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Options Player Positions for Recovery in Beleaguered Bank of America Shares

Today’s tickers: BAC, JNJ, EXP, KO, YHOO, VVUS, SKS & STJ

BAC – Bank of America Corp. – A large-volume bullish risk reversal initiated in the September contract on Bank of America in the first half of the current trading day indicates one options strategist is positioning for a rebound in the price of the underlying stock by expiration day in a couple of months. BAC’s shares, which fell 2.85% to $13.38 this afternoon, are currently down more than 32.7% since the stock reached a 52-week high of $19.86 back on April 15, 2010. Analysts at Goldman Sachs removed Bank of America from the conviction buy list on Monday. But, one optimistic individual is rooting for BAC to come roaring back to life by September expiration day. The investor appears to have sold 20,000 puts at the September $12 strike for a premium of $0.26 apiece in order to purchase the same number of calls at the higher September $15 strike for a premium of $0.36 each. The net cost of the transaction amounts to $0.10 per contract. If financial services firm’s shares fail to rally above $15.00 by expiration, the investor will lose the full premium paid to purchase the trade. However, if the price of the underlying increases 12.85% over the current price of $13.38, the risk reversal player will start to make money above the effective breakeven price of $15.10 through September expiration. Finally, the short position in put options at the September $12 strike suggests the investor is willing to have Bank of America shares put to him at an effective price of $12.10 apiece should the puts land in-the-money at expiration.

JNJ – Johnson & Johnson – Shares of the provider of consumer products, pharmaceuticals and medical devices fell more than 2.85% in afternoon trading to arrive at $56.89 just before 3:00 pm (ET). The health care company’s shares slipped lower after the firm said second-quarter revenue was flat and lowered its 2010 profit forecast by $0.15 a share. JNJ still reported a 7.5% increase in net income, earning $1.23 a share in the second-quarter, but revising full year earnings lower took its toll on the price of the underlying stock today. One contrarian options player populating JNJ LEAPS caught our eye this afternoon. The investor appears to have purchased a plain-vanilla debit call spread using sky-high strike prices in the January 2012 contract. The trader responsible for the spread picked up 3,600 calls at the January 2012 $80 strike for an average premium of $0.38 apiece, and sold the same number of calls at the higher January 2012 $90 strike for an average premium of $0.10 each. The net cost – and maximum possible loss faced by the investor – in this transaction amounts to $0.28 per contract. JNJ’s shares have never come close to trading above $80.00. Thus, it is unlikely this investor expects the price of the underlying stock to rally 41.1% in the next year and a half in order to exceed the average breakeven point on the spread at $80.28. Perhaps the trader is, however, anticipating bullish movement in JNJ’s shares by expiration in January 2012. Such share price appreciation, or increases in options implied volatility on the stock, will inflate premium on the calls and could allow the investor to take profits by selling to close the spread at an advantageous price at some point ahead of expiration day. Options implied volatility on JNJ is up 13.00% at 17.06% as of 3:15 pm (ET).

EXP – Eagle Materials Inc. – Investors are scooping up call options on the manufacturer of gypsum wallboard and cement ahead of the firm’s second-quarter earnings report scheduled for release ahead of the opening bell on Thursday. Eagle Materials’ shares rallied 2.00% during afternoon trading to $26.59, but earlier increased as much as 4.4% to secure an intraday high of $27.21. Options players expecting the cement maker’s shares to continue to appreciate ahead of August expiration purchased approximately 2,000 calls at the August $30 strike for an average premium of $0.20 per contract. Call buyers are prepared to make money as long as the price of the underlying stock surges 13.6% to trade above the effective breakeven price of $30.20 by expiration day next month.

KO – Coca-Cola Co. – Shares of the world’s largest soft-drink maker are up 1.70% to stand at $54.15 as of 12:40 pm (ET) after earlier rallying as much as 2.90% to an intraday high of $54.78. The price per share of the Coke manufacturer increased after the firm revealed in its second-quarter earnings report that it sold more beverages in every part of the world save Europe. KO posted second-quarter net income of $1.06 a share, excluding a charge for restructuring, which beat average analyst expectations of $1.03 per share. One bullish options player appears to be rolling a sizeable long, previously established call position in the August contract to a higher strike price in the November contract. It looks like the investor sold 15,000 calls at the August $55 strike at a premium of $0.60 per contract in order to purchase the same number of calls at the November $57.5 strike for a premium of $0.75 apiece. The net cost of the transaction amounts to $0.15 per contract. The fresh long call stance positions the bullish player to make money should KO’s shares rally another 6.45% over the current price of $54.15 to surpass the effective breakeven point to the upside at $57.65 by expiration day in November. Shares of Coca-Cola Co. last traded above $57.65 back on December 31, 2009.

