Friday Options Update: ORCL, XRT, ERTS, FXI

Includes: EA, FXI, ORCL, XRT
by: Interactive Brokers

Oracle Corp. (NASDAQ:ORCL) – A short straddle transaction initiated in the January 2011 contract on Oracle Corp. today indicates one investor expects shares of the underlying stock to remain range-bound through expiration next year. The software developer’s shares slipped 0.40% to $24.43 as of 12:20 pm ET. The straddle was enacted through the sale of 10,000 in-the-money puts at the January 2011 $25 strike for a premium of $3.00 apiece in combination with the sale of 10,000 calls at the same strike for a premium of $2.12 each. The gross premium pocketed by the ‘straddler’ amounts to $5.12 per contract. The investor keeps the full premium received on the trade if shares settle at $25.00 at expiration day. The short position in both calls and puts exposes the investor to potentially devastating losses should Oracle’s shares fluctuate significantly in the next ten months. Losses amass if shares surge 23.30% above the current price and surpass the upper breakeven point at $30.12, or if the stock falls roughly 18.60% to breach the lower breakeven price of $19.88, by expiration in January.

SPDR S&P Retail ETF (NYSEARCA:XRT) – Shares of the retail exchange-traded fund, which mirrors the performance of the S&P Retail Select Industry index, edged 0.65% higher to $36.91 during the trading session. Options activity on the fund, however, paints a bearish picture of the sector going forward. One pessimistic individual purchased a debit put spread in the June contract. The investor picked up 9,000 puts at the June $35 strike for a premium of $1.49 apiece and sold 9,000 puts at the lower June $32 strike for an average premium of $0.70 each. The net cost of the spread amounts to $0.79 per contract. Perhaps the trader responsible for the transaction anticipates XRT share price erosion in the next four months to expiration. Maximum potential profits of $2.21 per contract are available to the investor should shares of the fund fall 13.30% from the current price to $32.00 ahead of expiration. Options implied volatility on the XRT is down 12.87% to 21.59%.

Electronic Arts, Inc. (ERTS) – Shares of video game developer, Electronic Arts, are up 0.85% to $16.73 today prompting bullish options activity on the stock. It appears 30,000 put options were sold outright at the January 2011 $15 strike for a premium of $1.48 apiece. The put-seller keeps the full $1.48 premium per contract as long as ERTS shares trade above $15.00 through expiration next January. The investor is vulnerable to losses only if the video game software creator’s shares nose-dive 19.15% beneath the current price and breach the breakeven point at $13.52 ahead of expiration day.

iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI) – Shares of the China-exchange traded fund, which invests in twenty-five of the largest and most-liquid Chinese companies, declined 1.20% to stand at $39.23 today. Despite the modest share price erosion, one options trader established a three-legged bullish combination strategy in the August contract. It looks like the investor sold put options in order to partially finance the purchase of a debit call spread. The call spread involved the purchase of 2,400 calls at the August $40 strike for a premium of $2.78 apiece, marked against the sale of the same number of calls at the higher August $47 strike for a premium of $0.71 each. Added financing was provided by the outright sale of 2,400 put options at the August $32 strike for a premium of $1.35 apiece. The net cost of the bullish combo amounts to $0.72 per contract. Maximum available profits of $6.29 per contract accrue for the options strategist if FXI’s share price rallies 19.80% from the current day’s value to $47.00 ahead of August expiration.