underlying stock position from losses by going long the put/short the call for a long underlying stock position, or short the put/long the call for a short underlying stock position. The current price of the IWO represents only about a dollar-premium from its 52-week high – its price has averaged $81.28 over the past 6 months.
IWD – iShares Russell 1000 Value – Shares in another Russell ETF, this one corresponding to large-cap value stocks such as GE, Exxon Mobile and Bank of America, are trading 1.8% lower at $71.25. This morning’s option activity amounts to 46 times the normal level seen in this ticker, and suggests limited downside heading into the August contract. Put-spreads at the August 70/74 strikes appear to be in play, a strategy in which a trader buys the higher strike put at $6.20 but funds the purchase in part through the sale of lower-strike puts at $4.70, limiting the initial cash outlay. This yields a break-even for the trade at $72.50, while the sale of the 70 puts would seem to put a floor on any downside.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
