4 C
New York
Monday, February 6, 2023


Hewlett Packard bull call spread at large

Today’s tickers: HPQ, FXI, WFC, UNP, MGM, LVS, INFY, VIX, TXT & F

HPQ Hewlett-Packard Company – The world’s largest technology company has seen its shares decline by more than 1.5% to stand at $33.53. Despite the dip in shares today, HPQ received very good news regarding EDS, an HP company. EDS, a leading IT outsourcing firm and a global technology services provider, was selected by the U.S. General Services Administration (GSA) to “provide information technology (IT) solutions for all federal government agencies under the GSA Alliant contract”. EDS will be vying for task orders along with 59 other companies under the $50 billion contract. In line with the bullish news, though not necessarily inspired by it, one investor established a bull call spread in the January 2010 contract. At the January 40 strike price 10,000 calls were purchased for 2.80 apiece and spread against the sale of 10,000 calls at the January 50 strike for a premium of 75 cents each. The net cost of the call spread amounts to 2.05 and yields a maximum potential profit of 7.95 if shares can rally all the way up to $50.00 by expiration next year. In order to achieve such a rise shares would need to jump by 49% over the next nine months. Shares of HPQ have not traded above $50.00 since December 31, 2007.

FXI iShares FTSE/Xinhua China 25 Index Fund – The Chinese ETF appeared on our ‘most active by options volume’ market scanner this afternoon amid a 1% dip in shares to $30.55. Despite the fact that shares are off slightly, one trader initiated a bullish calendar spread. This optimistic investor sold 8,500 calls at the May 32 strike price for an average premium of 1.60 and repurchased 8,500 calls at the January 2010 40 strike price for 1.70 each. The trader receives a credit of 10 cents for rolling his position forward by about 8 months while bearing the risk that shares rise above $32.00 as he is short 8,500 calls at the May 32 strike. This trade implies that the investor does not see shares rallying above $32.00 by expiration in May, but does want to see shares rise by 31% to break through the January 40 strike by January’s expiration. Elsewhere, option traders purchased 15,000 puts at the May 25 strike price for 60 cents apiece along with some 10,000 put options which traded to the middle of the market at the August 25 strike price for 2.00 each. When all of these trades are viewed together it appears that there is some consensus amongst investors that shares are likely to decline in the near- to medium-term. The calendar spread also looks for a significant rally at the start of 2010.

WFC Wells Fargo & Co. – Although shares have slipped more than 5.5% to $15.42 today, Wells Fargo caught our eye due to some optimistic trades established in the May contract. One investor appears to have sold 20,000 puts at the May 13 strike price for a premium of 1.70 per contract indicating that he does not see shares falling through the breakeven point at $11.30 as he would begin to incur losses at any price below that point. The full 1.70 premium will be retained if shares remain above $13.00 by expiration as the 20,000 put options that this investor is now short of would land out-of-the-money. The other trade of interest was a sold straddle enacted at the May 20 strike price by the sale of 7,000 puts for a premium of 5.50 each and the sale of 7,000 calls for 1.00 apiece. The gross premium enjoyed on the trade amounts to 6.50 and will remain in the investor’s pocket if shares can settle to $20.00 by expiration. Should shares fail to land at the straddled May 20 strike price, the trader will experience losses beginning at $26.50 on the upside and at $13.50 on the downside.

UNP Union Pacific Corporation – Shares of the rail transportation services company have declined by more than 5% to $43.61 after having experienced a rally of 9.9% this past Thursday along with similar gains experienced by other rail companies. One investor was seen looking for volatility to increase on the stock as they purchased a strangle in the May contract. At the May 43 strike price 5,000 puts were bought for 3.70 each along with the purchase of 5,000 calls at the May 44 strike for 3.60 apiece. The net cost of the strangle amounts to 7.30 and yields effective breakeven points at $35.70 on the downside and at $51.30 on the upside. This investor will begin to make money if shares can swing outside of the breakeven points. This would require either a rally of 17% or a decline in shares of 18%. Option implied volatility is currently up from Friday’s 61% reading to 68%.

MGM MGM Mirage, Inc. – The gaming and casino resort operations company has seen its shares surge by more than 37% to $6.37 amid news that MGM is planning to sell two of its non-Las Vegas properties in order to raise capital. Call buying in the April and May contracts reflected today’s share price rally, but further along in the June and September contracts options action was decidedly bearish. Investors looking for further upside gains looked to the April 7.5 strike price and purchased 4,600 calls at an average price of 51 cents each. Similar optimism spread to the May 7.5 strike where about 2,000 calls were scooped up for 1.07 apiece. Shares would need to continue to rally by 17% for the 7.5 strike calls to land in-the-money by expiration. Optimism on MGM gave way to pessimism as investors looking for shares to decline established put spreads. At the June 5.0 strike price 3,000 puts were bought for 1.84 each and spread against the sale of 3,000 puts at the June 2.5 strike for 51 cents apiece. The net cost to the investor amounts to 1.33 and yields a maximum possible profit of 1.17 if shares fall to $2.50 by expiration. A similar put spread was initiated at the September 5.0 strike price with the purchase of 2,000 puts for 2.59 per contract against the sale of 2,000 puts at the September 2.5 strike for 91 cents. The net cost of this bearish play amounts to 1.68 and yields a smaller maximum profit of 82 cents if shares decline to $2.50 by expiration. Option implied volatility has risen from 207% at the start of the trading day to the current reading at 234%.

