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NetApp option implied volatility jumps as call demand surfaces

Today’s tickers: NTAP, AXP, MOS, SEPR, GM, JNPR, ROK, VIX, TGT & TCK

NTAP NetApp, Inc. – Option implied volatility has skyrocketed from yesterday’s value of 56% to the current reading of 74% as merger fever has set its sights on the company. Shares have jumped more than 10% to $16.47 today, attracting many a bullish option trader hungry for some hot call action. Option volume has risen above 103,000 contracts on the day, with 3.65 calls traded for each put in action. The April 17.5 strike price saw some 10,700 calls purchased for 32 cents each while calls as high up as the April 22.5 strike were coveted for 5 cents per contract. More volume was seen building on the call side in the May contract with 9,100 calls bought at the May 17.5 strike for an average premium of 79 cents. Again, the most bullish traders selected the May 22.5 strike and picked up 3,700 calls for 16 cents apiece. Shares would need to continue to rally by 38% in order for the 22.5 strikes to land in-the-money by expiration. When looking for downside protection, investors clustered at the April 16 strike price and scooped up 7,400 puts at an average premium of 58 cents per contract.

AXP American Express Company – The global payments and travel company has enjoyed a 3.5% share price rally to $15.54 after it received an upgrade from Citigroup yesterday following Goldman Sachs’s decision to remove AXP from its ‘conviction sell’ list on Friday. Investor bullishness was apparent at the April 17 strike price where about 5,200 calls were purchased for an average of 20 cents apiece. Other optimists were observed picking up 1,000 calls at the April 19 strike price at a price of 5 cents per option contract. Volatility on the stock is on the rise, up from the low for the day of 82% to the current value of 89%.

MOS The Mosaic Company – The producer of potash and animal feed has made a comeback since this morning with its shares currently up 5% to $45.15 after having fallen 4% in pre-market trading. Shares started down due to disappointing third-quarter results, which revealed that profits declined dramatically to just 13 cents a share as compared with $1.17 per share one year ago. The company’s CEO, James T. Prokopanko, is looking for Mosaic’s financials to improve in the fourth quarter. Perhaps the optimism expressed by the CEO looking forward spurred option traders to brush their shoulders off, despite lower than expected results, and get bullish on Mosaic. Traders were observed displaying their positivity by selling puts and buying calls in the April contract. At the April 40 strike price 4,100 puts were sold for 1.06 apiece while the April 45 strike had 1,200 puts sell for 3.17 each. Investors hoping for a continued share price rally picked up 3,800 calls at the April 45 strike price for 1.05 per contract while the April 50 strike witnessed bullish call buying of 3,000 lots for 21 cents each. If traders want to profit from the April 50 calls, shares would need to experience an 11% rally to the breakeven point at $50.21. Option implied volatility has come off a great deal since earnings were released, having fallen from 85% yesterday to the current value at 69%.

SEPR Sepracor, Inc. – The research-based pharmaceuticals company has watched its shares rally by more than 9.5% to $14.75 amid rumors of “renewed takeover chatter.” Traders showed no signs of fatigue as they launched into call activity on SEPR, the maker of the prescription sleep-aid, Lunesta. The April 15 strike price was a popular destination for investors looking to take a bullish stance as some 9,600 calls were purchased for an average premium of 48 cents each. The most optimistic traders scooped up 2,000 call options at the April 17.5 strike price for about 15 cents per contract. Shares would need to rally by an additional 19% in order to breach the breakeven on the trade at $17.65 by expiration. Option implied volatility jumped from 68% this morning up to 79%, however, the reading has since come off to stand at 74%.

GM General Motors Corp. – Shares of the ailing automotive company have lost 4% today to stand at $1.92. The well-flagged potential for a Chapter 11 filing is really provoking some interesting options combination. GM jumped onto our ‘most active by options volume’ market scanner after an option trader initiated a bullish trade in the June contract. This investor was seen looking for upside movement in the stock while other traders enacted a bearish play. The optimistic early bird struck first this morning, initiating a call spread by purchasing 5,000 calls at the June 1.0 strike price for 1.05 apiece and selling 5,000 calls at the June 2.0 strike for a premium of 53 cents per contract. The net cost of the bullish play amounts to 52 cents, but this investor significantly reduced the cost by selling 5,000 puts at the June 1.0 strike price for 49 cents apiece. By selling the puts he has effectively reduced the cost of the spread to just 3 cents and has also solidified his opinion that shares will rise rather than fall. We anticipate that the views will widely vastly on what a Chapter 11 filing will do for GM’s shareholders. With restructuring clearly on the cads, one might be forgiven for leaning towards the view that a post-bankruptcy era would logically see better prospects for its shares. In that regard, playing the option market is about reading the timing of coming out of Chapter 11. Today’s option bull provoked other combinations, some of which were complex multi-legged orders that could largely be interpreted as trying to ameliorate the impact of sky-high implied volatility as investors seek downside protection. Option implied volatility on the stock had soared to 316% early on in the trading day, but has since come off a great deal to stand at 201%

