Fortune Brands’ Shares Trade at New 52-Week High, Bullish Players Covet Call Options
by Andrew Wilkinson - March 15th, 2010 4:10 pm
Today’s tickers: FO, STJ, XLB, BSX, BIDU, VRSN & MNKD
FO - Fortune Brands, Inc. – Shares of the holding company with subsidiaries such as Beam Global Spirits & Wine, Inc., which manufactures Jim Beam whiskey and Maker’s Mark, and Acushnet Company, the producer of Titleist golf products, rallied 2.35% during the session to reach a new 52-week high of $48.45. The increase in Fortune’s share price inspired bullish options trading on the stock today. Approximately 1,000 calls were picked up at the April $50 strike for an average premium of $0.66 apiece. But, the real action took place at the June $50 strike where nearly 15,500 calls were purchased for an average premium of $1.68 per contract. Investors holding the June $50 strike call options stand ready to amass profits only if Fortune Brands’ shares rally another 6.65% from the current day’s price to breach the breakeven point on the calls at $51.68 by expiration day in June.
STJ - St. Jude Medical, Inc. – The manufacturer of cardiovascular medical devices experienced a sharp 8.45% rally in its share price today to $40.67 on news its rival, Boston Scientific Corp., suspended sales of its implantable heart defibrillator this morning. Options players initiated bullish transactions on the stock by selling 2,100 puts at the March $40 strike for an average premium of $0.60 apiece. Put-sellers keep the $0.60 premium per contract as long as St. Jude’s shares trade above $40.00 through expiration on Friday. However, put-players are obliged to have shares of the underlying stock put to them at an effective price of $39.40 each should the put options land in-the-money at expiration. Optimistic investors scooped up 3,100 call options at the July $45 strike by paying an average premium of $0.77 per contract. Call-coveters are positioned to profit only if shares rally another 12.5% from the current price to breach the breakeven share price at $45.77 by expiration day in July.
XLB - Materials Select Sector SPDR – Shares of the XLB, an exchange-traded fund that tracks the performance of the materials economic sector of the S&P Composite Stock Index, declined 0.30% today to $33.19. Trading in long-dated options on the fund, however, suggests one individual is bullish on the sector through expiration in January 2011. It appears the investor sold 10,000 put options outright at the January 2011 $27 strike for a premium of $1.32 per contract. The trader keeps the full premium pocketed…
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Options Player Reveals Long-Term Bullish Sentiment on AIG
by Andrew Wilkinson - March 12th, 2010 4:19 pm
Today’s tickers: AIG, MU, F, POT, CLF, PAYX, ERIC, SVU, LFC & CA
AIG - American International Group, Inc. – The insurer’s shares experienced a fantastic 56.7% run up from its low point in the current month of $24.54 on March 3, 2010, up to yesterday’s intraday high of $38.45. During the current session, AIG surrendered a small portion of its recent share price gains, slipping slightly lower by 1.40% to stand at $34.62 in afternoon trading. Extreme-bullish positioning in long-dated options caught our attention today as one investor established a call spread in the January 2011 contract. The optimistic trader purchased 5,500 calls at the January 2011 $50 strike for a premium of $3.65 apiece, and sold the same number of calls at the higher January 2011 $75 strike for $1.30 each. The net cost of the transaction, and maximum loss potential faced by the investor, amounts to $2.35 per contract. American International Group’s shares must surge 51.2% from the current price of $34.62 in order for the trader to break even on the spread at $52.35 per share. Perhaps the individual responsible for the trade expects AIG’s shares to rebound up to the current 52-week high on the stock of $55.90 (attained back on August 28, 2009), or above within the next ten months to expiration. Maximum available profits of $22.65 per contract – total gains of $12.4575 million – accumulate for the bullish player if AIG’s shares jump 116.6% from today’s price to $75.00 by January expiration day. Shares last traded above $75.00 back in October of 2008.
