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Kaleidoscope of Butterflies Lie in Wait for Goldman Sachs Rebound

Today’s tickers: GS, BAC, AEA, QDEL, DUK, HTZ, EFA, MAR, PXD & WLP

GS – Goldman Sachs Group, Inc. – Bullish options strategists touting butterfly wings were once again enticed by the sweet nectar of potential profits hinging on Goldman Sachs’ shares ability to continue to climb out of the hole created by the drama and uncertainty surrounding the SEC’s suit against the investment banking firm. Goldman’s shares are up 2.36% in late afternoon trading at $156.65, but the stock realized a 4.9% rebound in its shares from Tuesday’s intraday low of $150.15, to an intraday high of $157.45 during the current session. We observed bullish butterfly plays on Goldman Sachs each day this week suggesting investors are pre-ordering their tickets on the rebound-boat so as not to miss out on profits to the upside. Tuesday’s call-fly engaged the October 160/175/190 strikes while Monday’s butterfly spread involved the May 150/160/170 strikes. Today, butterflies parked themselves in the June contract, buying approximately 8,000 calls at the June $165 strike for a premium of $4.66 each [wing 1] and purchasing roughly 8,000 calls at the higher June $185 strike for $0.88 apiece [wing 2]. The body of the butterfly centered at the June $175 strike where some 16,000 calls were shed for an average premium of $1.99 a-pop. Average net premium paid for the spread amounts to just $1.56 per contract. The investor or investors holding the bullish stance stand ready to accrue maximum potential profits of $8.44 per contract should GS shares surge up to $175.00 by expiration day. The transaction is a very efficient way to act on bullish sentiment because maximum loss potential – $1.56 per contract in this case – is scant when compared to potential profits which are 5.4 times greater. Profits start to amass if Goldman’s shares rally 6.33% from the current price of $156.65 to breach the average breakeven price of $166.56 ahead of June expiration. Finally, not all optimistic options players selected the butterfly spread strategy. A long-term bullish trader targeted the October contract to enact a plain-vanilla debit call spread. The investor picked up 3,000 in-the-money calls at the October $155 strike for a hefty average premium of $16.50 apiece, and sold the same number of calls at the higher October $180 strike for $6.55 each. The net cost of the call spread amounts to $9.95 per contract, and yields maximum potential profits of $15.05 per contract to the investor if shares of the underlying stock jump 14.9% to $180.00 in the next six months to expiration.

BAC – Bank of America Corp. – A large-volume put spread enacted on Bank of America today suggests one options player is preparing for potential bearish movement in the price of the underlying stock through June expiration. BAC’s shares added 1.50% in late afternoon trading to stand at $17.73. It looks like the options trader picked up 20,000 puts at the June $17 strike for a premium of $0.70 apiece, and sold the same number of puts at the lower June $16 strike for a premium of $0.40 each. The net cost of the transaction amounts to $0.30 per contract. The investor is most likely building up downside protection to safeguard the value of a long underlying stock position. If this is indeed the case, protection kicks in should BAC’s shares tumble 5.8% from the current price to breach the breakeven point on the spread at $16.70. Options implied volatility on the stock is down slightly by 5.6% to 33.93% as of 3:30 pm (ET). More than 320,000 option contracts changed hands on BAC thus far in the trading session.

AEA – Advance America, Cash Advance Centers, Inc. – Put options are in demand on the provider of cash advance services ahead of its first-quarter earnings report slated for release after the closing bell this evening. AEA’s shares are down 2.12% to $6.93 with 45 minutes remaining the trading session. It looks like one options investor bracing perhaps for an earnings disappointment purchased 5,000 puts at the October $5.0 strike for an average premium of $0.55 per contract. The put player makes money on the position if Advance America’s shares plummet 35.8% from the current price to breach the effective breakeven point on the puts at $4.45 by expiration day next month.

QDEL – Quidel Corp. – Shares of the manufacturer of medical supplies are down slightly by 0.80% to stand at $14.49 ahead of its first-quarter earnings announcement slated for release after the closing bell on Thursday. One pessimistic options player wary of continued bearish movement in the price of the underlying stock purchased a debit put spread in the May contract. Perhaps the trader expects disappointing earnings from Quidel tomorrow. The investor purchased 4,000 now in-the-money put options at the May $15 strike for an average premium of $1.025 apiece, and sold the same number of puts at the lower May $12.5 strike for an average premium of $0.175 each. Net premium paid for the put spread amounts to $0.85 per contract. Thus, the trader stands ready to accrue maximum potential profits of $1.65 per contract should Quidel’s shares decline 13.75% from the current price to $12.50 ahead of expiration day in May. Profits start to accumulate as long as shares slip beneath the average breakeven price on the spread at $14.15 by expiration. Options implied volatility is up 4.6% to 45.93% ahead of Quidel’s earnings report.

DUK – Duke Energy Corp. – Shares of the energy company engaged in electric power and gas distribution operations in the Americas are up more than 4% to $16.66 today after CNBC reported that PPL Corp. is likely acquiring E.ON AG’s U.S. utility unit for $7 billion, beating out a competing bid by Duke Energy Corp. Options investors rejoiced in the share price rally by scooping up call options on the stock. Bullish players purchased at least 5,000 calls at the May $17 strike for an average premium of $0.15 per contract. Call-buyers are prepared to profits should Duke’s share price exceed $17.15 ahead of May expiration. Optimism spread to the July $17 strike where another 3,000 calls were picked up for an average premium of $0.27 each. July contract call coveters make money as long as Duke Energy’s shares rally another 3.7% to surpass the average breakeven point on the calls at $17.27 by June expiration day. Options implied volatility is soaring 29.6% higher to 19.42% as of 12:40 pm (ET).

