Today’s tickers: AMZN, DELL, FXI, AET, XOM, LPX, CSCO, VCI & ITMN
AMZN – Amazon.com, Inc. – E-tailer, Amazon.com, Inc., attracted two-way trading traffic in its options today after the firm gave in to publisher, Macmillan’s, demands to increase the price of digital books. Amazon.com’s concession to Macmillan is fueling investor concerns that the largest internet retailer is relinquishing its pricing advantage. Shares of the online shopping destination slumped more than 8.65% during the trading session to an intraday low of $114.38 – the largest decline in Amazon’s shares in more than one year. Investors inundated Amazon with options trades today, exchanging more than 226,300 contracts on the stock by 2:50 pm (EDT). Option volume generated thus far in the session represents more than 45% of the total 493,697 lots of existing open interest on AMZN. Strong demand for options on the stock as well as a rise in investor uncertainty boosted option implied volatility on Amazon roughly 8.3% higher to 41.44% in afternoon trading. Option traders expecting shares to rebound quickly purchased 2,200 call options at the February $115 strike for an average premium of $5.67 apiece. The $120.67 breakeven price on the contracts suggests call buyers expecting to amass profits in the next few weeks, anticipate a more than 5% increase off the intraday low, by expiration day in February. Call buying and selling in roughly equal proportions was observed at the February $120 strike and at the February $125 strike. Two-way trading traffic of put options is also apparent in the February contract. Contrarian players sold nearly 8,000 puts at the February $115 strike to take in an average premium of $3.58 per contract. Put sellers at this strike keep the full premium received if AMZN’s shares trade above $115.00 through expiration day. The most bearish moves were made at the March $105 strike where 1,100 puts were picked up for an average premium of $2.81 each.
DELL – Dell, Inc. – Bullish investors initiated call spreads on the just-in-time manufacturer of personal computers this afternoon with Dell’s share price up 2.5% to $13.22 on the day. Option traders purchased more than 10,000 calls at the August $14 strike for an average premium of $1.17 apiece, spread against the sale of roughly 10,000 calls at the higher August $18 strike for an average premium of $0.20 each. The average net cost of the bullish trade amounts to $0.97 per contract. Investors enjoy maximum potential profits of $3.03 per contract if Dell’s share price surges 36% above the current price to $18.00 by expiration in August. Profits begin to amass for call-spreaders only if shares increase 13.25% to breach the breakeven price of $14.97 by expiration.
FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the FXI exchange-traded fund, which invests in 25 of the largest and most liquid Chinese companies, rallied 2.25% to $39.22 today. The move higher in shares of the underlying stock perhaps motivated the investor responsible for transacting a bullish risk reversal in the May contract. It appears the trader sold 7,500 puts at the March $37 strike for a premium of $1.92 apiece in order to finance the purchase of 7,500 calls at the higher May $42 strike for an average premium of $1.53 each. The optimistic trader pockets a net credit of $0.39 per contract on the reversal, which he keeps if the FXI’s share price remains at or above $37.00 through expiration. Additional profits accumulate in the event that shares of the ETF increase 7% from the current price to surpass the effective breakeven price of $42.00 by expiration in May. We note that shares of the fund traded above $42.76 as recently as January 19, 2010.
AET – Aetna, Inc. – A large-volume protective put play in the April contract on health benefits company, Aetna, Inc., caught our eye in the first half of the trading session. Aetna’s shares are trading 1.50% lower to $29.50 today and perhaps partly inspired the bearish put spread transacted on the stock. It looks like one investor purchased 20,000 in-the-money puts at the April $30 strike for an average premium of $2.16 apiece, spread against the sale of 20,000 puts at the lower April $25 strike for about $0.55 each. The spread cost the trader a net $1.61 per contract, thus providing downside protection should shares decline beneath the effective breakeven price of $28.39 ahead of April expiration. We note that the size of the transaction suggests the investor responsible for the trade is likely utilizing the spread to insure the value of a long underlying stock position through expiration in three months.
