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Call Spreader Targets Ancestry.com, Inc. as Shares Soar to All-Time High

Today’s tickers: ACOM, DLB, S, FSIN, XLF, PDE, MED, KO & THC

ACOM – Ancestry.com, Inc. – Shares of the online family history resource surged 8.380% in afternoon trading to reach an all-time high of $22.76. The rally in Ancestry’s shares inspired one bullish options investor to purchase a plain-vanilla call spread in the February 2011 contract. It looks like the trader picked up 1,050 now in-the-money calls at the February 2011 $22.5 strike for an average premium of $2.82 each, and sold the same number of calls at the higher February 2011 $30 strike at an average premium of $0.55 a-pop. Net premium paid to establish the bullish spread amounts to $2.27 per contract. Thus, the trader is poised to profit should ACOM’s shares jump 8.8% over today’s high of $22.76 to surpass the average breakeven price of $24.77 by expiration day in February. Maximum potential profits of $5.23 per contract are available to the call-spreader if ACOM’s shares rally 31.8% to exceed $30.00 by February expiration.

DLB – Dolby Laboratories, Inc. – A short strangle on the provider of products and technologies created to enhance various aspects of entertainment media indicates one options investor expects Dolby’s shares to trade within a specified range through expiration in March 2011. Shares surged 6.3% to reach an intraday high of $59.46 by 2:30 pm ET after the stock was upgraded to ‘market outperform’ from ‘market perform’ with a 12-month target share price of $69.00 at Avondale Partners LLC. It looks like the strangle-seller sold roughly 3,000 puts at the March 2011 $50 strike at a premium of $2.46 each, and shed about the same number of calls at the higher March 2011 $65 strike for a premium of $2.80 apiece. Gross premium pocketed on the transaction amounts to $5.26 per contract. The investor responsible for the trade keeps the full premium received as long as Dolby’s shares trade within the boundaries of the strike prices described through expiration day next year. The premium received acts as a limited buffer against losses in the event that, at expiration, shares fail to trade within the specified price range. However, losses start to accumulate if DLB’s shares rally above the upper breakeven price of $70.26, or if shares nosedive to trade below the lower breakeven point at $44.74, ahead of expiration day in March. The increase in demand for options on the stock coupled with the sharp rally in the price of the underlying stock lifted Dolby’s overall reading of options implied volatility 8.1% to 31.72% as of 2:35 pm ET. Approximately 8,260 options changed hands on Dolby Laboratories thus far in the session, which is just over 1,000 lots less than the 9,326 contracts comprising the stock’s existing open interest.

S – Sprint Nextel Corp. – A massive call spread involving 200,000 option contracts was transacted on wireless communications company, Sprint Nextel Corp., during afternoon trading today. Sprint’s shares increased as much as 3.83% during the session to touch an intraday high of $4.61. Looking at the mammoth trade purely from an options perspective, it appears to be a bull call spread, with 100,000 calls picked up at the January 2011 $5.0 strike at a premium of $0.38 each, and 100,000 calls sold at the higher January 2011 $6.0 strike for premium of $0.12 apiece. But, it looks as though the spread was tied to the sale of 2.3 million shares of the underlying stock at a price of $4.5565 each. The number of sold shares matches up with the delta of approximately 0.23 on the spread, which suggests the transaction is a delta neutral hedge. Net premium paid to put on the call spread amounts to $0.26 per contract. Roughly 212,000 contracts changed hands on Sprint Nextel Corp. thus far in the trading session, which represents approximately 42.8% of total existing open interest on the stock of 494,824 contracts.

FSIN – Fushi Copperweld, Inc. – The manufacturer of electrical components and equipment popped up on our ‘hot by options volume’ market scanner in the first half of the trading day after a large chunk of calls changed hands in the March 2011 contract. Fushi Copperweld’s shares rallied 3.3% during the session to secure an intraday high of $8.10 as of 12:35 pm ET. It looks like one investor purchased 20,000 calls at the March 2011 $10 strike at a premium of $0.65 apiece. Perhaps the call buyer is expecting Fushi’s shares to increase significantly ahead of expiration day in March. In this scenario, the investor stands ready to amass profits should shares surge 31.5% in the next six months to exceed the effective breakeven price of $10.65 by March expiration. FSIN’s shares last traded above $10.65 back on June 3, 2010. Approximately 20,310 options changed hands on Fushi today, which is nearly double the number of lots of previously existing open interest on the stock of 11,112 contracts. FSIN’s overall reading of options implied volatility dropped 11.3% to 41.62% by 12:45 pm ET.