LVS Las Vegas Sands Corp. – Piggy-backing on MGM’s gains, shares rose 12.5% in Las Vegas Sands as investors reacted to prospects of a better-trading environment for the sector. Option activity in LVS picked up as shares gained to $5.05 with option investors conveying mixed messages. Amid the 12,000 April calls in action today at the 5.0 strike, activity was finely balanced. At the 6.0 and 7.5 strikes investors appeared happy to write premium paying short-shrift to the view that a rally might be extended. In the June contract the action centered on the 5.0 strike calls were volume of close to 6,000 was in view. However, some 4,100 lots were clearly sold for an average premium of 1.20, but we’re unsure as to whether this means investors are stating a bearish view or simply taking profits off the table. On March 24, around 5,000 calls were purchased at this strike driving up open interest at prices between 45-70 cents. Today’s share price rise might have given option traders willing to pay a small premium at the time a decent exit today. Shares on that date closed at $3.05.

INFY Infosys Technologies Limited ADR – The information technology company has experienced a 2.5% decline in shares to $28.32. INFY appeared at the top of our ‘hot by options volume’ market scanner after one investor initiated a ratio put spread in the April contract. At the April 25 strike price 10,000 puts were sold for a premium of 50 cents apiece while 5,000 puts were purchased at the April 27.5 strike for 1.30 each. The net cost of the bearish trade amounts to 30 cents and yields a maximum potential profit of 2.20 if shares decline to $25.00 by expiration. Shares would need to fall by at least 4% from the current price in order to breach the breakeven point at $27.20, the price at which the investor begins to amass profits on the downside.

VIX CBOE Vix Index – The volatility gauge had its first close on Friday beneath 40.0 since January 28 as equity traders turned bullish. Using the stock market as a leading indicator of economic activity, the rally really gathered a head of steam making it the most powerful since the Roosevelt New Deal back in the 1930’s. The relative degree of pessimism with the Vix basing at 40.0, is one of a few signs that investors are treating the rally with skepticism. Today’s financial sector downgrade by an analyst at Calyon Securities has investors, rethinking the prospects for an economic rebound, instead mulling the likelihood of a so-called ‘rolling recession.’ The Vix reacted by raising the cost of option insurance with the index adding 3 points to 43.0, while option traders sold around 1,200 put options with a 40.0 strike at 96 cents indicating that the fear-gauge will be above this level at expiration this month. More equity bearish plays involved what appears to be a bull call spread on Vix options using the 60.0 and 90.0 strikes. An investor bought 2,300 lower strike calls at 15 cents and sold 2,300 90.0 strike calls for 2 cents, leaving a net 13 cent spread. The curious thing about this trade is that the April option contract expires in around two weeks meaning that this investor is looking for forthcoming earnings and economic data to create more gyrations for stocks and a ramp up in the Vix index. Remember that this strategy might not be taken to expiration, but would receive a boost from a sudden jolt to confidence and that the 13 cent premium could easily jump even if the index just hops in to the ‘fifties.

TXT Textron, Inc. – The multi-industry aircraft, defense, industrial, and finance company has enjoyed a more than 8% share price rally to $8.08 amid rumors that they may be acquired. While takeover chatter is unconfirmed, option traders wasted no time reacting to the bullish tidbit and were seen scooping up call options. At the now in-the-money April 7.5 strike price traders picked up more than 4,100 calls for an average of 85 cents apiece. Optimism continued at the April 9.0 strike where 6,000 calls were coveted for 33 cents each while the April 10 strike had 1,750 calls bought for 17 cents. Investors continued to pick up calls at the May 10 strike where more than 4,100 were purchased for 60 cents. The most optimistic traders bought 1,700 calls at the May 12.5 strike price for an average premium of 34 cents per contract. Shares would need to rally by 59% to $12.84 in order for super-bulls on TXT to breakeven on the purchase of May 12.5 strike call options. Defense contractor Lockheed Martin Corp. is thus far the only company that has been rumored to make an offer for Textron. Option implied volatility spiked from Friday’s reading of 116% to as high as 143% today, but currently volatility has come off a bit to stand at 135%.

F Ford Motor, Co. – Shares of the second-largest automaker have rallied significantly by 16% to $3.77 in response to the actions taken to “substantially strengthen Ford’s balance sheet.” The company has managed to remain independent of government aid by aggressively cutting costs and restructuring its debt. Ford has managed to reduce its borrowings by some $9.9 billion and hopefully will have enough liquidity to weather the current downturn. Option traders joined the assembly-line and purchased about 6,600 calls at the April 4.0 strike price for about 15 cents per contract. Investors also bought about 2,300 call options at the May 5.0 strike for 12 cents apiece. Further along, the June 4.0 strike price witnessed some 5,100 calls coveted for an average premium of 43 cents. Traders were also seen buying protective puts should the rally give way to downward movement. The June 5.0 strike had some 10,000 in-the-money puts purchased for an average of 1.95 each. The actions Ford has taken appear to be bolstering investor confidence in the company’s ability to make it through these tough times.

Notify of
Inline Feedbacks
View all comments

Stay Connected


Latest Articles

Would love your thoughts, please comment.x