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Saturday, April 20, 2024

American Express bulls play calendar spread

Today’s tickers: AXP, JNPR, GE, XLF, JPM, WFC, DNA, COP & XOM

AXP – American Express Company – Shares of the global payments and travel company have rallied by 7% to $11.83, an upward move which is likely due to the news that AXP’s fourth quarter earnings were favorably revised yesterday because of an accounting error. Adjustments boosted earnings per share to 21 cents from the previously recorded 15 cents for the quarter, and net income for the year amounted to $2.7 billion up from $2.63 billion originally. Option traders welcomed the unexpected news and established bullish positions on AXP today. One indication of bullishness was the rash of put selling in the March contract. March 10 and 12.5 strikes were heavily sold. Juxtaposed with the near-term bullishness observed is one far-term optimist on AXP, who sees shares doubling by January 2011. In the January 2010 contract at the 20 strike price 10,000 calls were sold for 95 cents each. Using the 20 strike price in January 2011, 10,000 calls were purchased for 1.95 apiece. For this calendar spread to come good, shares would need to nearly double from the current level. We have to think that this spread is already or will be coupled with underlying stock with the risk that the investor is left deficient of shares in the event of a break through $20.00 ahead of expiration.

JNPR – Juniper Networks Inc. – Shares have remained relatively flat today, having fallen just 0.15% to $13.46. The assured and secure Internet Protocol networking solutions company caught our attention due to its high call-to-put ratio which is currently favoring calls 11 times to every single put in play. But, the majority of the calls traded today were sold, indicated an overall bearish picture of the stock. At the March 13 strike price, 3,300 in-the-money calls were sold for 88 cents apiece – perhaps profit taking by investors exiting existing positions at that strike. At the March 14 strike 3,500 calls were shed for 42 cents apiece. The same trend was observed in the April contract where the April 12 strike price had 4,000 calls sold for 1.96, the 13 strike price saw the sale of over 5,100 calls for a premium of 1.28, and the 14 strike had more than 3,600 calls sold for 80 cents per contract. Implied volatility has come off since yesterday reading of 60% to today’s value of 51%.

GE – General Electric – CEO Jeff Immelt, who once blasted investors for overlooking shares in the industrial and financial powerhouse is today the victim of a crisis of capitalism and probably wishes that he had a grave to turn in. Investors are having a hard time feeling the floorboards beneath the share price, which has touched $6.90 today. That’s the lowest in 15 years. Implied volatility on options on the stock reached its highest level ever today at 140% indicating that investors are stepping up their pessimistic outlook for the company’s share price. It appears that there is a large buyer of June expiration put options at the 2.5 strike where a 30 cent premium has been paid and volume has surged to 53,000 contracts.

XLF – Financial Select Sector SPDR – Shares of the financial index failed to maintain a positive start leaving the ambitions of one financial sector bull floundering. Shares in the XLF stand almost 4% easier today at $6.85, coincidentally a 52-week low. In early trading a large volume call spread was established in the June contract that lifted the call-to-put ratio on the XLF to more than 10-to-1. At the June 10 strike price, 66,400 calls were purchased for 43 cents each, while at the June 12 strike, 66,400 calls were sold for 17 cents per contract. The net cost to this bullish investor amounts to 26 cents for the spread, and yields a maximum possible profit of 1.74 if shares can manage to rally to $12 by expiration in just 4 months time. If shares can increase higher than the breakeven share price located at $10.26 then this investor will begin to amass profits all the way up to the $12 strike price. Shares would need to surge upward by at least 43% in order to breach the breakeven point. That spread has buckled to 21 cents as the XLF reversed course.

JPM – JPMorgan Chase & Co. – The financial services firm also saw early optimism fade as the 1% rally in its share turned into a 2% decline to $20.76. That followed reports that the company managed to produce approximately $5 billion in profits despite the worst year in Wall Street’s history. Option traders wasted no time feasting upon the positive mumblings from JPM, but one bullish trade in particular caught our eye. A call spread was established in the June contract where one investor purchased 10,000 calls at the June 25 strike price for 2.87 each. At the June 35 strike, 10,000 calls were sold for a premium of 48 cents per contract. Thus, the net cost amounts to 2.39 for the spread and yields a maximum possible profit of 7.61 if shares can rally to $35 by expiration. This investor will begin to amass profits if shares can surpass the breakeven share price located at $27.39. Losses would be incurred if shares failed to rise above the lower strike price at $25 given the failure of calls to land in-the-money leaving the investor nursing the maximum loss of 2.39 on the trade. From today’s current price, shares will need to rise by at least 32% in order for this bullish investor to breakeven at $27.39 come expiration in June.

WFC – Wells Fargo & Company – Shares of the financial services company have fallen by about 3% to $10.52. In line with the ever-present mixture of uncertainty and pessimism surrounding the banking sector, one option trader picked up over 51,000 in-the-money puts at the April 12.5 strike price at an average cost of 3.35 apiece. Perhaps this investor is long the stock and is seeking protection through to next month’s expiration. Or it could be the case that the trader believes the premium at the 12.5 strike will grow richer in the near future given declines in the share price, and thus he is waiting to flip the puts at a profit. It is unclear as to which scenario fits this trade, but either way the hefty purchase was certainly noteworthy.

DNA – Genentech – Biotech investors are having their party spoilt by broader market weakness, but it looks like an option investor continues to see further upside potential for Rituxan and Avastin manufacturer, Genentech. With shares ahead by 1% today at $82.36, a trader has placed a combination using call options expiring in June to wager its shares will rotate towards $90.00. The combination appears to be a long butterfly in which 10,000 calls were bought at the 80 and 100 strikes, while 20,000 calls were simultaneously sold at the central 90 strike price. The investor would benefit most if shares were at the mid-strike in June when the written calls would expire would expire worthless, while the lower long strike would be worth 10.0 points. The combination was placed at a net cost to the investor of 3.0, which means the bracket within which he makes money stands at $83.00 and $97.00.

COP – ConocoPhillips – The international integrated energy company’s shares have rallied by about 1% to $35.37. COP edged onto our ‘most active by options volume’ market scanner after nearly 13,000 calls were purchased at the April 40 strike price at an average cost of 1.36 per contract. It appears that investors are looking for COP to rebound by expiration next month, as shares teeter just 32 cents off the 52-week low of $35.05. From about November of 2008 to February of 2009 shares remained between $45 and $55 after COP’s initial plummet from such great heights at about $95 in October of 2008. The stagnation seen between November and February seemed to resist broader market declines. However, since COP went ex-dividend on February 19, shares have declined by more than 10 dollars. Perhaps the bullish call buying observed today reflects investor optimism that COP can return to the $45-$55 range in the near future, and are therefore securing rights at the April $40 strike price. In order to breakeven on today’s purchase, shares will need to rise by about 17% to $41.36, at which point profits will begin to amass.

XOM – Exxon Mobil Corporation – The crude oil, natural gas, and petroleum products company has slipped slightly by less than 1% today to stand at $64.75. We noticed optimism on XOM as in ConocoPhillips today by one investor in the January 2010 contract. A call spread was established by purchasing 2,000 calls at the January 65 strike price for 10.05 apiece, and by selling 2,000 calls at the January 85 strike for 3.00 per contract. The spread cost the investor 7.05 and yields a breakeven share price of $72.05 and maximum possible profits of 12.95 if shares can rally to the upper strike price at $85 at expiration. The calls at the lower strike are nearly in-the-money given today’s share price, but in order to capture the maximum profits available, shares would need to surge upwards by about 31% by expiration. In order to merely breakeven, shares must rise by 11% by next year.

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