XOM – Exxon Mobil Corp. – Shares of the largest company in the United States rallied more than 2.50% today to $66.14 after the Texas-based firm revealed a smaller-than-expected decline in fourth-quarter profits. XOM posted earnings of $1.27 per share in the fourth quarter, which exceeded average analyst estimates by about 8 pennies a share. Bullish options activity on Exxon Mobil in the January 2011 contract today seems to be a repeat performance of long-term optimistic trading we observed recently. A bull call spread was purchased by an investor positioning for a move up in XOM’s share price by expiration next January. The trader picked up 14,500 calls at the now in-the-money January 2011 $65 strike for a premium of $6.15 each, marked against the sale of 14,500 calls at the higher January 2011 $75 strike for approximately $2.35 apiece. The net cost of the spread amounts to $3.80 per contract. Maximum potential profits of $6.20 per contract accumulate for the trader if Exxon Mobil’s share price increases 13.40% over the current value to $75.00 by expiration day. Option implied volatility on the stock is down roughly 9% to 20.98% following earnings.
LPX – Louisiana-Pacific Corp. – It looks like a couple of different options trading strategies were employed on the manufacturer of building products today. A large short straddle enacted in earlier trading suggests one individual expects decreased volatility in the price of the underlying going forward, while plain-vanilla call buying indicates bullish sentiment by another investor. Louisiana-Pacific’s shares are currently up more than 2% to $7.26. All notable options trading activity on LPX took place at the January 2011 $7.5 strike. One investor sold 10,000 calls at the January 2011 $7.5 strike for a premium of $1.25 each in combination with the sale of 10,000 in-the-money put options at the same strike for an average premium of $1.60 apiece. The gross premium pocketed by the straddle-seller amounts to $2.85 per contract. The investor keeps the full premium if LPX’s shares settle at $7.50 by expiration next January. As always, short straddle players are exposed to potentially devastating losses outside of the effective breakeven points, throughout the life of the option contracts. In this case, the trader experiences losses if shares of the underlying rally above the upper breakeven price of $10.35, or if shares decline beneath the lower breakeven point at $4.65 in the next eleven months. Finally, traders looking for further upside movement in the price of the underlying stock purchased 2,000 calls at the January 2011 $7.5 strike for a premium of $1.40 per contract. Investors long the calls stand ready to accrue profits if shares of LPX increase above the breakeven price of $8.90 ahead of expiration. Option volume of 22,055 contracts generated during the session exceeds total existing open interest on the stock of 17,297 lots.
CSCO – Cisco Systems, Inc. – The manufacturer of switches and routers was upgraded to ‘buy’ from ‘hold’ at Signal Hill today and its share price improved 0.40% to $22.56. Perhaps still feeling sore from last week’s pullback in technology stocks, one investor initiated a put spread in the July contract today. The trader purchased 5,000 puts at the now in-the-money July $23 strike for a premium of $2.04 each, marked against the sale of 5,000 puts at the lower July $19 strike for $0.70 apiece. The net cost of the bearish spread amounts to $1.34 per contract. Therefore, downside protection provided by the transaction kicks in if Cisco’s shares fall back down through the breakeven price of $21.66 ahead of expiration in July.
VCI – Valassis Communications, Inc. – Shares of media and marketing services firm, Valassis Communications, are up 14% as of 10:10 am (EDT) to a new 52-week high of $23.90. VCI shares traded as high of $24.69 at the start of the session. Option traders exchanged nearly 3,000 call options at the February $25 strike, where it looks like the majority of the contracts were purchased for an average premium of $1.10 apiece. Option implied volatility is down 9.67% to 62.41% with 45 minutes elapsed thus far in the trading day.
ITMN – InterMune, Inc. – Biotechnology company, InterMune, Inc., attracted an influx of option players in early trading with shares of the firm up 2.80% to $16.05. Option implied volatility is soaring 114.91% higher to 116.02% as of 10:15 am (EDT). Investors are favoring call options on ITMN as traders exchanged more than 2.65 calls on the stock for each single put option in play. In the first hour of the trading day more than 24,500 contracts changed hands on InterMune. Notable call volume is building at the March $20 strike where 4,675 contracts are in play on existing open interest of 2,863 lots at that strike. We will certainly keep our eye on ITMN to see whether trading remains active throughout the session.