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Tuesday, May 28, 2024

Option traders see Harley dropping a gear

Today’s tickers: HOG, GE, GM, MWW, MAR, YHOO, ALL & C

HOG Harley-Davidson, Inc. – The motorcycle company’s shares have dipped by more than 2% to $17.64 today and have motivated investors to shop for downside protection on the stock. HOG appeared on our ‘most active by options volume’ market scanner after one trader purchased 11,800 puts at the May 15 strike price for a premium of 88 cents per contract. This lot of purchased-puts represents nearly twice the amount of existing open interest at that strike. Should shares fall below the breakeven point at $14.12 by expiration next month the trader will begin to amass profits as shares move lower. From today’s current price, shares would need to fall by another 20% in order to breach the breakeven point described.

GE General Electric – Shares of the Connecticut-based company have rallied by more than 8% to $12.25. Option investors were observed making a mixture of bearish and bullish moves on GE. At the April 12 strike price, 20,000 calls were sold for a premium of 63 cents apiece while the April 12 puts were purchased 24,000 times for an average price of 57 cents per contract. Perhaps investors are banking gains by selling in-the-money calls ahead of expiration on Friday, but also picking up downside protection in case shares reverse direction in the next 4 days. The May 10 strike price witnessed the sale of nearly 16,000 puts for 46 cents and indicates that some traders do not see shares dipping below the breakeven point at $9.54 by next month’s expiration. Finally, the June 13 strike price saw the purchase of 4,600 calls for a premium of 1.06 apiece as some investors are hopeful that shares will breach $14.06 in June. Bullish traders even looked to the June 20 strike price where 2,600 calls were picked up for about 8 cents each. GE’s shares have not traded above $14.06 since January 14th, and have not been above $20.00 since November 4, 2008, but option traders appear to be chomping at the bit – hungry for a meatier GE share price.

GM General Motors, Corp. – Shares are off by more than 16% to $1.70 amid news that the U.S. Treasury has directed the failing automaker to prepare for a bankruptcy filing by June 1, 2009. Option implied volatility has exploded to 324% from Thursday’s reading of 197% as investor uncertainty regarding GM’s future continues to rise. Option traders built up some 87,000 contracts today down from the stock’s peak historical option volume for the year at approximately 506,000 contracts which was traded on March 30, 2009. The uncertainty over exactly when and how GM will run the bankruptcy gamut motivated option traders to enlist some interesting tactics on the stock. Investors sold some 12,400 calls short at the May 1.0 strike price for an average premium of 76 cents. It is likely that these short sellers are happy to bank the in-the-money premium on the calls because they expect shares to decline towards zero before the “new” GM emerges from the flames engulfing the old/toxic company. Elsewhere, traders were observed selling 4,300 puts for 27 cents each at the May 1.0 strike price in order to fund the purchase of 3,500 calls at the May 2.0 strike price for 26 cents apiece. This seems to be a risky move in the face of bankruptcy as shares continue to decline. Losses would begin to amass for those investors who sold puts at the May 1.0 strike beginning at 73 cents per share and below. All other notable activity was put buying as option traders look for profit-making opportunity as shares decline. 3,400 puts were picked up at the May 2.0 strike price for 90 cents apiece while the September 1.0 strike had some 3,100 puts bought for 59 cents each. Finally, puts were coveted as far out as the June 1.0 strike where 4,300 were scooped up for a 46 cent premium per contract.

MWW Monster Worldwide Inc. – Online job broker, Monster Worldwide has seen add $1.75 to its share price today, which is trading at $12.25. Option open interest of 33,583 contracts is relatively low, while bulls have followed the lead of a William Blair analyst as he upgrades the company to ‘outperform.’ At its current share price, Monster is trading at exactly twice that of its January low point, despite ongoing weakness in global labor markets, which makes the rally all the more curious. Thomas McHugh notes that if the company can sit still and lose no money this year essentially weathering the economic storm, it will be a good thing, which is likely why shares are heading northwards today. With April options expiring on Friday, monster bulls appear to be selling calls at the 12.50 line in exchange for buying the same strike at the May expiration. Around 3,200 April calls were traded Monday morning with premiums ranging anywhere between 15 and 35 cents. Most appeared to trade to the bid or were put up for sale. By writing April calls investors were able to defray the cost of getting long into May by as much as 30%. The May calls at the 12.50 strike cost around 1.00. Shares are closing in on $13.00, which is the highest Monster has traded at in one year. Neither strike price carries much by way of open interest, indicating that this is fresh positioning for a rebound in the fortune of the company. The danger to investors is that shares continue to rally through Friday and settle above the strike price. What these call buyers are looking for is bread today and jam tomorrow. Demand for higher strike calls is also driving option implied volatility higher today to above 80%, which is a two-month high.