XLF – Financial Select Sector SPDR ETF – The familiar shadow of a put butterfly spread appeared on the Financials ETF in morning trading, suggesting perhaps, that one options investor is prepared for the price of the underlying shares to reverse course in the next couple of months. Shares of the XLF, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index, rallied as much as 1.30% during the session to touch an intraday high of $14.80 as of 12:15 pm ET. The investor responsible for the butterfly spread likely purchased 15,000 in-the-money puts at the November $15 strike at a premium of $0.85 each [wing 1], sold 30,000 puts at the November $14 strike for premium of $0.42 apiece [body], and picked up 15,000 puts at the November $13 strike for a premium of $0.19 a-pop [wing 2]. Net premium paid to establish the bearish spread amounts to $0.20 per contract. Thus, the trader is poised to profit should the price of the fund’s shares trade below the effective breakeven price of $14.80 at expiration. Maximum potential profits of $0.80 per contract are available to the put-fly trader should shares decline 5.40% from today’s high of $14.80 to settle at $14.00 by November expiration.

PDE – Pride International, Inc. – Bullish options traders positioning for shares of the international provider of offshore contract drilling services to rally are picking up call options in the January 2011 contract this morning. Pride’s shares are currently up 2.75% at $28.38 as of 11:30 am ET. Shares may have been helped higher by reports at the end of last week regarding the likelihood that the drilling moratorium will end sooner than the planned November 30 expiration date. Additionally, Credit Suisse analysts speculated on Friday that Pride International could be an attractive acquisition target for Seadrill, which sent PDE shares sharply higher on the final day of trading last week. Investors looking for the oil services firm’s shares to extend gains picked up approximately 2,500 calls at the January 2011 $29 strike for an average premium of $2.17 apiece. Call buyers make money if the price of the underlying stock surges 9.8% over today’s high of $28.38 to surpass the average breakeven price of $31.17 by expiration day next year. Options implied volatility on Pride International is up 3.5% at 41.25% just before 11:40 am ET.

MED – Medifast, Inc. – The weight management and disease management products maker popped up on our ‘hot by options volume’ market scanner in the first half of the trading session after one wary investor purchased a put spread in the January 2011 contract. Shares of the distributor of consumable health and diet products inched up 0.80% in the first half of the trading session to arrive at $26.87 by 11:40 am ET. The put player could be long the stock and seeking to lock in gains by establishing the protective spread. Alternatively, the spread may be an outright bearish bet that Medifast’s shares are set to decline ahead of expiration day next year. The investor purchased 1,000 in-the-money puts at the January 2011 $28 strike for an average premium of $4.85 each, and sold the same number of puts at the lower January 2011 $20 strike at an average premium of $1.33 apiece. Net premium paid to initiate the trade amounts to $3.52 per contract. Thus, the investor starts to make money – or realizes downside protection – if MED’s shares fall 8.9% from the current price of $26.87 to breach the effective breakeven point to the downside at $24.48 by expiration day. Maximum potential profits of $4.48 per contract are available to the investor if Medifast’s shares plunge 25.5% lower to trade below $20.00 by January expiration.

KO – Coca-Cola Co. – One bullish player appears to be rolling a sizeable position in call options up to a higher strike price today in order to position for continued appreciation in the price of Coca Cola’s shares through January 2011 expiration. Shares of the beverage maker are up 0.55% to stand at $57.88 as of 11:15 am ET. It looks like the options investor sold 10,000 now in-the-money calls at the November $57.5 strike for premium of $1.75 apiece in order to purchase the same number of calls at the higher January 2011 $60 strike at a premium of $1.17 each. In isolation, net profits enjoyed on the trade amount to $0.58 per contract. It is likely that the investor responsible for today’s transaction originally purchased the November $57.5 strike calls as part of a similar calendar roll back on July 21, 2010, wherein he rolled calls up from the August $55 strike to the November $57.5 strike. The beverage-bull is hoping to see KO’s shares extend gains through the start of next year.

THC – Tenet Healthcare Corp. – It looks like a number of investors are placing near-term bullish bets on the health care services company this morning by selling put options. Tenet’s shares rallied as much as 5.45% thus far in the session to touch an intraday high of $4.45. Optimistic players expecting Tenet’s shares to exceed $4.00 through October expiration shed approximately 7,500 puts at the October $4.0 strike to take in premium of $0.05 per contract. Put sellers keep the full premium pocketed on the transaction as long as THC’s shares trade above $4.00 through expiration day next month. Investors short the puts are apparently happy to have shares of the underlying stock put to them at an effective price of $3.95 each in the event that the puts land in-the-money at expiration. The overall reading of options implied volatility on Tenet Healthcare is lower by 6.4% to arrive at 41.99% as of 11:55 am ET.


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