Sketchers USA, Inc. (SKX) – Fashion footwear manufacturer, Sketchers, received a vote of confidence by one option trader today who initiated a bullish risk reversal in the February contract. The investor implemented the optimistic strategy despite the 0.5% decline in SKX shares to $28.60. It looks like the trader sold 1,800 in-the-money puts at the February 30 strike for 3.00 apiece in order to finance the purchase of 1,800 out-of-the-money calls at the same strike for 2.00 each. The investor receives a net credit of 1.00 per contract on the transaction. The short sale of puts implies that the trader is obliged to have shares of the underlying stock put to him for an effective share price of $29.00 in the event that the puts land in-the-money by expiration. The long call stance positions the investor to accrue profits – in excess of the one dollar credit – if the stock rallies above $30.00 in the next two months.
iShares FTSE/Xinhua China 25 ETF (FXI) – Chinese equity prices measure by the Shanghai composite index slipped 2.3% overnight and it seems that investors are alone in missing out on the global rally. The irony here is that the role of the Chinese authorities has helped rejuvenate the global growth argument and this is helping investors elsewhere put faith in domestic measures enacted by their own governments. At the vanguard of Chinese measures is a boon in bank lending, which has seen some money flow heavily into property and stock markets. A warning today by Chinese central banker, Zhou Xiaochuan over the importance of reserve lending requirements as a policy tool sent a reminder to the markets that the government doesn’t want to inflate a speculative balloon. One option trader today bought a calendar put spread, which appears to take advantage of the recent downturn in fortunes of the FXI exchange traded fund. With its shares trading unchanged at $41.37 the investor appears to have bought 10,000 put options expiring in May and sold the same amount at the August contract. Both involve the same at-the-money $41.00 strike price and the additional premium received from the sale of puts at the August strike nets the investor a 1.25 premium. Assuming that the overall trend gets back on track in 2010 the investor would retain that credit. Should Chinese shares stumble the investor is protected in the near-term and could put a position to the put seller at expiration in May.
Starbucks Corp. (SBUX) – Shares of the high-quality coffee company are up 2% to $23.60 as of 12:00 pm (EDT). The share price tapered off slightly since this morning when the stock reached a new 52-week high of $23.78. Some investors are positioning for continued bullish momentum in the price of the underlying by purchasing call options. Roughly 1,200 calls were picked up at the February 24 strike for an average premium of 1.16 per contract. Call-buyers stand ready to accumulate profits above the breakeven price of $25.16. Other traders scooped up downside protection in the form of 1,000 puts at the February 23 strike for 1.05 each. Perhaps put-buyers are long the stock and looking to protect the value of the underlying position in case shares decline through the effective breakeven price of $21.95 by expiration in February.
CBOE Vix index (VIX) – – The year end equity rally is prompting investors to lower their level of fear for next year’s market performance. It’s typical that thin markets create perhaps an illusion of optimism and when the bears have no fodder to get their claws into, they just go back into the woods and bide their time. The volatility index slipped convincingly to below a reading of 20 for the first time since August 2008. After a round of broker upgrades yesterday, the optimism sparked by the passage of healthcare reform, the latest spark of optimism is coming from the unusual angle of rising bond yields. A surge in yields accompanies a lack of investor demand for the safety of government bonds. U.S. yields have moved from 3.16% at the commencement of the Dubai World crisis to 3.75% today as investors jump ship from bonds to stocks. The economic outlook appears brighter and the final straw would be the removal of monetary policy. As ever markets are swift to discount such a move. In the vix options market today an investor appears to have bought between 20 and 25,000 put options in the expectation that volatility will stay lower before contracts expire in January. The premium paid today of 1.50 at the 22.5 strike implies a breakeven for the trader at a reading of 21 on the volatility index.
Acorda Therapeutics, Inc. (ACOR) – Shares of the biopharmaceutical company rose 1% to $25.45 today, but contrarian option traders initiated bearish transaction on the stock. Investors effectively enacted bearish risk reversals in the February contract by selling call options to finance put purchases. We note that the following trades were not spread against one another. However, the combination of the transactions mimics the risk reversal strategy. Investors sold 2,500 calls at the February 30 strike for an average premium of 1.30 apiece. Around the same time, traders also purchased 2,500 puts at the February 22.5 strike for 2.05 each. Such positioning suggests that traders do not expect shares to rally. Rather, they anticipate profits to the downside as evidenced by the long put and short call stances on the stock. It is possible that the trades are the work of one bearish investor. In this case, the trader reduced the cost of buying the puts to a net 75 cents per contract by selling the call options. The investor is positioned to amass profits beneath the breakeven price of $21.30 through expiration in February.