Friday's Options Update: INTC, SMH, AIG, EEM

Includes: AIG, EEM, INTC, SMH
by: Interactive Brokers

Intel Corp. (NASDAQ:INTC) Shares of the tech-sector bellwether jumped more than 4.5% to $20.35 this morning after projecting higher sales estimates for the quarter. The world’s largest chip maker also increased the gross-margin forecast for the period, and expects margin will be between 53 and 55 percent. Option bulls reacted to the news by exchanging call options more than 3 times to every put traded on the stock. Optimism for continued upward movement in INTC was reflected at the near-term September 21 strike price where more than 3,500 calls were purchased for an average premium of 26 cents apiece. Bullish sentiment spread to the October contract where nearly 10,000 calls were coveted at the October 22 strike for about 36 cents each. Traders holding these contracts will begin to accumulate profits if shares of Intel rally through the breakeven point at $22.36 by expiration. Option implied volatility on the stock rose up from 28% to a high of 31% during the session, but has since come off slightly to stand at the current reading of 30%.

Semiconductor HOLDRS Trust (NYSEARCA:SMH) – Heavy put activity was observed on the Semiconductors exchange-traded fund today perhaps as investors strive to lock in gains from the more than 2% rise in the underlying to $25.73. Chip makers and computer-industry companies alike rose during the session on optimism that the demand for PCs and technology-related hardware may be stabilizing. It appears that one trader, who is likely long the stock, sold 16,000 puts at the now out-of-the-money September 25 strike price for 37 cents each in order to extend downside protection to a higher strike in October. He purchased 16,000 puts at the in-the-money October 26 strike for an average premium of 1.26 per contract. The net cost of rolling the position higher amounts to approximately 89 cents and protects the trader in case the SMH declines beneath the breakeven price of $25.11 by expiration. Plain-vanilla put buying was seen at the 24 strike price in both the October and November contracts. Purchases may have been motivated by players long the stock and looking for cheaper protection today, or by contrarian investors hoping to profit if the fund declines over the next several months.

American International Group, Inc. (NYSE:AIG) – The wings of a butterfly spread unfurled across the October contract this morning as one option trader appears to be loading up on protective put options. Shares of the insurer had surged as much as 15% to $54.91 today, but is currently up by a more modest 6% to $50.72. It is likely that the investor initiating the butterfly strategy is currently long shares of the underlying stock and is aiming to cheapen the cost of protecting his stock position. The body of the butterfly landed at the October 35 strike price where 10,000 puts were shed for 3.10 apiece. The sale of the central strike puts partially offset the cost of buying both the wings. The higher October 45 strike price had 5,000 puts bought for 6.90 each, while 5,000 puts at the lower October 25 strike cost him 1.10 apiece. The net cost, and incidentally the maximum possible loss on the transaction, amounts to just 1.80 per contract. This trader has built up a buffer against declines in AIG through expiration in October. Downside protection kicks in beneath the breakeven price of $43.20 and accumulates to a maximum of 8.20 realized if shares fall down to the central strike price of $35.00. Of course, it is always possible that the investor does not hold shares of the underlying. If this is the case, he is taking an extremely bearish position on AIG and hoping to amass maximum profits of 8.20 per contract on a more than 31% decline in the stock to $35.00.

iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM) - Shares of the emerging markets fund are slightly lower today by less than 1% to stand at $35.97. Some investors were seen hoarding put options on the ETF, but mere put volume does not necessarily mean traders are bracing for bearish movement in the price of the underlying. Put-buyers could be long the stock and seeking downside protection, or they may expect to profit from declines if they are short the stock. The nearer-term October 34 strike price had 20,000 puts picked up for an average premium of 98 cents per contract. Shares of the EEM would need to fall about 8% from the current price before put-holders breakeven at a price of $33.02. Longer-term put action was observed at the just in-the-money January 36 strike where 18,615 puts were purchased for an average premium of 3.35 each. If this trader is long the stock, downside protection begins to accumulate if shares fall beneath $32.65 by expiration next year.