HTZ – Hertz Global Holdings, Inc. – Options activity on the holding company for Hertz, a worldwide car rental and equipment rental business, suggests one investor is taking a long-term bullish stance on the stock. The optimistic options player appears to have purchased a large chunk of married HTZ put options in order to position for share price appreciation, while still hedging against potential price erosion through December expiration. Hertz Global Holdings’ shares edged 0.20% lower in the first half of the trading day to stand at $14.13. It looks like the investor picked up 10,000 puts at the December $10 strike for a premium of $0.70 each at 11:09 am (ET) this morning when shares of the underlying stock were trading at a volume-weighted average price of $14.44 each. The put options serve as long-term downside protection for the investor in case Hertz’s share price nose-dives 34% to the downside in the next seven months to breach the effective breakeven price of $9.30. But, the acquisition of both stock and puts indicate the investor anticipates bullish movement in Hertz’s share price. Shares of the holding company must exceed $15.14 – the price paid per share plus the cost per put option – before the investor realizes gains on the long underlying stock position.

EFA – iShares MSCI EAFE Index Fund – Posturing in put options on the EFA, an exchange-traded fund which tracks the price and yield performance of the MSCI EAFE Index – an index created as a benchmark for international stock performance – with stocks from Europe, Australasia and the Far East, suggests some investors anticipate additional bearish movement in the price of the underlying fund through May expiration. Shares of the fund are currently down 0.50% to $53.98 as of 12:45 pm (ET). One pessimistic individual purchased a plain-vanilla debit put spread by picking up 6,800 now in-the-money puts at the May $54 strike for a premium of $1.13 each, marked against the sale of the same number of puts at the lower May $52 strike for $0.54 apiece. Net premium paid for the bearish spread amounts to $0.59 per contract. The investor reels in maximum potential profits of $1.41 per contract if shares of the EFA decline another 3.7% from the current price to trade at or below $52.00 by expiration.

MAR – Marriott International, Inc. – Options traders holding bullish positions on the worldwide operator and franchisor of hotels and lodging facilities took profits off the table in the first hour of the trading session perhaps in anticipation of continued bearish movement in the price of the underlying shares. Marriott’s share price edged 1.05% lower to $35.67 as of 10:40 am (ET), adding to the stock’s total price decline of 6.33% since Monday’s session when shares reached a new 52-week high of $38.08. One investor unraveled a decent-sized options combination play in the July contract in order to bank available profits. It looks like the trader originally purchased 5,790 calls at the July $40 strike for a premium of $0.25 apiece, and sold the same number of puts at the lower July $28 strike for $0.25 each. The transaction was initiated at zero cost to the investor back on April 15, 2010, when shares of the underlying stock were trading at a volume-weighted average price of $34.13. Today, the trader took off the trade by selling the calls for a richer premium of $0.50 each, and buying the puts for $0.20 apiece. Net profits pocketed on the trade amount to $0.30 per contract for total gains of $173,700. Profit-taking behavior spread to the near-term May contract where it looks like other investors abandoned long call positions on Marriott. Approximately 5,000 calls were purchased at the May $36 strike for an average premium of $0.54 apiece back on April 21, 2010, when shares of the hotel operator closed at $34.67. Investors sold roughly 5,000 calls this morning for an average premium of $1.00 each to bank average net profits of $0.46 per contract. Profit-takers cannot be blamed for failing to see into the future, however, they could have walked away with more substantial gains had they sold the calls on Monday when the stock soared up to its new 52-week high of $38.08.

PXD – Pioneer Natural Resources Co. – Shares of the independent oil and gas exploration and production company, which received a target share price upgrade to $80 from $48 at Oppenheimer yesterday, are up slightly by 0.30% to $62.74 in morning trading. One options player, however, positioned for a potential pullback in Pioneer’s share price by enacting a plain-vanilla put spread in the May contract. The investor purchased roughly 1,500 puts at the May $60 strike for a premium of $1.55 each, spread against the sale of about the same number of puts at the lower May $55 strike for $0.47 apiece. Net premium paid for the bearish transaction amounts to $1.08 per contract. Thus, the put player is prepared to amass maximum potential profits of $3.92 per contract should Pioneer’s shares plummet 12.33% from the current price to $55.00 by expiration day next month. The trader starts to make money if PXD shares slip beneath the effective breakeven point on the spread at $58.92.

WLP – WellPoint, Inc. – The health benefits company’s shares are up 1.6% to $56.82 this morning after the firm posted first-quarter net income of $1.96 per share, which blew right past average analyst forecasts of $1.67 per share. One early bird investor, however, expects WellPoint’s share price to taper off over the next several months to settle at $55.00 by June expiration. The trader initiated a short straddle on the stock, selling about 2,000 in-the-money calls for an average premium of $3.11 each, and selling 2,000 puts at the same strike for an average premium of $2.20 apiece. Gross premium pocketed on the straddle play amounts to an average of $5.31 per contract. The investor keeps the full amount of premium if shares settle at $55.00 at expiration. The trader keeps some portion of the premium received unless WellPoint’s shares swing violently in either direction away from the central strike price. Losses are incurred should shares rally above the upper breakeven point at $60.31, or if shares slip beneath the lower breakeven price of $49.69, ahead of expiration day in June. Options implied volatility on the health care company is down 10.8% to 31.89% following earnings.


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