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Qualcomm – Rally in sight, but not just yet

Today’s tickers: QCOM, GT, IVN, AMGN, C, GFI, HMY, SQNM & GE

QCOM – Qualcomm Inc. – Things might be looking better for Qualcomm – but not just yet according to one large option trade that went through earlier today. An investor sought protection in the April contract for fear that shares would be below $35.00 when the contract expires and turned the cost of the premium into a credit by selling January 2010 expiration puts at the same strike. The strategy assumes that the shares will not break through the strike price as the second quarter begins, in which case the investor gets paid out for every penny below $35.00 the share are at that time. But ahead the investor’s core assumption is that shares will shift ahead of $35.00 when next year begins, rendering the sold put options worthless. Today Qualcomm is trading a shade higher at $33.75.

GT – The Goodyear Tire & Rubber Company – Shares of the manufacturer of tires and rubber products have fallen by 5% to $4.57 today. Perhaps the continued decline stems from the downgrade GT received on Monday to ‘underweight’ from ‘hold’ by a KeyBanc analyst, who cited challenges such as global sales declines, and rising costs related to pension and raw materials. Despite the downgrade and today’s decline in share price, one investor established a bullish play on the stock. At the April 7.5 strike price, 10,000 calls were purchased for 10 cents each. Should there by a rally in shares before expiration, this trader will see premiums grow richer at the 7.5 strike, and could then potentially sell the calls to profit. There is a delta of 0.13 on the trade, thus there is a 13% chance that these calls will land in-the-money by April. The current share price would need to experience an increase of 66% in order to surpass the breakeven point on the trade located at $7.60. Whether the shares can breach the breakeven point or not, this investor can still capitalize on today’s position with even a slight rally in shares by selling premium.

IVN – Ivanhoe Mines Limited – The international mineral exploration and development company’s shares have rallied by 3% to stand at $4.59. IVN caught our attention when it edged onto our ‘hot by options volume’ market scanner. Calls were in demand in the June contract, where over 12,300 calls were purchased for 50 cents at the June 7.5 strike price. An additional 1,800 just out-of-the-money calls were also scooped up at the June 5.0 strike for 1.05 apiece. Perhaps these investors are looking for upside on Ivanhoe despite this week’s decline in the price of metals. Given that the calls were bought in June, it seems that traders expect the price of metals to increase, and subsequently also expect the share price of IVN to rally further albeit at a gradual rate.

AMGN – Amgen Inc – Shares took the hit yesterday as Democrat budget proposals threatened Amgen’s future revenues thanks to likely increased competition of generic drugs. On Wednesday Amgen investors could have sold their shares for $57.00 apiece while today the price has rung up a low at $49.66. Our market scanners have brought to our attention an interesting risk reversal trade using the January 2010 contract in which an investor purchased 5,000 put options at the 50 strike for 7.90 while simultaneously selling 60 strike calls at 4.60, helping reduce the breakeven to $46.70 in the event that a changing political climate burdens the company’s prospects. The risk is a breach of the ceiling at $60.00 in the event that this investor doesn’t own the stock already.

C – Citigroup, Inc. – Implied volatility has surged up to 211% due to investor anxiety and uncertainty over the possibility that the U.S. government may become the largest shareholder in the company with a 36% stake. Shares have plummeted by over 33% to $1.64, and investors have been trading options at a frenzied pace since the opening bell sounded. The heaviest volume appeared at the 5.0 strike price in the June contract where a combined 290,000 put and call options traded by noon-time. It appears to us that the trend is largely put buying and call selling. We haven’t quite figured out why this trade makes sense and we’re unsure of what, if any the stock component is here. What’s for sure is that the volume on this trade is mammoth.

GFI – Gold Fields Ltd. ADR – Shares of the South African mining company have slipped over 2% to $10.05, perhaps due to the decline in the price of gold from its peak at this week of $1,006.90, to the current price at $936.00. One options trade caught our attention when GFI popped up on our ‘hot by options volume’ market scanner. An investor purchased over 9,600 calls at the 17.5 strike price in the January 2010 contract for 1.00 apiece. Perhaps this investor is looking beyond the pullback in the price of gold and is seeking upside in the stock, expecting shares to rally by 74% by next year. In order to profit on today’s purchase, shares would need to breach the effective breakeven location at $18.50.

HMY – Harmony Gold Mining Company Limited ADR – Like other gold mining companies today, Harmony has seen its shares decline by nearly 3% to $12.06. The South African miners are currently the third most productive in terms of gold output from the country. One investor sold over 7,400 puts for a premium of just 2 cents apiece at the May 2.5 strike price, and at the same time purchased 2,200 calls at the May 15.0 strike price for 70 cents each. Given the open interest of 50,000 on the puts, it is possible that this trader is closing an existing position and taking in the 2 cent premium as downside protection is currently unnecessary at that low strike price. Or the put sale could be a vehicle by which to partially fund the purchase of the calls, which yield a breakeven share price of $15.70. In order to profit by expiration in May shares of HMY would need to rally by 30%.

SQNM – Sequenom Inc. – Shares are being dragged lower by a negative undertone to the healthcare and biotech markets, but one investor appears to have built a rather bullish long term spread on shares of this genetic and molecular diagnostic company perhaps on the view that more government spending rather than less will ultimately be forthcoming for research and development. With shares trading down 2.2% at $14.71, an investor appears to have placed a bull call spread using January 2011 expiration to buy the 20 strike and sell the 30 strike at a net cost of 2.75 on 19,000 contracts. If the shares do rally the investor would start to make money at a share price of $22.75 and would make full gains of 7.25 per contract if the stock exceeds its established 52-week high of $29.14 and moves to $30.00 and beyond.

GE – General Electric Company – Shares of GE have continued to decline, and have fallen over 6% to $8.53. Two trades appeared to go through simultaneously, which we found of interest. At the March 7.5 strike price, 10,000 puts were purchased for 52 cents apiece, while further down in the April contract, 10,000 calls were sold at the 10 strike for a premium of 67 cents each. The net credit to the trader, assuming these are tied at the hip, amounts to 15 cents on the trade. This investor may be seeking further downside protection if he is long the stock. The calls may be an exit strategy should shares rally through $10 by April, in which case the investor’s underlying stock would be called away. Whether the trader is long the stock or not, the call sales do serve as a way to fund the put purchase and take a 15 cent credit on the trade. Implied volatility on GE has increased today from 100% to 110%.


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