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Monday, May 20, 2024

Sun bulls still looking for better news using option spreads

Today’s tickers: JAVA, APOL, EWZ, EMR, BBBY, WYNN, CSCO, CBG, GE & AA

JAVA Sun Microsystems, Inc. – Shares continue to slide for the second day after JAVA allegedly rejected IBM’s offer of $9.40 per share because it was too low. Currently, shares have declined by more than 4.5% to $6.26. A couple of contrasting trades caught our attention as one investor played the downside and another looked for upside movement in shares. In the May contract it appears that a ratio put spread was initiated with the sale of 22,000 puts at the May 5.0 strike for 46 cents each spread against the purchase of 11,000 puts at the May 6.0 strike for 89 cents apiece. The investor receives a credit of 3 cents for initiating this trade and stands to make a maximum profit of 103 cents if shares decline to $5.00 by expiration, but would burst apart at the seams should Sun’s shares breach $3.97. Further along in the October contract, a trader hoping to see JAVA rebound put on a bullish call spread which was partially funded by the sale of put options. At the October 5.0 strike price 10,000 puts were sold for a premium of 80 cents apiece. Meanwhile, a bull call spread was established via the purchase of 10,000 calls at the October 7.0 strike for 1.15 each and spread against the sale of 10,000 calls at the October 9.0 strike price for a premium of 40 cents apiece. This optimistic strategy yields the investor a 5 cent credit because the premium enjoyed on the sale of the put options and the sale of the higher strike calls more than offsets the cost of the October 7.0 strike call options. If shares can rally to $9.00 by expiration this fall, the investor stands to gain a maximum profit of 2.00 on the call spread plus the 5 cent premium. The two trades indicate bearishness in the near-term and bullishness as we head towards the concluding months of 2009.

APOL Apollo Group, Inc. – A provider of higher education to working adults, Apollo Group has experienced a 9% drop in shares to $63.17. Apollo’s share price slipped last week after the company warned that its profit margins would likely fail to meet analyst expectations. The recent share price erosion appears to be too severe as APOL still forecasts that it will achieve a 24% increase in sales along with a 34% gain in profits for the quarter. Reflecting the positive prospects for Apollo and looking right through near-term pessimism, one investor took a bullish stance on the company by initiating a call spread in the November contract. At the November 85 strike price 5,000 calls were purchased for 4.70 apiece and spread against the sale of 5,000 calls at the November 110 strike for 1.05 each. The net cost of the trade amounts to 3.65 and yields a maximum potential profit of 21.35 if shares were to blow through the 52-week high of $90 on the stock and get to $110 by expiration. In order for this investor to start garnering profits shares will need to rally by at least 40% to the breakeven point at $88.65. Shares managed to reach $89.07 on January 16th of 2009 but have since remained below that level. Option implied volatility on the stock has risen from 58% this morning to a current value of 65%.

EWZ iShares MSCI Brazil Index Fund – Shares of the Brazil ETF have declined by less than 1% to stand at $41.98. EWZ popped onto our ‘most active by options volume’ market scanner due to a large amount of activity in the June contract. It appears that one investor sold 24,200 calls at the June 55 strike price for a premium of 45 cents in order to partially fund the purchase of 24,200 puts at the June 35 strike which cost 1.85 apiece. The net cost of getting long 24,200 puts amounts to 1.40. Approximately 1 minute prior to the purchase of downside protection in the form of put options, it looks like a bull call spread was established in between the strike prices described above. At the June 40 strike price 7,500 in-the-money calls were purchased for 5.40 each and spread against the sale of 7,500 calls at the June 45 strike price for 2.90 apiece. The net cost of the call spread amounts to 2.50 and yields a maximum potential profit of 2.50 if shares can rally to $45.00 by expiration. Perhaps both trades are the work of a single investor who is looking for shares to rally, but who does not believe shares will much higher than $45.00 as he is now short 7,500 call options at that strike price. The investor appears to hold a short position of 24,200 calls at the June 55 strike price which implies that he does not see shares getting up that high. Additionally, the purchase of puts provides protection beginning at the breakeven point to the downside at $33.60. This protection comes into play in case shares decline rather than rally by expiration in June.

EMR Emerson Electric Company – The technology company has experienced a 4% rally in shares to $32.12 despite having cut its 2009 profit forecast from $2.70-$2.95 to a lower range of $2.40-$2.60 per share. The St. Louis-based company cited weakened demand and a decline in orders as catalysts for the revised EPS estimates. EMR has been reducing costs by making job cuts and is hoping to achieve about $21 billion in sales in 2009. Although the forecasts for sales and earnings were revised lower, option traders appeared to appreciate the guidance and reacted positively. At the April 30 strike price, 2,100 puts were sold for an average premium of 61 cents per contract. Meanwhile some 1,700 calls were picked up at the now in-the-money April 32 strike for 59 cents each. Sentiment was more mixed in the June contract as 2,600 calls sold versus about 2,000 calls purchased at the June 33 strike for a VWAP of 1.85 apiece. Investors seem to have absorbed the earnings forecast as of noon-time because volatility had spiked to 55% as of this morning’s news, but has now come off to stand at 51%.

