Friday Options Update: EWJ, RX, UUP, DRi

Includes: DRI, EWJ, RX, UUP
by: Interactive Brokers

iShares MSCI Japan Index Fund (NYSEARCA:EWJ) – Shares of the Japan exchange-traded fund rose 0.3% today to $9.92. The roughly 125,000 contracts exchanged on the fund today is likely the work of one investor adjusting previously established positions. The trader may be unraveling a portion of a bearish risk reversal established back in late-September. It appears 62,500 puts were sold at the March 10 strike for 53 cents apiece, spread against the purchase of the same number of calls at the January 2011 12 strike for 24 cents premium each. The technically bullish direction of the risk reversal play is possibly a closing transaction given the large levels of existing open interest at each strike described above.

IMS Health, Inc. (RX) – Shares of the provider of prescription information to the pharmaceutical and healthcare industries plummeted 14% to $18.34 at the start of the trading session. The stock collapsed on news senate democrats proposed an amendment to restrict data-mining practices. Investor uncertainty, as measured by option implied volatility, exploded today on fears the proposed ban may hurt RX’s recent $5.2 billion sale to TPG Inc. and the CPP Investment Board. IMS Health’s shares recovered significantly by midday (EDT) with the stock down a lesser 7.5% to $19.77. Frenzied option traders vied for both calls and puts in the December and January contracts. Investors exchanged nearly 100,000 contracts on the stock in the first three hours of the trading day. Today’s volume blew right past the previous existing open interest on RX of 73,386 contracts. Heavy trading volume and rising investor uncertainty launched option implied volatility up as much as 401.72% to a one-year high of 70.55%. Some traders appear to be selling call options to buy puts in the December contract, while other investors initiated plain-vanilla put buying strategies. Bearish individuals shed more than 6,000 calls at the December 20 strike for an average premium of 46 cents apiece. Traders keep the premium received on the sale if shares of RX remain below $20.00 through expiration. Put buyers favored the December 17.5 strike where roughly 10,000 puts were picked up for about 46 cents each. Some of the puts were spread against the sale of higher strike call options, while other contracts were purchased outright. Roughly 5,000 puts were purchased at the lower December 15 strike where investors paid an average of 18 cents to buy 5,000 lots. Similar call selling and put buying activity was observed in the January 2010 contract, as well.

PowerShares DB US Dollar Bullish Fund (NYSEARCA:UUP) – Massive bullish positioning on the US Dollar bullish exchange-traded fund suggests investors expect shares of the UUP to increase. Shares of the fund rallied nearly 1% during the session to $22.71 following strong retail sales data that suggests consumers have already loosened their purse strings at the start of the holiday season. One investor appears to have purchased a staggering 220,000 calls at the March 23 strike for 55 cents per contract. The transaction itself cost a whopping $12,100,000 to enact. The dollar-bull responsible for the purchase is positioned to accrue profits above the breakeven price of $23.55. Shares of the UUP must rally at least 3.7% before the trader breaks even on the transaction. Additional call-buying activity was observed as high up as the January 24 strike where it looks like 10,600 calls were picked up for an average premium of 10 cents per contract.

Darden Restaurants, Inc (NYSE:DRI) – A pair of long strangles on the restaurant operators suggests increased volatility in DRI shares through December’s expiration day. Shares at owner of the Olive Garden increased 1% to $32.47 during the session. The narrower of the two transactions involved the purchase of 1,000 calls at the December 33 strike for 66 cents each tied to the purchase of the same number of put options at the December 32 strike for 65 cents apiece. The net cost of the trade amounts to 1.31 per contract. The investor profits if shares swing above the upper breakeven point at $34.31, or if shares slip beneath the lower breakeven price of $30.69, by expiration on Friday. The wider strangle implies a more drastic movement in the price of the underlying within the next seven days. The investor responsible for the trade bought 1,000 calls at the December 35 strike for 18 cents each along with 1,000 puts at the December 30 strike for 23 cents premium apiece. The transaction cost a total of 41 cents per contract and positions the volatility trader to accrue profits if DRI trades above/below the effective $35.41/$29.59 breakeven points. Option implied volatility jumped 5.7% from an intraday low of 36.29% to a high of 38.35%.