YHOO – Yahoo!, Inc. – Shares of the Sunnyvale, CA-based company fell as much as 9.5% in the first half of the trading session to touch down at an intraday- and 52-week low of $13.75. Yahoo’s shares plunged after the firm reported weaker-than-expected second-quarter sales of $1.13 billion, which underwhelmed analysts anticipating, on average, sales of $1.16 billion. Citigroup analysts downgraded Yahoo!, Inc.’s shares to ‘hold’ from ‘buy’ and lowered its target share price to $18.00 from $22.00 today following second-quarter earnings. Options investors exchanged more than 145,400 contracts on Yahoo! by 12:10 pm (ET) with shares of the underlying stock trading 8.15% lower on the day to arrive at $13.96. It does not appear, however, that all traders are throwing in the towel just yet. It looks like one big player with a long-term optimistic viewpoint enacted a bullish risk reversal in the January 2011 contract to position for a rebound in the price of Yahoo’s shares by expiration. The trader sold 35,000 puts at the January 2011 $12.5 strike at a premium of $0.77 apiece, in order to purchase the same number of call options at the higher January 2011 $16 strike for premium of $0.64 each. The options strategist enjoys a net credit of $0.13 per contract on the transaction and keeps the entire amounts received as long as YHOO’s shares exceed $12.50 through expiration day next year. Additional profits are available to the investor should the price of the underlying stock surge 14.6% over the current price of $13.96 to trade above $16.00 by expiration in January 2011. Yahoo’s shares last traded above $16.00 back on May 18, 2010.

VVUS – Vivus, Inc. – The biopharmaceutical company popped up on our scanners after one optimistic individual replicated a three-legged bullish options combination play that we observed during Tuesday’s trading session. Shares of the Qnexa maker rallied 7.65% to $5.48 by 11:55 am (ET). Today’s transaction is nearly identical to yesterday’s bullish trade, but the more recent play is half of the size of the original and yields a net credit that’s also half the size. The investor sold 5,000 puts at the December $4.0 strike for premium of $0.75 apiece, purchased 5,000 calls at the December $7.0 strike for premium of $1.10 each, and sold 5,000 calls at the higher December $12 strike for premium of $0.45 a-pop. The trader responsible for the transaction pockets a net credit of $0.10 per contract, and keeps the full amount received as long as the biopharmaceutical company’s shares exceed $4.00 through expiration day in December. Additional profits accumulate should Vivus, Inc. shares surge 27.7% over the current price of $5.48 to surpass the $7.00-level by expiration. Maximum available profits of $5.10 per contract are safe in the investor’s piggy bank if the price of the underlying stock jumps 119% to trade above $12.00 ahead of expiration day in the final month of 2010. Options implied volatility on VVUS is up 14.7% to stand at 74.42% just after 12:00 pm (ET).

SKS – Saks, Inc. – The implementation of a short straddle on the high-end retailer indicates one options investor expects little to no movement in the price of the underlying shares through expiration in February 2011. Saks’ shares are currently flat on the day to stand at $7.64 just before 11:45 am (ET). The straddle-strategist sold 2,000 calls at the February 2011 $7.5 strike for a premium of $1.20 each, and sold 2,000 puts at the same strike for premium of $1.15 apiece. Gross premium pocketed by the trader amounts to $2.35 per contract. The investor keeps the full amount of premium if, by expiration, Saks’ share price settles at $7.50. Short positions in both call and put options expose the trader to losses should the retailer’s shares rally above the upper breakeven price of $9.85, or if shares slip beneath the lower breakeven point at $5.15, ahead of expiration day next year.

STJ – St. Jude Medical, Inc. – Options investors are buying put options on the medical devices maker ahead of its second-quarter earnings report scheduled to be released ahead of the opening bell on Thursday. St. Jude’s shares are currently down 2.35% at $34.80 as of 11:50 am (ET). Traders hedging potential share price erosion that is likely to occur should STJ’s earnings disappoint the Street on Thursday purchased roughly 1,800 now in-the-money puts at the August $35 strike for an average premium of $1.25 per contract. Put players are positioned to make money as long as St. Jude Medical’s shares fall another 3.00% from the current price of $34.80 to breach the effective breakeven point to the downside at $33.75 by expiration day in August. The increase in investor demand for put options on the stock and impending earnings lifted STJ’s overall reading of options implied volatility 12.1% to 31.49% by 11:55 am (ET).


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