BBBY Bed Bath & Beyond, Inc. – Shares of the retailer have slipped by about 2% to $25.85 ahead of its earnings report which is scheduled for release after the market closes today. BBBY and other home-goods chains have taken a big hit in this global recession. Excess inventory levels continue to rise as demand for home goods and furniture declines amid an abysmal US housing market. Option investors reflected the negative view on home-goods chains by buying puts in the April and May contracts. At the April 24 strike price more than 5,000 puts were purchased for an average of 55 cents apiece, while the April 25 strike saw some 1,200 puts purchased for 86 cents each. Traders appear to expect further declines next month as the May 22.5 strike price had 1,100 puts bought for 74 cents per contract. In order for the May 22.5 strike put options to yield profits, shares would need to fall through the breakeven point at $21.76. Option implied volatility has risen from yesterday’s reading of 56% to the current value at 59% as investors await BBBY’s full earnings report.

WYNN Wynn Resorts Limited – The developer, owner, and operator of casino resorts has experienced an 11% decline in shares to $27.75. Reflective of the downward movement in shares was the establishment of a put spread in the June contract by one investor who sees the opportunity to profit if shares can go much lower. At the June 21 strike price it appears that 10,000 puts were purchased for 2.55 apiece and spread against the sale of 10,000 puts at the June 15 strike for about 97 cents. The net cost off the transaction amounts to 1.58 and yields a maximum potential profit of 4.42 if shares decline all the way to $15.00 by expiration. In order to bank the full 4.42 in profits, shares would need to fall by 46% from the current price. It is likely that this investor took his cue courtesy of the position of Wynn’s 52-week low of $14.50 on March 6, 2009 and therefore provides guidance as to how low the stock might go in the event of another run to the downside.

CSCO Cisco Systems, Inc. – The networking and communications company has experienced a share price decline of about 3.5% to $16.90 amid declines in a number of tech-sector stocks today. Option investors drove the call-to-put ratio up to 2.74, indicating that more than two call options have traded for every put option in action. Although calls were traded more heavily than puts, traders were seen selling calls across the April and May contracts. At the April 17 strike price investors shed some 3,100 calls for a premium of 54 cents apiece, while the April 18 strike saw 1,600 calls sell for approximately 18 cents. Perhaps investors anticipate that shares will remain below $17.00 by expiration and are therefore selling call options that they believe will land out-of-the-money. Further along, at the in-the-money May 16 strike price, traders sold 10,800 calls for 1.76 per contract and shed an additional 4,300 calls at the May 17 strike for 1.15 apiece. Given that the May 16 strike is currently in-the-money, the call selling observed today may indicate increased bearishness by investors who are looking to take in whatever premium they can in case shares continue to decline.

CBG CB Richard Ellis Group, Inc. – The commercial real estate services firm has seen its share price slip by more than 3.5% to $4.64 amid a broadly lower financial sector. CBG appeared on our ‘hot by options volume’ market scanner after one investor appears to have initiated a sold straddle in the January 2010 contract. At the January 5.0 strike price about 9,000 calls were sold for a premium of 1.30 along with 9,000 puts which sold for 1.80 apiece. The gross premium pocketed on the trade amounts to 3.10 and will be fully retained if shares can settle at $5.00 by expiration next year. Should shares move in either direction, this investor would face losses beginning at $8.10 on the upside and at $1.90 on the downside. This investor’s straddle seems to be well placed as CBG’s shares have not fallen below $2.34 in the past 52-weeks nor have they risen above $8.10 since October of 2008. Option implied volatility registers a reading today of 132%, unchanged from Monday.

GE General Electric – Options activity is brisk on shares of General Electric, which has dropped by 4.2% to $10.71. However, there is no consensus within the pattern of activity. There appears to have been several thousand put options spread between the April and May contracts at the 10.0 strike in an effort to roll a bearish position forward across the time horizon. The net cost of the trade was around 48 cents and buys investors another month in order the event that the bear market rebound really wasn’t the start of a new bull market. In the April contract the call activity was balanced. There were more calls at the 10.0 strike sold today than bought indicating perhaps a degree of profit taking, while the 11.0 strike saw balanced two-way activity where series volume was 17,500 contracts. Options implied volatility bounced right off the 75% reading we highlighted last week and has risen in today’s session to 81%.

AA Alcoa Inc. – Kicking off earnings season after the bell, investors are looking at a loss for the quarter. Shares in Alcoa are trading 2% easier at $7.77 and so well off the 52-week low at $4.98. Investors appear to take the view that much of the earnings may be already discounted by the share price. Of the 11,000 puts at the 7.5 strike, most were sold where the average premium changing hands was 58 cents. This indicates that investors are bearing the risk of watching shares perhaps slip to $6.92 before they’d be underwater. This they clearly expect to be a low-risk event in terms of likelihood. On the call side the same strike saw two-way action with 18,000 lots changing hands at 72 cents. Bullish option buyers need a share price gain to $8.22 before cashing in on their options. Elsewhere option trading was mixed. The May 6.0 strike puts were bought 1,000 times for 41 cents, while the July 5.0 strike puts were sold on similar but unrelated volume at 46 cents. The October 6.0 strike puts were also bought for a 1.15 premium.

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