Friday, December 28, 2012

Wednesday Options Update: MDVN, TEX, EWZ & COST

Medivation, Inc. (MDVN) – The failure of Dimebon, Pfizer and Medivation’s experimental drug for Alzheimer’s disease, to benefit patients in an advanced study sent MDVN’s shares reeling toward rock-bottom today. The drug’s disappointing results inspired a rash of analyst downgrades on Medivation and pushed shares down 67.80% to $12.96. The biopharmaceutical company was cut to ‘hold’ from ‘buy’ and received a twelve month target share price of $10.00 at Roth Capital, which is just one of many downgrades announced thus far today. Options trading patterns reveal mixed sentiment on Medivation, particularly in the heavily populated March contract. Contrarian players betting on a recovery in the price of the underlying stock by expiration purchased 3,200 in-the-money calls at the March $12.5 strike for an average premium of $1.26 apiece. The higher March $15 strike had more buying interest, with 6,200 call options picked up for a premium of $0.43 each. Call-selling outweighed buying at the higher March $17.5 strike price where 5,600 calls were shed for an average premium of $0.11 per contract. Perhaps traders purchasing calls believe the price of Medivation’s shares has bottomed out at present. Options implied volatility fell off the proverbial cliff following the Dimebon news and is currently down 68% to 81.31%.

Terex Corp. (TEX) – Bullish option traders picked up the haunting aroma of a rally today as shares of global equipment manufacturer, Terex Corporation, jumped 8.20% to $21.62. Investors wasted little time populating TEX with optimistic positioning at the start of the trading session. Plain-vanilla in-the-money call buying took place at the March $20 strike where 2,400 contracts were picked up for an average premium of $0.94 each. Approximately 1,500 in-the-money calls were coveted at the higher March $21 strike for $0.61 apiece, while 1,000 out-of-the-money call options were purchased at the March $23 strike for an average premium of $0.22 per contract. Bulls also frequented the April $22 strike where 1,000 contracts were purchased at an average premium of $0.79 each. Uber-bullish individuals picked up nearly 2,000 lots at the higher April $24 strike for $0.31 per contract. Investors long the April $24 strike calls stand ready to amass profits if Terex’s shares surge 12.45% from the current price of $21.62, to surpass the effective breakeven point at $24.31 by expiration day next month.

iShares MSCI Brazil Index ETF (EWZ) – Shares of the EWZ, an exchange-traded fund which tracks the price and performance of securities traded in the Brazilian market as measured by the MSCI Brazil index, increased 1.90% to $71.82 today. Despite the rally in the price of the underlying stock, one options player initiated a bearish risk reversal in the June contract. The investor sold 6,000 calls at the June $85 strike for a premium of $0.75 each in order to partially finance the purchase of 6,000 puts at the lower June $65 strike for $2.52 apiece. The net cost of the reversal amounts to $1.77 per contract, and positions the investor to accumulate profits should shares trade below the breakeven price of $63.23 by expiration in June. If the trader is long shares of the underlying fund, the puts serve to protect the value of the position should shares decline, and the short calls mimic a covered-call stance. However, if the investor does not hold an equivalent number of EWZ shares, the naked selling of call options at the June $85 strike exposes the trader to potentially devastating losses in the event of a sudden surge in shares ahead of expiration.

Costco Wholesale Corp. (COST) – The largest warehouse-club chain in the United States posted a 25% increase in second-quarter profit to secure earnings of $0.67 per share up from $0.55 a share one year earlier. Shares are trading slightly lower by 0.70% to $60.95, however, and inspired one investor to initiate a protective put play in the April contract. The trader enacted a ratio put spread by purchasing roughly 2,000 contracts at the April $60 strike for an average premium of $1.11 apiece, marked against the sale of approximately 4,000 put options at the lower April $57.5 strike for $0.45 each. The net cost of the spread amounts to $0.21 per contract. If the investor is long shares of the underlying stock, the put spread serves to protect the value of the position should Costco’s shares trade below the breakeven point at $59.79 ahead of expiration day. Options implied volatility contracted 16.77% to 16.67% following earnings.

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