Wednesday Options Update: MDR, EFA, EWZ, IP & M

McDermott International, Inc. (MDR) – The global engineering and construction company claimed the top spot on our ‘hot by options volume’ market scanner this morning amid a 2% rally in shares to $16.23. Option traders concentrated their efforts on calls and drove the call-to-put ratio to 19, which indicates that 19 calls were traded to every put in action on the stock. Investors took bullish positions on MDR by purchasing more than 4,400 calls at the April 17.5 strike price for an average premium of 15 cents each, just a couple of days shy of expiration. Shares would need to rally by about 7% in order for the near-term contracts to land in-the-money by Friday. Traders also looked to the May 17.5 strike and picked up more than 2,100 calls for 1.20 apiece. Ultra-bullish individuals dominated the May 20 strike and bought more than 7,400 calls for about 44 cents per contract. For these optimists to breakeven by next month’s expiration shares would need to rise by 26% to a share price of $20.44. Option implied volatility is up sharply for MDR to the current value of 88% from yesterday’s reading of 77%.

iShares MSCI EAFE Index ETF (EFA) – Shares of the ETF are up slightly by less than 0.5% to $40.40 and the EFA edged onto our ‘most active by options volume’ market scanner after one investor initiated a strangle in the May contract. It appears that this trader sold 13,000 puts at the May 35 strike price for a premium of 41 cents apiece and simultaneously sold 13,000 calls at the May 45 strike for 29 cents each. The gross premium enjoyed on the trade amounts to 70 cents and will be retained in full as long as the share price remains ‘strangled’ between the two strike prices described above. This investor looks to have positioned this play based on the fact that shares have risen from the March low of $31.69 up to the current price and he does not see shares falling back through $35.00 (the lower strike price) by expiration next month. The upper strike price was selected because shares have not breached $45.00 since December of 2008, and thus, he feels his 70 cent premium is safe within the parameters of this trade. The investor would face losses, however, if shares were to move outside of the breakeven points at $34.30 to the downside and at $45.70 to the upside.

iShares MSCI Brazil (EWZ) – Some large volatility plays are showing up in the June contract of this ETF indexed to the performance of leading Brazilian companies. Aside from a rude three-day interruption at the start of April, shares have hugged a 45 –degree uptrend since March when they rallied from $31 to $45 yesterday. One investor appears convinced that the 45% gain is likely to falter and even expects a relapse to test the resolve of the bulls during the summer. A large put butterfly was established centered on the 30 strike involving at least 56,000 contract overall, but the trader might be increasing the size as we speak. It appears that with shares today trading at $43.35 a butterfly was bought using the 20 and 40 strikes as the wings. The net premium appears to be 1.65 and the trade’s success depends on the EWZ falling back towards $30.00. If the fund’s shares were trading at the body of the ‘fly by June’s expiration, the strategy would pay off a maximum gain of 8.35 per contract. Profits would begin to build beneath a share price of $38.35. Elsewhere the June contract saw a 12,500 combination go through involving matched amounts of the 34 put versus the 42 calls. The transaction was marked as a spread, but it’s unclear whether the calls were sold to fund a bearish stake in the expectation of a similar price decline or whether the investor bought or sold volatility, which today is marked at 155% on the fund.

International Paper Co. (IP) – Shares have surged in global paper and packing company, International Paper received a boost after the market closed Tuesday with a Deutshce bank upgrade. The analyst cited pulp demand in China and other key metrics indicating the decline in box demand might be easing. Shares have jumped by around one quarter today at $8.91 as investors have the analyst’s $11.00 target fixed in their sights. Call demand was apparent with investors creating fresh positions at the May 9.0 strike where almost 7,000 calls changed hands with the current premium paid at 1.10. Investors also bought May 10.0 calls while stretching higher in July to the 10.0 and 11.0 strikes. Option implied volatility rose by around 16% to stand at 116%. Recently the company rejigged its debt load favorably, which allowed shares to leave a 52-week low of $3.93 in the rear-view mirror.

Macy’s, Inc. (M) – One investor was seen getting bullish on the retailer today, taking advantage of the relatively cheaper call premiums induced by the more than 4% decline in shares to $11.60. Perhaps this trader sees better times ahead for the department store as he selected the August 12.5 strike price to purchase 15,000 calls for an average premium of 2.05 apiece. In order for these contracts to land in-the-money by expiration, shares will need to experience a rally of about 25% to breach the breakeven point at $14.55. Macy’s share price has not been above $14.55 since October of 2008.