IB Options Brief: Pandora Media Inc. (P) & iShares Dow Jones US Real Estate Index Fund (IYR)
Put Player Near-Term Bullish On Pandora Post Earnings
P ñ Pandora Media Inc.
Demand for options covering Pandora, the online music company that went public in June, jumped after the company reported better-than-expected earnings of $0.02 a share for the second quarter. Pandoraís first earnings report since become a publicly traded company sent shares up as much as 11.5% to an intraday high of $13.90 as its top- and bottom-line results topped expectations. Despite the spike in the price of the underlying today, shares continue to trade at a substantial discount to its initial public offering price of $16.00.
The positive earnings report spurred bulls to the options market, with notable volume building in September contract puts. It looks like one trader expecting Pandoraís shares to resist above $12.00 through expiration next month sold roughly 3,000 put options outright at the September $12 strike at a premium of $0.70 per contract. The put seller walks away with the full amount of premium at expiration as long as shares in Pandora exceed $12.00 and the options expire worthless.
The short stance in Pandora puts suggests the trader may wind up having around 300,000 shares put to him at an effective price of $11.30 each at September expiration if the stock slips beneath $12.00 in the next three weeks. Options implied volatility on Pandora Media Inc. stand 29.2% lower post earnings at 82.54% this afternoon.
IYR ñ iShares Dow Jones US Real Estate Index Fund
A sizable put spread on the iShares Dow Jones U.S. Real Estate Index Fund yields maximum benefit to one bearish strategist if the price of the underlying drops substantially by the end of the year. Shares in the IYR, an exchange-traded fund that tracks the Dow Jones U.S. Real Estate Index, turned positive in the aftermath of Bernankeís much anticipated speech in Jackson Hole, Wyoming, to trade 0.60% higher on the session at $54.16 as of 11:15 am ET.
The fundís largest holdings are in REITs Simon Property Group (SPG) and Equity Residential (EQR), self-storage services provider Public Storage (PSA), and mortgage REIT Annaly Capital Management (NLY). Shares in the top four holdings are all positive this morning, with Annaly Capital Management gaining the most, up 2.2% at $17.68.
The bearish spread initiated in the December contract on the IYR suggests, perhaps, that the fundís shares may surrender gains during the next four months. The put spread may be the work of an investor hedging exposure to the U.S. Real Estate sector, the ETF itself, or could be an outright bearish play designed to achieve optimal results should the fund nosedive.
It looks like the trader purchased 5,000 puts at the December $49 strike for an average premium of $3.16 apiece, and sold the same number of puts at the lower December $36 strike at an average premium of $0.825 each. Net premium paid to initiate the spread amounts to $2.335 per contract, thus positioning the trader to profit should shares in the IYR drop 13.8% to breach the effective breakeven price of $46.665 by December expiration day.
The investor could potentially walk away with maximum profits of $10.665 per contract if the fundís shares plunge 33.5% to trade below $36.00 at expiration. Shares in the IYR last traded below $36.00 back in August 2009, five months past the fundís lowest point of the financial crisis. Options implied volatility on the ETF slipped 6.2% to 38.09% by 11:30 am in New York.
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