Wednesday Options Update: CAL, SLB, AUY & EEM

Includes: AUY, EEM, SLB, UAL
by: Interactive Brokers

Continental Airlines, Inc. (NYSE:CAL) – A staunchly optimistic CAL-options investor made alterations to a previously established bull-call position today as shares of the underlying stock edged 0.70% lower during the first half of the session to $19.77. It looks like the trader originally purchased 20,000 calls outright at the March $20 strike back on September 1, 2009, for approximately $1.00 to $1.10 per contract when Continental’s shares were trading around $12.50 each. The airline’s shares roared back to life in the past six months, and are up 58% since September 1, 2009 to today’s current price of $19.77. The bullish trader opted to take minor gains by selling the 20,000 out-of-the-money calls in the March contract today for a premium of $1.16 each. But, this is not where the story ends. The trader initiated a new bullish strategy to position for continued gains in the value of Continental’s share price by June expiration. The investor purchased a debit call spread, limiting potential upside profits, rather than sticking with the original plain-vanilla long call strategy. The trader bought 20,000 calls at the June $21 strike for a premium of $2.15 apiece and sold the same number of calls at the higher June $24 strike for an average premium of $1.06 each. The net cost of the transaction amounts to $1.09 per contract. Therefore, the bullish investor stands ready to amass maximum potential profits of $1.91 per contract – for total profits of $3.820 million – should Continental’s shares rally up to $24.00 by expiration day in four months time.

Schlumberger Limitedf (NYSE:SLB) – A ratio call spread enacted on oil equipment and services provider, Schlumberger Limited, indicates one investor’s optimistic outlook on the stock through May expiration. Shares of the underlying stock are trading slightly lower by 0.25% to stand at $60.73. Schlumberger’s recent $11.34 billion all-stock deal to acquire Smith International was positively received by many analysts. UBS, for example, maintains a ‘buy’ rating on SLB and a target share price of $90.00. It appears the ratio-call spreader observed today also expects share price improvement over the next several months. The investor bought 5,000 calls at the May $65 strike for a volume-weighted average premium of $2.04 apiece, and sold 10,000 calls at the higher May $70 strike for approximately $0.84 each. The net cost of the spread amounts to just $0.36 per contract. Maximum potential profits of $4.64 per contract are available to the investor if Schlumberger’s share price increases 15.25% from the current value of the stock to reach $70.00 ahead of expiration day in May.

Yamana Gold, Inc. (NYSE:AUY) – The Canadian gold mining company’s shares are up 1.20% to $10.24 today, but a number of options players initiated long-term bearish bets on the Yamana in the January 2011 contract. It looks like traders purchased approximately 14,000 put options at the January 2011 $7.5 strike for an average premium of $0.69 per contract. Plain-vanilla put-buyers are perhaps expecting significant share price erosion within the next eleven months to expiration. The puts yield profits to the downside to investors if Yamana’s shares plummet 33.50% from the current price to breach the effective breakeven point at $6.81. An alternative explanation for put buying behavior is that traders are long the stock and merely picking up cheap, long term downside protection to insure the value of underlying positions in case of an all-out share price collapse by next January.

iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM) – A massive transaction involving 160,000 option contracts took place on the emerging markets exchange-traded fund in the first half of the trading day. Shares of the underlying fund are trading roughly 1% higher on the day to $38.87. The large-volume options play in most likely a bearish risk reversal initiated by an investor looking to cheapen the cost of buying put options. It looks like the trader sold 80,000 calls at the April $40 strike for a premium of $1.12 each in order to partially finance the purchase of 80,000 in-the-money puts at the same strike for $2.47 apiece. The net cost of the reversal play is $1.35 per contract. The parameters of the transaction suggest the trader expects to make money beneath the effective breakeven share price of $38.65 by April expiration. The large size of the trade and the inherently risky nature of naked call selling indicate the investor responsible for the transaction is very likely long shares of the underlying fund. If this is the case, the trader is establishing downside protection should EEM’s shares trade below $38.65 within the next couple of months. If no underlying shares are held by the investor, the short 80,000 calls at the April $40 strike expose him to potentially unlimited losses in the event that shares rally above $40.00 ahead of expiration day.