E-bay on options auction block

EBAY – Ebay Inc. – With its shares struggling to regain breakeven territory today and down 2% at $11.89, a large buyer of protective put options has emerged scooping up 20,000 contracts guaranteeing selling rights should the shares slip to $7.50 by January 2010 expiration. The investor paid a 67 cent premium to for 20,000 options potentially covering 2 million shares valued at almost $24 million at its current share price.

HUM – Humana, Inc. – The health benefits company has become a hot-bed for options activity today, and its shares have jumped 10% to $25.30 in response to news of a potential buy-out situation fresh from the rumor-mill. Although little information is currently available in terms of specifics, it has been reported that it would “take a behemoth of a company to acquire Humana”, as they are currently the second-largest provider of health benefits that is backed by the United States Medicare program. Investors have witnessed major acquisitions lately, such as Pfizer’s buy-out of Wyeth and the more recent Merck/Schering-Plough agreement. Thus, traders wasted no time reacting to the bullish musings surrounding Humana and options volume amassed steadily this afternoon. Calls were traded six times to every put and the frantic activity boosted call premiums and implied volatility higher. Some investors were seen banking gains by selling calls in the March contract at the now in-the-money 25 strike price, where about 5,000 sold for as much as 1.90. Further along, at the March 30 strike price, about 9,300 calls were purchased for an average premium of 60 cents. Shares would need to rally an additional 21% from the current price in order to reach the breakeven point at $30.60 by next Friday. In the April contract bullish investors were seen buying calls at the 30 and 35 strikes. Traders shelled out 1.14 for each of the 2,000 calls purchased at the April 30 and 57 cents for each of the 1,800 coveted at the April 35 strike price. It is likely that until a buyer – and more importantly a buy-out price – is announced traders will continue to trade heavily in HUM and send implied volatility even higher than the current reading at 106% up from 86% this morning. Investors have left much on the table for speculators here since the Obama budget announcement caused selling across the sector meaning that shares have plenty of room to the upside for anyone wanting to point to a higher deal price.

EEM – iShares MSCI Emerging Market ETF – Shares are up slightly at $23.32 for the day. In the January 2010 contract, it appears that one investor established a sold straddle at the 22 strike price by selling 20,000 calls for a premium of 4.42 while also banking a premium of 3.90 for the sale of 20,000 puts. The gross premium accumulates to 8.32 for the trade and yields breakeven points at $30.32 on the upside, and at $13.68 on the downside. The full 8.32 premium is retained by this investor if shares can settle at $22 at expiration. The premium will erode down to zero and give way to losses should shares swing in either direction and surpass a breakeven point. Interestingly, a similar straddle was sold on the FXI (iShares FTSE/Xinhua China 25) ETF in the January 2010 contract. One trader was seen selling volatility at the 25 strike price by shedding 20,000 calls for 5.12 and 20,000 puts for 5.00 each. This investor raked in a gross premium of 10.12 for the straddle and faces breakeven points at $35.12 on the upside and at $14.88 on the downside. The 10.12 premium is safe in the bank if shares settle from the current price of $26.54 (up 2% on the day) to $25 by expiration next year. Otherwise, this investor would face losses beginning at either of the breakeven points described.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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