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2010: A CHK BUYOUT, APPLE UP 15%+ AND A DOLLAR RALLY?

Options traders are already busy placing their 2010 bets and today’s action was all over the map bullish:

Traders are likely hoping for the 2010 merger market to pick-up.  After the XOM buyout of XTO traders are hoping for some similar action in shares of Chesapeake Energy:

CHK – Chesapeake Energy Corp. – Natural gas and oil exploration and production company, Chesapeake Energy Corp., experienced a 1.75% rally in the price of its shares to stand at $26.52 in afternoon trading. Some investors are anticipating a significantly higher share price for CHK by expiration in July 2010. Chesapeake-bulls bought roughly 4,000 calls at the July 30 strike for an average premium of 1.86 per contract. Call-buyers stand ready to accrue profits if CHK’s shares rally at least 20% from the current price to surpass the effective breakeven point at $31.86 by expiration. We note that Chesapeake’s shares have remained below $32.00 since October 1, 2008.

Options traders are also hoping for a continuation of the rally in tech shares.  2010 Call options were very busy today in shares of Apple:

AAPL – Apple, Inc. – The iPod manufacturer’s shares are up 1.75% this afternoon to $198.74, but bullish options activity on the stock today suggests shares may rally significantly by expiration in April 2010. A ratio call spread was enacted through the purchase of 1,600 calls at the April 200 strike for an average premium of 15.56 each, marked against the sale of 3,200 calls at the higher April 230 strike for 5.25 apiece. The net cost of the spread amounts to 5.06 per contract. Maximum potential profits of 24.94 are available to the trader if Apple’s shares rally 16% to $230.00 by expiration day. The investor breaks even on the trade if shares increase 3.2% to the breakeven price of $205.06 within the next four months.

In a recent change in trend, the dollar has been moving higher while stocks have remained buoyant.  The bullish options trading in the dollar ETF has been very heavy and implies more gains could be coming down the line.  Perhaps a hedging of sorts against other long positions?

UUP – PowerShares DB US Dollar Index Bull ETF – With the exception of a weak performance against an inspired Canadian dollar, the U.S. dollar is up across the board, although not so that you’d know it according to a marginally changed dollar index. Yet we continue to see heavy volume in the PowerShares ETF where option traders have recently made significant trades in the expectation that the dollar might rise. With the ETF trading at $23.02 today the most heavily trafficked call option series is at the 23 strike where investors over recent weeks have amassed positions amassing to a reading of open interest of some 469,000 contracts. In today’s action in which the UUP is one of the most active, it appears that investors are closing out some long call positions by selling out profitable plays. The calls appear to be trading largely to the 55 cent bid and the volume is buoyant despite the fact that the dollar index is not going anywhere today. Having said that the ongoing rise in yields is a comfort to investors hoping the dollar will trade higher. At 4.63% the 10-year yield looks set to breach overhead resistance that could see another 20 basis points on yield pretty quickly. The UUP was trading at $22.05 just three weeks ago.

Source: IB

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