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Thursday, December 1, 2022

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Analyst upgrade has investor spreading calls

Today’s tickers: TSCO, GE, FXI, DRYS, COF, WYE & PFE

TSCO – Tractor Supply Co. – The largest retail farm and ranch store chain in the U.S. received a boost from Wedbush Morgan, who raised TSCO’s target share price from $33 to $36 after earnings for 2008 for the company were reported after hours yesterday. Our ‘hot by options volume’ market scanner picked up TSCO today due to heavy call volume. One investor initiated a call spread, purchasing 5,000 calls at the April 35.0 strike for 3.30 and selling 5,000 at the April 45.0 bringing in 65cents per contract, yielding a net price of 2.65. The trade highlights the benefit of spread trading to help mitigate changes in implied volatility. This investor stands to profit from this strategy if shares reach breakeven at $37.65, and will realize a maximum gain of 7.35 per contract if shares can blow through analyst’s expectations to $45 per share. The outright purchase of lower strike calls in this case at a 58% implied reading of volatility is susceptible to a declining uncertainty should shares rise. Our IB Options Calculator (available free for download at this link) can help understand exactly how implied volatility can impact theoretical option prices.

GE – General Electric – CEO Jeffrey Immelt attempted to put speculation about the tug-of-war between dispersing dividend payments vs. maintaining their AAA credit rating to rest today. Immelt announced that GE is committed to allocating a $1.24 dividend-per-share for the year, and stated that though 2009 will likely be “extremely difficult” for many sectors of the Fairfield, CT based behemoth, he is confident in their ability to continue to persevere despite overall market turmoil. Despite feeling the strain of the credit crisis that afflicts most financial institutions, GE continues to profit from other operations boasting a solid $48billion in cash on their balance sheet. Though shares of the giant have tumbled nearly 40% since September of ’08, it appears that cost-cutting and restructuring plans, coupled with their ability to continue to reward shareholders via dividend payments, may bolster investor confidence. Option patterns all week have been bearish while today the tone is less so. The most popular option involves the February 14 strike call where volume of 22,000 has traded where the prevailing range so far is 30 to 64 cents. Some traders placed call spreads including the 16 strike and so see upside albeit limited to the $16.00 mark. More puts appear to have been sold at various February strikes. March 10 puts were also largely sold while several high strike calls were the target of buyers. In the June contract at the 14 strike a 1,500 lot straddle was sold at a 4.25 premium. The investor then expects the range for GE shares to be $9.75 to $18.25 for the first half of 2009.

FXI – iShares FTSE/Xinhua China 25 – There has been no shortage of interest in options using the Chinese ETF, whose shares are slightly better today at $24.00. We have noted both bull and bear activity in large volume over the course of the last week. Today an investor has combined a long share purchase of the underlying shares at $23.75 with the sale of 14,000 call options expiring in May at the 27 strike price. The premium received in this case is 2.43 per contract, which enhances the yield from the trade. You can look at a covered call in two ways. While the calls effectively lower the cost basis of the shares by the amount of the premium received, they also produce income even if the core position in the stock is “called-away” at expiration should shares reach the strike price. If that happens in this case the investor makes 13.7% on the stock plus the premium received. Shares could of course head lower in which case the losses could gather pace beneath an implied breakeven of $21.32.

DRYS – Dryships Inc. – Having suspended its quarterly dividend and drowned plans to acquire new vessels, it is no surprise that DRYS is taking on water faster than it can bail it out. The Greek bulk carrier’s share price has sunk 9% this morning to $9.60 and shows no sign of a quick resurgence given low freight rates and a frozen credit market. Put options were in action this morning where investors targeted the surrounding strikes. There were more puts sold at the 7.5 strike while investors bought the 10.0 strike perhaps underscoring the prospects for a possible share price floor sometime soon. Implied volatility appears comfortable at 155%, with option traders feeling that this is an appropriate reading given the negative environment. That despite the fact that shares spent much of November at a sub-$5.00 share price.

COF – Capital One Financial – Credit card issuer Capital One announced it expects losses to increase this year given the steadily increasing unemployment rate and the ravaged housing market. COF shares dipped 12.5% already today to $19.20 as investors realize that it’s not just “What’s in Your Wallet” that counts. Investors used put options to protect against further losses using the February 17.5 strike price where more than 12,700 lots were exchanged. More than half of today’s activity was sold to the bid indicating that at least some of the selling may have been profit taking given the established 9,000 lots of open interest at that strike. Investors are faced with a 1.65 premium at the strike implying a break even should shares slide beneath $15.85. Implied volatility after earnings was down by around one quarter at 106%.

WYE – Wyeth – Drug maker Wyeth has seen their shares rise in value today by 8% to $42.17 amid rumors of a takeover by drug giant Pfizer. The deal has an apparent price tag of $60 billion, which we estimate to be closer to $45 per share and hence the 8% share price surge to $42.00 today. The 42.5 and 45 lines were the clear focus of option bulls were large amounts of calls were bought. In the front month the open interest reading of over 3,000 lots at the 45 strike was easily surpassed by today’s volume at the strike where 14,000 were traded at around 1.00. An investor buying these today would need shares to breach $46.00 at expiration before making money. We’re wondering whether there might be a large degree of buy-writes in play with investors taking in the premium here and simultaneously buying stock. Implied volatility remains 47% today.

PFE – Pfizer Inc. – In response to the news shares in U.S. pharmaceutical giant Pfizer’s have slipped 2% today to $16.83. Purchasing Wyeth would create an enormous U.S. pharmaceutical powerhouse of well known drugs as well as synergizing R&D and other operating and fixed expenses which tend to winnow away at profit margins. Although its shares were down investors took advantage of cheaper call premiums to establish bull positions in the February 19 line at 5 cents where 8,200 lots were at stake. In the June contract at the same strike buyers paid 54 cents for 2,500 contracts and paid 32 cents to secure buying rights at the 20 strike. The September 20 strike also saw 5,210 lots trade as an investor established a fresh position at 68 cents.

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