MU - Micron Technology, Inc. – A large-volume long-term bullish transaction on the manufacturer of semiconductor devices indicates one big options player anticipates continued upward movement in the price of Micron’s shares by expiration in January 2011. Shares rallied 2.55% to $10.05 this afternoon, but earlier increased more than 4% to reach an intraday high of $10.25. The optimistic investor purchased a debit call spread in by picking up 20,000 in-the-money call options at the January 2011 $10 strike for a premium of $2.07 apiece, marked against the sale of 20,000 calls at the higher January 2011 $15 strike for $0.58 each. The net cost of the spread amounts to $1.49 per contract, positioning the investor to amass profits if Micron’s shares exceed the breakeven price of $11.49 by expiration next year. Maximum potential profits of $3.51 per contract – total gains of…
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Anadys Pharm-Bull Eyes Upside, Buys Call Spread
by Andrew Wilkinson - March 11th, 2010 4:57 pm
Today’s tickers: ANDS, FXI, GME, BIIB, TRA, WYN & AES
ANDS - Anadys Pharmaceuticals, Inc. – Biotechnology firm, Anadys Pharmaceuticals, enticed a long-term bullish investor to shell out option premium in order to establish a debit call spread in the September contract. ANDS-shares are trading 0.45% higher on the day to $2.19 as of 2:25 pm (ET). The optimistic options player purchased 3,000 calls at the September $2.5 strike for a premium of $0.55 apiece, marked against the sale of 3,000 calls at the higher September $5.0 strike for $0.15 each. The net cost of the call spread amounts to $0.30 per contract. The transaction positions the trader to accrue maximum potential profits of $2.20 per contract should shares of the underlying stock surge 128.3% over the current price to $5.00 by expiration day in September. Shares must rally at least 27.85% in order for the investor to break even on the trade at a share price of $2.80 each.
FXI - iShares FTSE/Xinhua China 25 Index Fund – The China exchange-traded fund, which corresponds to the price and yield performance of an underlying index invested in 25 of the largest and most liquid Chinese companies, realized a 0.95% decline in the price of its underlying shares to $41.13 this afternoon. Investors touting long-term pessimistic outlooks on the fund purchased put options in the January 2011 contract. It appears some 25,500 put options were picked up at the January 2011 $35 strike for an average premium of $2.50 apiece. Put-purchasers could be seeking downside protection on long underlying share positions. On the other hand, the contracts may have been purchased outright by extremely bearish individuals anticipating a 21% decline in shares of the FXI to $32.50 ahead of expiration. Investors in this case reel in profits should the price of the underlying fund trade below $32.50 in the next nine months to expiration day in January.
GME - GameStop Corp. – Shares of the largest retailer of video games jumped more than 5.10% during the trading session to $19.22 due to speculation the firm may be acquired. Despite the current rally in GameStop’s shares to $19.22 today, the stock still stands 41.45% below its 52-week high of $32.82 attained back on April 13, 2009. Investors taken-in by the takeover rumors purchased approximately 10,300 calls at the March $20 strike for an average premium of $0.47 per contract. The call options ready these traders to enjoy profits…
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Bearish Put Butterfly Spread Materializes on Emerging Markets Fund
by Andrew Wilkinson - March 10th, 2010 4:13 pm
Today’s tickers: EEM, GE, PXD, STI, VLO, UPS, RF, NWL, HNT & FFIV
EEM - iShares MSCI Emerging Markets Index ETF – A contrarian options trader established a large-volume bearish put butterfly spread in the June contract this afternoon even though shares of the emerging markets exchange-traded fund, which looks for investment results that correlate to the price and yield performance of the MSCI Emerging Markets index (an index designed by MSCI as an equity benchmark for international stock performance), are trading 0.65% higher to $41.47 as of 2:30 pm (ET). The massive pessimistic play yields maximum benefits to its owner if shares of the underlying stock plummet more than 15.50% from the current price to $35.00 by June expiration. The investor enacted the butterfly by purchasing 20,000 puts at the June $31 strike for a premium of $0.24 apiece [wing 1] in conjunction with the purchase of another 20,000 puts at the higher June $39 strike for $1.41 each [wing 2]. Finally, the body of the butterfly spread involved the sale of 40,000 puts at the central June $35 strike for a premium of $0.58 apiece. The net cost of the ‘fly amounts to just $0.49 per contract. Therefore, the bearish player is positioned to reel in maximum potential profits of $3.51 per contract – total net profits of $7.02 million – should shares of the underlying fund slip to $35.00 by expiration day. Shares of the EEM must surrender at least 7% of their current value by June expiration in order for the investor to breakeven at $38.51. The transaction is a very efficient way for this investor to establish a pessimistic stance on the emerging markets fund because maximum potential gains trump maximum possible losses on the position. The parameters of the butterfly spread represent a reward-to-risk ratio of more than 7-to-1.
GE - General Electric Co. – The diverse conglomerate’s shares are standing 0.30% higher on the day at $16.55 with one hour remaining in the trading session. General Electric’s shares have rebounded 6.30% in the past month since dipping to $15.57 on February 12, 2010, but one big options strategist is positioning for continued bullish momentum in the price of the underlying stock through expiration in May. The optimistic investor initiated a large-volume bullish risk reversal play by shedding 20,000 puts at the June $15 strike for an average premium of $0.37 apiece, spread against the purchase of 20,000…
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Covered-Call Sellers Make Note of Exits on American Airlines Parent Corp.
by Andrew Wilkinson - March 9th, 2010 4:14 pm
Today’s tickers: AMR, AIG, C, GME, HD, XLP, ALL, CMC, QLGC & YUM
AMR - AMR Corp. – Bullish investors engaged in covered-call selling on AMR Corporation this afternoon after its subsidiary, American Airlines, revealed February passenger unit revenue increased between 6.5% to 7.5% as compared to roughly the same time a year ago. The so-called buy-write strategy took off amid an 11% rally in the price of the underlying stock to $9.93. Options traders sold approximately 16,300 calls at the March $11 strike for an average premium of $0.09 apiece, and simultaneously purchased an equivalent number of AMR-shares when the stock was trading at approximately $9.84 each. The net price paid per AMR-share amounts to $9.75 apiece because of the $0.09 per contract financing provided by the sale of the call options. Investors utilizing the buy-write strategy are positioned to accumulate maximum potential gains of 12.82% if shares rally through $11.00 by expiration day. The covered-calls provide an effective exit strategy for investors, who walk away with 12.82% profits if AMR shares rally to $11.00, and if the underlying shares are called from them at expiration.
AIG - American International Group, Inc. – Insurance firm, American International Group, already reported plans to sell two units for $51 billion, but speculation that it may sell additional assets sparked rampant options trading activity on the stock this afternoon. Shares surged more than 18% to $34.34 at times during afternoon trading. Options investors exchanged more than 224,000 contacts on AIG as of 2:30 pm (ET), and traded more than two call options on the stock for each single put option in play. Two-way trading traffic in out-of-the-money call options is evident, but it looks like – in most cases – more calls are being purchased than sold. The nearest-to-the-money March $35 strike had more than 37,000 calls trade today versus that strike’s previous existing open interest of just 12,297 contracts. More than 12,300 calls were purchased for an average premium of $0.89 apiece. The higher March $40 strike had 12,900 calls picked up by bullish individuals who paid an average $0.25 premium per contract. Finally, the March $45 strike attracted buying interest in the amount of 3,200 calls for an average premium of $0.18 each. More than 7,000 contracts changed hands at the March $45 strike, which trumps existing open interest of just 2,489 lots. It is likely that a large portion of today’s trading activity…
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Cisco Call Options Fly off the Shelves
by Andrew Wilkinson - March 8th, 2010 4:06 pm
Today’s tickers: CSCO, DRYS, CIGX, AES, V, MCD, BIIB, SNE, GME & VALE
CSCO - Cisco Systems, Inc. – Bullish call-buying dominated options trading patterns on Cisco today on news the firm is slated to “make a significant announcement that will forever change the internet and its impact on consumers, businesses and governments.” Cisco’s shares jumped 4.15% to a new 52-week high of $26.25 during the session on a target share price upgrade to $28.00 from $26.00 at JPMorgan Chase & Co. Bullish traders purchased approximately 15,800 in-the-money calls at the March $26 strike for a premium of $0.33 apiece and coveted 9,300 calls at the higher March $27 strike for an average premium of $0.10 each. Uber-bullish individuals bought 4,000 calls at the March $28 strike for just two pennies premium per contract. Investors long the closest-to-the-money March $26 strike calls are positioned to accrue profits if Cisco’s shares trade above $26.33 ahead of expiration day. The surge in demand for options on the stock as well as uncertainty surrounding tomorrow’s announcement lifted the reading of overall options implied volatility on Cisco by 17.5% to 22.85% in afternoon trading.
DRYS - DryShips, Inc. – Dry-bulk shipping company, DryShips, Inc., experienced a short-lived dip in the price of its shares in morning trading, but regained its footing this afternoon, rallying 7.77% to $6.10 with about forty minutes remaining in the session. Call-buying action flooded DRYS today with approximately 22,300 now in-the-money calls picked up at the near-term March $6 strike for an average premium of $0.22 apiece. Nearly 12,000 calls were coveted at the higher March $7 strike for $0.05 premium per contract. Optimism spread to the same strike prices in the April contract, as well. Investors secured roughly 11,600 long in-the-money calls at the April $6 strike for an average premium of $0.39 each. Traders bought another 4,000 call options at the higher April $7 strike for $0.16 per contract. Options traders exchanged more than 130,000 contracts on DryShips during the session, which represents about 27% of total existing open interest on the stock of 480,443 contracts. Options implied volatility jumped approximately 34.8% this afternoon to 60.26%.
CIGX - Star Scientific, Inc. – Shares of the maker of dissolvable smokeless tobacco products surged 6.70% to $1.12 today, inspiring one investor to establish a bullish risk reversal on the stock in the August contract. The trader appears to have sold roughly 7,200 puts at the August…
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Option Players Construct Conflicting Strategies on EBAY
by Andrew Wilkinson - March 5th, 2010 4:09 pm
Today’s tickers: EBAY, RCL, RAI, VLO, VRSN, USU, JAS, NUAN, TIVO & DNR
EBAY - eBay, Inc. – Two different options strategies employed on online auction-house, eBay, Inc., today indicate conflicting medium-term sentiment on the stock. One trader is positioning for a significant rally in the price of the underlying, while another individual anticipates shares will remain range-bound through July expiration. EBAY’s shares increased 3.35% during the current session to stand at $24.58. The uber-bullish stance taken on the stock involved the purchase of 10,000 call options at the July $30 strike for a premium of $0.22 per contract. The investor holding the calls stands ready to amass profits should shares of the underlying stock surge 22.95% from the current price to surpass the effective breakeven point on the calls at $30.22 by expiration in five months time. In contrast, the other options player initiated a sold strangle, which yields maximum benefits only if shares trade within a specified range through expiration. The investor sold 3,500 calls at the July $26 strike for a premium of $1.10 apiece in combination with the sale of the same number of puts at the lower July $21 strike for a premium of $0.58 each. Gross premium enjoyed on the trade amounts to $1.68 per contract. The investor keeps the full amount of premium if shares trade between $21.00 and $26.00 through expiration. However, losses accrue on the position if EBAY’s shares trade above the upper breakeven point at $27.68, or if shares slip beneath the lower breakeven price of $19.32 by expiration day. If the call-buying optimist ends up accurately predicting EBAY’s future share movements, the strangle seller will lose out big time. But, if shares do remain range-bound, the call-buyer only ever risks losing $0.22 per contract, or the price paid to take ownership of the call contracts.
RCL - Royal Caribbean Cruises Ltd. – The cruise operator received an upgrade to ‘neutral’ from ‘sell’ with a target share price of $27.00 at Goldman Sachs Group yesterday, and today nearly reached the target price amid a 2.60% rally in the price of the underlying shares to $29.70. Option trading in the June contract today is likely the work of a bullish trader investing in married put options. It appears the investor purchased shares of the underlying stock for about $29.36 apiece in conjunction with the purchase of approximately 39,000 puts at the June $25 strike for…
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Strangle Strategist Tightens Grip on JPMorgan
by Andrew Wilkinson - March 4th, 2010 4:15 pm
Today’s tickers: JPM, TIVO, RHT, UTX, CSCO, CI, BA, XRX, DIS, AKS & M
JPM - JPMorgan Chase & Co. – A long strangle enacted on JPMorgan today indicates one investor is expecting the firm to experience a significant shift in the price of its shares by June expiration. The investment banking and financial services giant realized a 1% rally in share price during the current session to $41.94. The investor initiated the strangle strategy by purchasing 9,000 calls at the June $46 strike for a premium of $1.06 apiece and by picking up 9,000 puts at the June $36 strike for $0.96 each. The net cost of the transaction amounts to $2.02 per contract. Strangle-players benefit from drastic moves in share price, but lose out if the value of the stock stagnates. In this specific trade, the investor profits if JPM’s shares rally above the upper breakeven price of $48.02 by expiration, or if shares trade below the lower breakeven point at $33.98, by June expiration. The trader is looking for increased volatility in the price of the underlying shares, but also may benefit from higher options implied volatility. Moves higher in options implied volatility corresponds with greater option premium on both calls and puts. Thus, the investor could potentially sell the strangle at a profit ahead of expiration day if combined premium on the trade exceeds the $2.02 per contract paid today. We note that JPM’s shares have not exceeded $47.47 in the past year, but did trade as low as $14.96 back on March 6, 2009.
TIVO - TiVo, Inc. – Shares of the innovator of digital-video recording services surged as much as 61.30% to an intraday high of $16.42, the highest price recorded for TiVo’s shares in at least five years. TiVo was named the victor today after a U.S. appeals court ruled that Dish Network Corp. and EchoStar Corp. are “still infringing its patent and should stop providing digital-video recording services.” Options traders had a field day with the news and exchanged upwards of 275,300 contracts on the stock by 3:10 pm (ET). Today’s options trading volume on TiVo represents just under 80% of the total existing open interest on the stock of 348,203 contracts. Investors populated the stock with a plethora of trading strategies. Some traders banked profits on the rally, while others employed the use of strangles. Plain-vanilla call buying and put selling by bullish individuals was…
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VIX-Investor Enacts Ratio Call Spread on Fear-Gauge
by Andrew Wilkinson - March 3rd, 2010 4:13 pm
Today’s tickers: VIX, JPM, PEP, MDVN, TEX, EWZ, COST, RSH, AMAG & TIVO
VIX - CBOE Volatility index – The fear-gauge spent the better portion of the session in the red, but edged higher in late-afternoon trading to stand up 1.20% to 19.29. Options players busily populated the VIX with a number of interesting trades during the session. One transaction in particular, however, focused our attention on activity in the May contract. A hefty ratio call spread involving a total of 30,000 call options at deeply out-of-the-money strike prices was established on the VIX today. The investor purchased 10,000 calls at the May 27.5 strike for a premium of $1.50 apiece, and sold 20,000 calls at the higher May 35 strike for $0.70 each. The net cost of the transaction is reduced to just $0.10 per contract. It is possible the investor was motivated to put on the spread because of the low cost of the trade and because of the allure of potential profits going forward. The trader appears to believe the VIX will likely breach the breakeven point on the spread at 27.60 in the next three months to expiration, but doubts the fear-gauge will explode up to the mid-30’s. Evidence to support such a scenario is abundant. First, the investor can almost taste victory because the VIX traded as high as 29.22 on February 5, 2010, which is well above the point at which he garners profits. Second, losses above and beyond the premium paid to initiate the trade seem unlikely because the Index failed to rise above 30 since early November of last year. The resistance of the volatility index at the 30-level persisted despite the drop in global markets after China waved the fear-flag by announcing plans to rein in its country’s economic growth at the end of January. Additionally, angst regarding Europe’s debt crisis and threats to the strength of the Euro were also unable to boost the VIX up above 30. The ratio call spread described above looks to be a relatively cheap way to profit from another bout of market turmoil or jump in investor uncertainty ahead of May expiration. We note that the index must rally at least 43% from its current level before the investor breaks even on the transaction at 27.60.
JPM - JPMorgan Chase & Co. – The banking institution’s shares surrendered intraday gains of about 1% over yesterday’s close and are…
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Gold-Bull Buys Call Spread on Newmont Mining Corp.
by Andrew Wilkinson - March 2nd, 2010 4:15 pm
Today’s tickers: NEM, EWZ, ZION, JCP, PCX, TSL, NTRI, TIVO, SQNM & KR
NEM - Newmont Mining Corp. – Shares of the gold mining company are up 2.90% to $51.74 this afternoon as gold stocks across the board rallied along with the price of the previous metal. Newmont’s shares recovered significantly since reaching a low point for the year 2010 of $42.87 back on January 29, 2010. The current price per NEM share of $51.74 represents an impressive 20.65% rally over its January low of $42.87. One options trader populating our screens today expects the good times at Newmont Mining to continue through March expiration. The investor purchased a debit call spread by picking up 5,000 calls at the March $55 strike for a premium of $0.52 apiece, marked against the sale of 5,000 calls at the higher March $57.5 strike for $0.17 each. The net cost of the transaction amounts to $0.36 per contract. The trader is prepared to pocket maximum potential profits of $2.14 per contract should Newmont’s shares rally another 11.15% to $57.50 by expiration day. Shares of the underlying stock must increase at least 7% from the current price in order for the call-spreader to breakeven on the trade at $55.36 per share.
EWZ - iShares MSCI Brazil Index ETF – Bearish options positioning on the Brazil exchange-traded fund, which generally reflects the price and yield performance of securities in the Brazilian market as measured by the MSCI Brazil index, indicates one investor is bracing for a pull back in the price of the underlying shares by April expiration. Shares of the underlying fund are trading 1.85% higher to $70.97 with approximately forty-five minutes remaining in the session. The trader sold 10,000 calls at the April $72 strike for a premium of $2.55 apiece in order to partially offset the cost of purchasing 10,000 put options at the lower April $70 strike for $2.73 each. The investor paid a net premium of $0.18 per contract for the bearish risk reversal transaction. The pessimistic play yields profits to the trader if shares of the EWZ trade beneath the breakeven price of $69.82 ahead of expiration in April. We note that shares traded as low as $62.79 on February 8, 2010, and failed to rally above $70.00 until the current session’s breakout.
ZION - Zions Bancorp. – A bullish options player celebrated the 2.80% rally in ZION’s share price to $18.81 today by raking…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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