MAR Marriott International, Inc. – The global operator and franchisor of hotels has experienced a share price rally of about 2% to $19.57. Option traders have scooped up calls in the April and May contracts and appear to be looking for continued upward price movement on the stock. At the April 20 strike price, 4,100 calls were purchased for an average premium of 38 cents apiece. Shares would need to continue to rally by an additional 4% from the current price in order for investors to breakeven at $20.38 by expiration this coming Friday. Bullishness spread to the May 22.5 strike price where 1,600 calls were bought for about 52 cents per contract. The most optimistic of traders selected the May 25 strike and picked up about 1,000 calls for 20 cents apiece. The call-to-put ratio of 15.1 completes the bullish picture on Marriott as investors have traded more than 15 calls to each put option this morning. Option implied volatility has risen from Thursday’s value of 67% to the current reading of 77%.

YHOO Yahoo! Inc. – Weekend stories circulated that put respective heads at Microsoft and Yahoo! at the same table to discuss a tie-up that would sell Internet search and display advertising. According to stories on Friday Ballmer and Yahoo’s new CEO, Carol Bartz held face-to-face discussions to working together without merging yet increasing revenues from search and display methods. Investors would do well to consider that this latest embarkation is a collaboration and not a marriage, and so any share price gains are essentially discounting the success of future revenue streams. In other words, buying shares in Yahoo! in search of finding the next takeover target is perhaps an ill-advised strategy. Still, the gains in the shares saw call buyers light up the screens today in the world of options. Almost three-times as many calls changed hands compared to bearish puts as its share price rose 5.8% to $14.24. There was a mix of activity at the May 20.0 strike where buyers are clearly fixated with some kind of a corporate merger or takeover, while sellers are taking advantage of the 34 cent premium as sufficient reward for undertaking the risk of a 29% surge in its share price over the next month.

ALL The Allstate Corporation – Shares of the insurance company are up slightly by less than 1% to stand at $23.13. ALL hopped to the top of our ‘hot by options volume’ market scanner after one investor was observed populating the April and July contracts. We believe that this trader established a covered call back on March 19th by buying shares of the underlying stock and selling 12,500 calls at the April 25 strike price. At that time, shares were experiencing a rally and this investor bought into ALL at around $18.69 per share. It appears that this same investor has set his sights higher by reestablishing a similar strategy in the July contract. It looks as though he is hoping to add to the 24% gain he has already enjoyed since he first initiated the covered call and took ownership of the shares. Today we witnessed the investor purchase the 12,500 calls he had originally sold for an average of 32 cents back in March. The 12,500 calls were bought today for about 30 cents apiece at the April 25 strike price. Apparently, this trader is looking for shares to rise even higher and is therefore protecting himself by repurchasing the calls in April rather than running the risk of having them called away ahead of weekend expiration. The investor reestablished the covered call strategy in the July contract be selling 12,500 calls at the July 32.5 strike price for a premium of 65 cents apiece. Perhaps the news that TARP funds will be available for insurance companies has bolstered this trader’s confidence that ALL’s shares will remain on the rise. Thus, this individual has taken a 65 cent credit and has positioned himself to reap the benefits of a share price rally through to expiration in July. Shares would need to rally by about 40% from the current price in order to breach the July 32.5 strike price designated by this investor.

C Citigroup Inc. – Options in the bank have been hectic on Monday and with earnings due on Thursday its shares are bucking the trend with a 12.5% rally to stand at $3.42. Option trading appears to be littered by a slew of spread transactions today with some of the volume resulting from the roll of options from April to May. At the May 5 strike, a 90,000 spread trade was enacted in what looks like a bought straddle – but based upon prices traded, this could be a reversal play. If the activity is indeed a straddle the total premium paid of 2.45 suggests a break outside of a $2.55 and $7.45 range within a month. Demand for options combinations drove implied volatility up to 175% today.

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