JNPR Juniper Networks, Inc. – Providers of high-performance network infrastructure, Juniper Networks has experienced a 12% share price rally to $17.50 as well as a ‘buy’ rating by an analyst at Brean Murray Carret & Co. today. JNPR has reported that it sees first-quarter profits of 16 to 17 cents per share, which is in accord with analysts’ expectations. Option investors took the good news with a grain of salt and were seen initiating a mixture of bullish and bearish plays. At the April 16 strike price some 7,000 puts were sold for 15 cents apiece, indicating that some traders are hoping shares will remain above the breakeven point at $15.85 by expiration. The April 17 strike attracted both put buyers and sellers and had some 13,000 puts trade hands for an average price of 51 cents each. Juniper bulls looked to the April 18 strike price to buy about 2,000 calls for 35 cents. Further along, in the May contract, about 8,200 calls were shed at the May 18 strike price for a premium of 97 cents each. Perhaps some investors believe today’s rally is doomed to be short-lived, while some early bulls may have already cashed in their chips. Finally, in keeping with the theme of contrasting trades, the May 17 strike saw the sale of 5,300 puts for a premium of 1.20 each while the May 16 strike had 3,300 puts purchased for 84 cents per contract. Option implied volatility has fallen from 64% yesterday to the current reading at 58%.

ROK Rockwell Automation – Rumors are apparently resurfacing about prospects for a takeover of this industrial automation power, control and information solutions provider by Emerson Electric. Rockwell’s share are 11% higher at $26.31 today, while option activity is abuzz with several call plays that appear to be optimistic about a deal. In the May contract call buyers paid a 74 cent premium to secure buying rights on the stock at a fixed $30.00. Using October call options at the 35.0 strike it appears that one investor might be willing to pursue the unfounded chatter through a long stock and sold call option combination where some 3,000 calls were traded at a premium of 1.77. Shares would need to rally by one-third to reach the strike by expiration and the investor would also pocket the premium from the call sale. Not all trades were bullish though. A block of 5,000 puts was bought at the May 22.5 strike for 1.10 per contract, indicating that at least one investor sees the chatter as nothing more than that.

VIX CBOE Vix Index – Caught between market declines and nervousness surrounding the onset of earnings season, the volatility gauge has dropped once again this week below the floor of 40.0. It appears that option traders are positioning for a rebound, however, as we try to unravel today’s trading off the tape. We can see recent midday action at the May 60 and 65 calls where we believe premiums were paid against the sale of puts at the 42.5 and 35.0 strikes respectively. Bottom line is a market bearish tone if we’re accurate in our reading of trades, which are marked as trading to mid-market prices.

TGT Target Corp. – The retailer has received a nice dose of optimism amid the bullish news regarding the better than expected earnings report from home-furnishing retailer, Bed Bath & Beyond. Target’s shares have rallied by more than 6.5% to $37.39, attracting option investors to play their hand today. TGT jumped to the top of our ‘most active by options volume’ market scanner after one investor shuffled large amounts of calls around in the near-term April contract. At the deep in-the-money April 30 strike price, 31,000 calls were sold for a hefty premium of 6.20 apiece. Given the existing open interest of 35,000 calls at the April 30 strike, we looked to confirm out suspicions that the same investor was now working the calls again. As it turns out, the investor had originally bought 31,000 calls at the April 30 strike on March 17, 2009, at a price of 2.06 per call option. Thus, with today’s sale, this trader could have banked a profit of 4.14. However, he chose to instead purchase an additional 31,000 calls at the in-the-money April 32.5 strike price for 3.90 per contract. These 31,000 calls adds to an already established position of 62,000 calls at the April 32.5 strike price, originally acquired at a 97 cent premium per contract. While this trader chose to play with in-the-money calls options, a separate bullish investor was seen selling puts to buy calls. At the April 34 strike price, 7,500 puts were sold for 42 cents apiece to finance the purchase of 7,500 calls at the nearly at-the-money, April 37.5 strike for 61 cents per contract. The net cost of getting bullish amounts to 19 cents and yields a breakeven point of $37.69 to the investor. If shares can rise through the breakeven point, the trader stands to make unlimited gains as shares push higher.

TCK Teck Cominco Limited Class B – Shares of the metals producer have surged by more than 9.5% to $7.04 amid takeover rumors reported by one news source. Apparently there is renewed speculation surrounding TCK that the world’s largest mining company, BHP Billiton, may be interested in acquiring them. Rumors aside, option traders were getting bullish on the stock by trading call options 11 times to every put seen in action today. At the April 7.5 strike price, 6,700 calls were purchased for 34 cents apiece. In order to amass profits by expiration, shares will need to rally by 11% through the breakeven point at $7.84. The May 7.5 strike price also attracted buyers and 1,600 calls were scooped up for a premium of 1.03 per contract. Option implied volatility has lifted from yesterday’s reading of 138% to the current value of 161%.

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