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Hartford covered call writer strikes gold, albeit rather early in the game

Today’s tickers: HIG, ORCL, LDK, AXP, MS, JNPR, RIO & BWA

HIG – The Hartford Financial Services Group, Inc. – The roof is on fire at HIG after shares sky-rocketed up by over 23.5% to $8.25. But, one investor appears to have jumped the gun today by initiating the sale of over 17,000 calls at the January 2011 7.5 strike price for a premium of 3.90 at which point the tinder was aflame, but the roaring blaze was yet to come. We believe the sale was part of a covered call in which the underlying shares were purchased simultaneously. The investor appears to have been selling volatility which was 130.3% at the 7.5 strike when shares were at $6.65. It is likely that he was happy with the 3.90 in premium coupled with the hope inherent in this trade of a 13% rally in shares to $7.50. The investor was likely thinking that if shares rose to meet the strike price, the underlying stock would likely get called away from him at expiration. However, in hindsight it seems the timing of his trade was poor as premiums have since soared to 5.20 and shares have exited the building (so to speak).

ORCL – Oracle Corporation – Shares of the software and services company have increased by roughly 3% to stand at $16.35. ORCL caught our attention due to a number of noteworthy options trades that played out today. A sold strangle was initiated in April by selling 7,500 puts at the 14 strike price for a premium of 50 cents, and by selling 7,500 calls at the April 18 strike for a premium of 53 cents each. The gross premium pocketed by this investor amounts to 1.03 on the trade. Thus, it appears that this trader does not see much by way of recovery for Oracle in the next couple of months, rather seeks experience maximum retention of the 1.03 premium if shares remain within the borders set by the April strikes selected. If shares were to swing outside the strikes, this investor would experience losses beginning at $12.97 on the downside and at $19.03 on the upside. Looking past April showers, a number of bulls were observed scooping up calls in June. Purchases were made at a number of strikes and settled as far up as the June 22 strike price, where 6,000 calls were bought for 15 cents apiece. The calls yield profits at a breakeven share price of $22.15, which is a mere 1.47 off the 52-week high for the stock. But, not all options trades seen today on ORCL were bullish. Bear shout-outs to the put purchasers: 5,000 puts were snapped up at the June 15 strike price for 1.22, while at the September 10 strike price, 8,675 puts were bought for 45 cents each.

LDK – LDK Solar Co., Ltd – The manufacturer of multicrystalline solar wafers experienced a 7% rally in share price today to $5.90. Despite the incline in shares, one option trader appears to have established a ratio put spread in the January 2010 contract. At the January 2.5 strike price, over 25,000 puts were purchased for about 78 cents apiece, while at the January 5.0 strike, 12,500 puts were sold for an average premium of 2.12. Thus, the net credit to the trader amounts to 56 cents. The credit from the spread is safe in the investor’s piggy-bank as long as shares remain above the breakeven share price of $4.44 by expiration. Should shares decline below the breakeven point it’s bye-bye to the pink ceramic pig, although the investor’s losses are capped at 1.94 per contract. Implied volatility on LDK has increased by over 35% in the past week following weaker revenue guidance from management.

AXP – American Express – According to confirmed reports in the media, AmEx is offering some clients $300 to pay down their credit card balance and close their accounts with the company. Investors are in no mood for business model rethinks that lead to lower revenues in this climate and have sold shares in the company 1.9% to $11.92 creating a fresh 52 week low for the share price. Option traders were quick to the party and sold calls expiring in March at the 12.5 and 15.0 strikes around 5,000 times earlier. In the April contract investors appeared to have sold puts at the 10.0 and 7.5 strikes but likely tied to stock according to our reading of the tape. In that case the investor shorts the underlying and writes put premium to enhance the yield on the position and also offers an exit strategy should the share price reach the strikes at expiration in which case the investor has the short position reversed when shares are put back to him.

MS – Morgan Stanley – Option traders spend a meager 30 cent premium to secure rights to purchase shares in Morgan Stanley at a fixed $26.00 ahead of March expiration. Today MS shares are 8.2% ahead at $20.35 as investors revisit the evergreen question of whether or not banking stocks look attractive yet. There was also a willingness to sell premium by writing puts at the March 20 strike for around 2.10, which helps explain the slide in options implied volatility today to 104% from 114% on Monday. Sellers here would lose money should MS fall beneath $17.90 at expiration. Investors are taking a bullish perspective on the stock following a Charlie Rose television interview with CEO, John Mack in which he noted that the company has deleveraged from around $31 to $12 since the collapse of Lehman Brothers in September. Mr. Mack also noted that his company will likely suffer from a curtailment of its activities after it meets with regulators over coming months.

JNPR – Juniper Networks, Inc. – Shares of the networking solutions company have climbed less than one percent today to $14.37, edging away from the 52-week low on the stock of $13.29. The CEO of JNPR noted today that while conditions remain challenging in the near-future, the company plans to cut costs where possible. Some option investors appear to be throwing in the towel on any further weakness in the share price in the near-term at least. A spate of in-the-money put selling caught our attention after nearly 4,500 puts were sold for an average premium of 1.99 each at the March 16 strike. Additionally, at the March 17 strike price about 2,600 puts were shed for a premium of 2.80 per contract. Perhaps this trend indicates that investors feel that the downside for JNPR has run its course given the move away from the 52-week low, and are therefore counting profits as they exit profitable positions. Perhaps these cost-cutting measures will lift shares and affirm today’s put sales.

RIO – Companhia Vale do Rio Doce ADS – The metals and mining company has seen shares rally by 4% to $12.45 today. RIO popped up on our ‘most active by options volume’ market scanner after a large-volume put spread was established in the March contract. At the March 10 strike price, 37,500 puts were purchased for 44 cents each, while at the March 12 strike, 37,500 puts were sold for a premium of 1.12 apiece. The investor has thus gained a net credit of 68 cents on the trade. By writing a put spread the investor hopes that the rebound is for real and hopes shares will stay north of $12.00 at least through expiration. By selling the 12’s and buying the 10’s, this trader is limiting risk on the downside. Should shares decline all the way to the lower strike at 10 by expiration, the strategy employed cuts losses to a maximum of 1.32.

BWA – BorgWarner, Inc. – The company specializes in products that help improve vehicle performance, fuel efficiency, air quality, and vehicle stability and has seen shares rise by a modest 1.5% to $17.20 today. BorgWarner hopped to the top of our ‘hot by options volume’ market scanner courtesy of a sold strangle in the April contract. At the April 15 strike price, 5,000 out-of-the-money puts were sold for a premium of 1.12, while at the April 20 strike, 5,000 out-of-the-money calls were sold for a premium of about 80 cents apiece. The gross premium enjoyed by this investor amounts to 1.92 on the trade. It would appear that part of the impetus for this trade is the fall in implied volatility from 79% to 75% today. Additionally, this trader wisely selected the 15 strike price, which also happens to approximate the 52-week low on the stock of $14.88. Perhaps this investor feels that there will be no meaningful recovery of shares in the next couple of months, but that shares have also reached a low for now. The full 1.92 in premium is retained if shares remain within the designated strike prices in April. Breakevens are $13.08 to the downside and $21.92 to the upside.

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