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Bulls Eye Continued Rally For USEC Inc.

Today’s tickers: USU, EP & CHMT

USU - USEC Inc. – The supplier of low enriched uranium (LEU) for commercial nuclear power plants popped up on our scanners this morning after large blocks of Jan. 2012 contract call options changed hands on the stock. Shares in USU are flat on the day at $2.04 following the more than 60.0% pop in the price of the underlying at the tail-end of the previous trading week to $2.12 from $1.30. With shares at $2.04, the stock is down more than 65.0% year-to-date off a 52-week high of $6.35. The burst of call activity on the Bethesda, Maryland-based company appears to be nearly identical to a large call spread initiated this past Friday. The trader responsible for Friday’s transaction may have purchased a 10,000-lot Jan. 2012 $2.0/$3.0 call spread for a net premium of $0.35 per contract. The position may yield maximum potential profits of $0.65 per contract should shares in USU top $3.00 at expiration next year. Today’s sizeable call spread also cost a net premium of $0.65 apiece, but the investor purchased a wider 10,000-lot Jan. 2012 $2.0/$3.5 call spread. The trader responsible for the spread may make up to $1.15 per contract in the event that USEC’s shares surge 71.5% over the current price of $2.04 to exceed $3.50 at expiration in January. Shares in USU last traded above $3.50 in July. The company is scheduled to report third-quarter earnings after the final bell on November 2, 2011.

EP - El Paso Corp. – Kinder Morgan Inc.’s agreement to purchase El Paso Corp. for $21.1 billion saw shares in EP up 23.5% at $24.20 as of 12:30 pm in New York. The deal, which will create the largest operator of natural-gas pipelines and fourth-largest energy company in the U.S., spurred relatively heavy trading in El Paso options on Monday. Fresh prints in call and put options cropped up this morning, with investors favoring calls slightly over puts, and overall volume topping 32,700 contracts in early-afternoon trade. The overall reading of options implied volatility on the stock fell 49.5% to 20.3% today on news of the deal.

The huge rally in the price of El Paso’s shares overnight resulted in massive profits – at least on paper – for some investors who appear to have picked up November contract calls over the past few weeks. Open interest patterns in the Nov. $17 strike call suggests one or more traders purchased around 1,250 contracts at that strike for an average premium of $1.49 each back on September 26. The last-traded price on these calls as of 12:45 pm EDT reads $7.25, according to data in IB’s Trader Workstation. More recently, some 1,600 call options were likely purchased at the Nov. $19 strike on Friday at an average premium of $1.35 a-pop. Investors long the calls at that price, find the contracts are today trading up at $5.20 each. Up at the Nov. $21 strike call, open interest suggests traders picked up roughly 1,000 of the contracts for an average premium of $0.32 each between Thursday and Friday of last week. Premium required to buy the Nov. $21 strike call today could set you back more than 10 times that amount, given the current asking price of $3.50 on the contract. Buyers of the call options last week appear to be hanging on to their positions, given relatively light volume changing hands at those strikes this afternoon. El Paso Corp reports third-quarter earnings ahead of the open on November 2.

CHMT - Chemtura Corp. – Activity in Chemtura call options suggests at least one options trader is positioning for shares in the manufacturer of polymer and specialty chemical products to rally sharply by December expiration. Shares in CHMT are down 4.15% at $10.84 as of 1:30 pm in New York, roughly three weeks ahead of the company’s third-quarter earnings release on November 1. More than 3,800 calls changed hands at the Dec. $12.5 strike against open interest of 1,412 contracts. It looks like most of the calls were purchased in a block of 2,540 contracts by one investor for a premium of $0.70 apiece. The trader may profit on the bullish position if shares in Chemtura Corp. surge 21.8% over the current price of $10.84 to surpass the effective breakeven point at $13.20 by expiration day in December. Shares in CHMT last traded above $13.20 back on September 20. The stock is off its lows of the year, but still trades at a 44.0% discount to its May 2 52-week high of $19.37.

Caitlin Duffy
Equity Options Analyst

 


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