Low on the HOG?

• Posted by Adam Warner
• on February 11th, 2010

Some option thoughts on yesterday’s action from MKM Partners.

In Wednesday’s Morning Derivatives, we suggested that clients looking to hedge sovereign debt risk out of U.S. equity portfolios could initiate downside exposure in the Euro Currency Trust (FXE, $137.52). We recommended selling March 140 strike calls to buy the 137p/134p put spread in the same expiry for a net debit of $0.10, per pricing at Tuesday’s close. In a similar‐minded trade yesterday, the February 135/136/137 put butterfly traded 10k/20k/10k for $0.15, with the wings bought and guts sold. The position makes a maximum of $0.85 (5.6:1 payout ratio) with spot at 136 on expiration next week and has break evens of 136.85 and 135.15. At risk is the $0.15 premium paid.

Harley‐Davidson (HOG, $22.47) already announced 4Q09 earnings and will not report again until late April. As a result, the timing of an opening March 22/19 put spread bought 10,000 times for $0.79 is curious, since it hedges an unknown negative catalyst. The position makes a maximum of $2.21 with the spot price 19 or lower at expiration and breaks even at 21.21, or 5.6% below current levels.

In Williams Companies (WMB, $21.08), 52,800 February 10 strike calls were sold at 11.00 to close out either a portion of a large 360,000‐contract position initiated on December 8, 2009, around 9.40, or a position assembled over multiple days in October 2009. Either way, the investor booked some profits, then rolled out to May and up to the 16 strike calls (deep in the money with more than $5 of intrinsic value), buying a total of 58,850 on that line in an opening transaction. The synthetic long position has a delta that approaches one and is obviously a directional play on WMB since it does not benefit from the 2.1% annual dividend that the company pays out.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus