Option Trader Prescribes Bullish Risk Reversal on CVS

by Andrew Wilkinson - November 19th, 2009 5:43 pm

Today’s tickers: CVS, LIZ, ITMN, MA, V, RF, KG, HW, WSM, AEP & NTAP

CVS - CVS Caremark Corp. – Shares of the pharmacy retail chain are up 1.5% to $31.11 perhaps due, in part, to the ‘buy’ rating it received at UBS today. Optimistic options activity took place in the December contract as one investor initiated a bullish risk reversal. It appears the trader sold 4,400 puts at the December 31 strike for an average premium of 94 cents apiece in order to finance the purchase of the same number of calls at the higher December 32 strike for 63 cents each. The investor pockets a 31 cent credit on the trade, which he retains in full as long as shares remain above $31.00 through expiration. Additional profits accumulate if CVS’s shares rally above $32.00.

LIZ - Liz Claiborne, Inc. – A 15,000-lot covered call in the January 2011 contract on Liz Claiborne today suggests shares are likely to recover, albeit at a glacial pace. Shares of the apparel and accessories retailer suffered a 5% decline to $4.55 during the trading session. One investor effectively purchased shares of the underlying stock for $3.30 apiece by selling 15,000 calls at the January 2011 5.0 strike for a premium of 1.25 each. Thus, the trader stands ready to accrue gains of 51% if shares of LIZ appreciate to $5.00 by expiration. The long-term positioning of the covered call play provides several advantages to the investor. One advantage is that the call options do not expire for another 13 months, which leaves ample time for LIZ’s shares to appreciate up to the strike price of $5.00. The 15,000-lot call transaction represents nearly 50% of the total existing open interest on LIZ of 31,502 contracts. Note that shares last traded above $5.00 yesterday at approximately 10:35 am (EDT).

ITMN - InterMune, Inc. – A bull call spread on the biotechnology company today suggests shares could rally significantly by expiration in April 2010. Bullish options activity on the stock belies the more than 3% decline in ITMN’s shares during the session to $10.94. The call spread involved the purchase of 3,750 calls at the April 15 strike for an average premium of 2.25 each, marked against the sale of the same number of calls at the higher April 25 strike for 75 cents apiece. The net cost of the transaction amounts to 1.50 per contract. The optimistic investor is positioned…

Tags: AEP, CVS, HW, ITMN, KG, LIZ, MA, NTAP, RF, V, WSM

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Chinese ETF Options Hint of More Nerves Ahead

by Andrew Wilkinson - August 14th, 2009 5:04 pm

Today’s tickers: FXI, NUE, BBT & NTAP

FXI – Bearish options activity was observed on the China exchange-traded fund this morning amid a nearly 2.5% decline in shares to $40.78. Investors expecting further declines initiated bearish reversal plays on the ETF in the September contract. Approximately 10,000 calls were shed at the September 44 strike price for 80 cents apiece in order to partially finance the purchase of 10,000 put options at the now in-the-money September 41 strike for an average premium of 1.96 each. The net cost of the reversal amounts to 1.16. Thus, profits will begin to amass to the downside if shares fall beneath the breakeven point at $39.84 by expiration. Additional plain-vanilla put buying in the amount of 5,000 lots was seen at the September 41 strike for 1.96 per contract. Investors who did not fund their purchase of puts by selling calls will not start to profit unless the FXI declines at least 4% from the current price through the lower breakeven point at $39.04. Increase investor uncertainty regarding the future price of the fund is reflected by the 11% rise in option implied volatility today to a high of 41%. – iShares FTSE/Xinhua China 25 Index Fund

NUE – The manufacturer of steel and steel products edged onto our ‘most active by options volume’ market scanner this morning after call activity was observed in the January 2010 contract. Shares of NUE have suffered a 2.5% decline to stand at $46.48. The bullish ratio call spread established by one investor suggests a recovery in the stock up to its current 52-week high of $53.46 or above by expiration. The spread involved the purchase of approximately 5,000 calls at the January 50 strike price for a premium of 3.70 apiece against the sale of 10,000 calls at the higher January 55 strike for 2.07 per contract. The trader receives a net credit on the transaction of about 44 cents and may bank additional gains if NUE rallies 8% higher to surpass the $50.00 level by expiration. Maximum potential profits of 5.00 (excluding the credit received) will be attained by the investor if shares surged to $55.00. The risk undertaken by the trader in this situation is that he is holding a short position in 5,000 calls. Potentially unlimited losses would begin to amass on the call options if the stock blows through the breakeven point to the upside at $60.44 by…

Tags: BBT, FXI, NTAP, NUE

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Gold and silver ETFs shine as dollar declines

by Andrew Wilkinson - May 22nd, 2009 4:16 pm

Today’s tickers: GLD, SLV, SHLD, NTAP & DOW

GLD– Shares of the gold ETF have climbed less than 1% to $94.19 amid a rise in oil and metals prices. One trade of interest on the fund was the work of an investor who is likely long shares of GLD. The trader sold 5,000 calls at the July 100 strike price for a premium of 2.15 apiece and also sold 10,000 calls at the higher July 107 strike for a dollar each. Perhaps the transactions represent covered calls. If this is the case, the investor enjoys the premiums granted for writing the options and establishes effective exit positions. About one-third of his shares will be called away from him at expiration if the July 100 calls land in-the-money by expiration with the remaining shares called from him in the event that the July 107 calls land in-the-money. The Gold ETF would need to rally by as much as 14% in order for the July 107 calls to expire in-the-money. – SPDR Gold Trust ETF

SLV– The silver ETF took up residence on our ‘most active by options volume’ market scanner this morning after investors targeted the January 2010 contract looking for further bullish movement in the fund. Shares of the SLV are currently higher by more than 1% to $14.53. Yesterday we observed a trader who is expecting either a silver-bonanza or a silver-bust as he established a 20,000 lot bought-strangle in the same January 2010 contract for a net cost of 1.32. In contrast, today’s traders have positioned themselves to benefit solely from gains in the silver-sector. At the January 17 strike price more than 5,200 calls were purchased for an average premium of 1.13 each. These optimists will begin to see profits if shares rally by approximately 25% from the current price to the breakeven point at $18.13 by expiration in eight months. – iShares Silver Trust ETF

SHLD– Shares of the largest U.S. department-store chain have surged by more than 16.5% to $58.50 after reporting unexpected first-quarter profits. Earnings of 38 cents per share must have come as quite a surprise to analysts who had previously forecast a loss of 87 cents for the firm. Profits for the quarter were aided by reductions in advertising combined with cuts in payroll expenses. Despite the bullish news, investors could not shake the overall picture of SHLD which is far less rosy. Revenue fell more…

Tags: DOW, GLD, NTAP, SHLD, SLV

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NetApp option implied volatility jumps as call demand surfaces

by Andrew Wilkinson - April 8th, 2009 5:01 pm

Today’s tickers: NTAP, AXP, MOS, SEPR, GM, JNPR, ROK, VIX, TGT & TCK

NTAP NetApp, Inc. – Option implied volatility has skyrocketed from yesterday’s value of 56% to the current reading of 74% as merger fever has set its sights on the company. Shares have jumped more than 10% to $16.47 today, attracting many a bullish option trader hungry for some hot call action. Option volume has risen above 103,000 contracts on the day, with 3.65 calls traded for each put in action. The April 17.5 strike price saw some 10,700 calls purchased for 32 cents each while calls as high up as the April 22.5 strike were coveted for 5 cents per contract. More volume was seen building on the call side in the May contract with 9,100 calls bought at the May 17.5 strike for an average premium of 79 cents. Again, the most bullish traders selected the May 22.5 strike and picked up 3,700 calls for 16 cents apiece. Shares would need to continue to rally by 38% in order for the 22.5 strikes to land in-the-money by expiration. When looking for downside protection, investors clustered at the April 16 strike price and scooped up 7,400 puts at an average premium of 58 cents per contract.

AXP American Express Company – The global payments and travel company has enjoyed a 3.5% share price rally to $15.54 after it received an upgrade from Citigroup yesterday following Goldman Sachs’s decision to remove AXP from its ‘conviction sell’ list on Friday. Investor bullishness was apparent at the April 17 strike price where about 5,200 calls were purchased for an average of 20 cents apiece. Other optimists were observed picking up 1,000 calls at the April 19 strike price at a price of 5 cents per option contract. Volatility on the stock is on the rise, up from the low for the day of 82% to the current value of 89%.

MOS The Mosaic Company – The producer of potash and animal feed has made a comeback since this morning with its shares currently up 5% to $45.15 after having fallen 4% in pre-market trading. Shares started down due to disappointing third-quarter results, which revealed that profits declined dramatically to just 13 cents a share as compared with $1.17 per share one year ago. The company’s CEO, James T. Prokopanko, is looking for Mosaic’s financials to improve in the fourth quarter. Perhaps the optimism expressed by the…

Tags: AXP, GM, JNPR, MOS, NTAP, ROK, SEPR, TCK, TGT, VIX

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