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Strangle Strategist Targets VeriSign Options

Today’s tickers: VRSN, CAT, EWZ & XCO

VRSN – VeriSign, Inc. – Symantec Corp. agreed to shell out $1.28 billion in cash to purchase VeriSign Inc.’s authentication services unit in a deal reportedly set to close by the end of September. Despite securing a buyer for its unit, which certifies that websites are legitimate and safe for online transactions, VeriSign’s shares are lower by 1.75% to stand at $27.50 as of 11:20 am (ET). VeriSign received an upgrade to ‘buy’ from ‘hold’ at Deutsche Bank today where analysts tout a 12-month target share price of $35.00 on the stock. One options strategist expecting shares of the underlying stock to remain range-bound through September expiration sold a strangle to reap the benefits of inflated options implied volatility. The investor sold 10,300 calls at the September $31 strike for a premium of $1.00 each and sold the same number of puts at the lower September $28 strike for $2.85 apiece. Gross premium pocketed on the transaction amounts to $3.85 per contract. The trader keeps the full premium received on the sale as long as shares trade within the range of the strike prices described through expiration. The short sale of both call and put options expose the investor to potential losses should shares rally above the upper breakeven price of $34.85, or if shares slip beneath the lower breakeven point at $24.15, ahead of expiration. Another investor opted to take profits off the table by selling a previously established long call position in the September contract. Perhaps the trader is taking in whatever profits are available now in case shares continue lower ahead of expiration. It looks like the investor originally purchased at least 15,000 calls at the September $28 strike for an average premium of $1.45 apiece back on April 15, 2010, when shares were trading at a volume-weighted average premium of $26.84. Today the options trader sold 15,000 calls at that strike for a premium of $2.15 each, receiving net profits of $0.70 per contract. In hindsight the investor could have raked in more substantial gains had he sold the calls yesterday when VeriSign’s shares surged to a 52-week high of $29.23 on the news Symantec Corp. agreed to buy out the authentication services unit at VRSN.

CAT – Caterpillar, Inc. – Options activity on the machinery manufacturer casts a glimmer of optimism on the stock despite the 4.45% decline in the price of the underlying shares to $58.71 this morning. Earlier shares fell 5.3% to touch down at an intraday low of $58.18 after the firm said its global retail sales of machines dropped 4% in April. One options investor appears to expect CAT’s shares to rebound by August expiration. It looks like the bullish trader picked up 5,000 calls at the August $62.5 strike for an average premium of $4.25 apiece. Just three seconds after the call options were purchased, a chunk of 5,000 puts were sold at the January 2011 $45 strike for a premium of $4.00 each. The comparable size and time of execution of these trades suggests the activity may be the work of one investor. If this is the case, the optimistic options player reduced the net cost of getting long the August $62.5 strike calls to just $0.25 per contract. In this scenario the trader stands ready to accrue profits so long as Caterpillar’s shares rally 6.9% over the current price of $58.71 to surpass the effective breakeven point at $62.75 by August expiration. The sale of the put contracts indicates the trader does not expect CAT’s shares to plummet 23.35% ahead of expiration day in January 2011. If the purchase of the calls and the sale of the puts are unrelated and not the work of one trader, the call buyer will not make money unless shares of the underlying stock surge 13.7% to exceed $66.75 – the breakeven price on the calls excluding the financing provided by the sale of the puts – by expiration day in August. Options implied volatility on CAT is up 22.9% to 58.47% as of 11:12 am (ET).

EWZ – iShares MSCI Brazil Index ETF – Shares of the EWZ, an exchange-traded fund that seeks investment results which correspond to the price and yield performance of publicly traded securities in the aggregate in the Brazilian market as measured by the MSCI Brazil Index, are down 5.50% to $58.17 as of 12:15 pm (ET). The sharp decline in the price of the fund inspired rampant put activity across the May and June contracts. Investors appear to be rolling large chunks of near-term and now in-the-money put contracts to more bearish strike prices in the June contract. One transaction involved the sale of 20,000 deep in-the-money puts at the May $70 strike for a rich premium of $10.90 each, spread against the purchase of the same number of puts at the June $65 strike for $7.15 apiece. The level of put open interest at the May $70 strike – 27,187 lots – suggests the investor behind the calendar roll may be pocketing a portion of the net credit of $3.75 per contract available on the trade by shifting the puts to a lower strike price. A similar transaction involved the sale of 20,000 puts at the May $66 strike for a premium of $7.40 each, marked against the purchase of 20,000 puts at the June $60 strike for $4.65 per contract. The trade yields a net credit of $2.75 per contract. Investors engaging the put options could bank some or all of the available net credit on the trades depending on the price paid to initially buy the May contract options.

XCO – EXCO Resources, Inc. – Shares of the Texas-based independent oil and gas exploration and development company are trading 1.15% lower at $15.49 as of 11:35 am (ET). One optimistic options investor is itching for a sharp rebound in the price of the underlying stock by September expiration. The trader sold 2,000 puts at the September $12.5 strike for a premium of $0.95 apiece in order to partially offset the cost of buying the same number of calls at the higher September $17.5 strike for $1.25 premium each. The net cost of getting long the call options is reduced to $0.30 per contract. Thus, the bullish investor is prepared to profit should XCO’s shares rally 14.9% over the current price of $15.49 to surpass the effective breakeven point at $17.80 by expiration day in September. We note that EXCO Resources’ shares traded up to an intraday high of $18.08 as recently as May 13, 2010.


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