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Bulls singing Yahoo! in tune

Today’s tickers: YHOO, MMR, FXI, CI, HOG, KFT, NUAN & VMC

YHOO Yahoo!, Inc. – Shares have rallied by more than 2% to $14.32 amid news that the company is seeking buyers for its HotJobs employment website and has plans to cut some 200 to 500 jobs. Perhaps investor confidence has been bolstered by the past few months with CEO Carol Bartz at the helm as the stock has risen about 29% from its January 2009 low of around $11.03 up to today’s price. Option investors were seen taking bullish stances on the stock in the May and October contracts. At the May 15 strike price 26,600 calls were purchased for an average premium of 77 cents apiece. Shares would need to rise by another 10% in order to breach the breakeven point on the trade at $15.77 by expiration in May. Further along, the October 12 strike price witnessed the sale of 2,100 puts for a premium of 1.30 each. Some traders were showing caution in the May contract by purchasing 4,500 puts at the May 14 strike price for 99 cents should shares experience a decline in the near future. These put options would begin to provide downside protection or profits beginning at the breakeven point to the downside at $13.01. Option implied volatility on Yahoo! is up sharply today to 74% from yesterday’s reading of 67%.

MMR McMoRan Exploration Co. – Shares of the oil and natural gas company have declined slightly by less than 1% today to stand at $5.22. Despite the fall in share price, one investor does not see shares falling much further as he sold more than 14,000 puts at the May 5.0 strike price for a premium of 50 cents apiece. There is currently no open interest at the May 5.0 strike, and thus this trader accepts the 50 cent premium in exchange for bearing the risk that shares fall beneath the breakeven point to the downside at $4.50. Should shares plummet through the breakeven point, the investor would face increasing losses in proportion with declines in the stock. The puts traded today represent nearly 40% of the existing open interest on the stock of 38,000 contracts. While we do not know the exact motivation for the trade, we do know that shares need only decline by 13% from the current price for this investor to face losses.

FXI iShares FTSE/Xinhua China 25 Index Fund – The ETF has experienced a slight share price decline of less than 1% to $32.87. FXI jumped to the top of our ‘most active by options volume’ market scanner after a mass of options activity took place in the May contract. A sold straddle in particular caught our attention as one investor appears to be looking for share price stability into next month. It looks like this trader sold 22,500 calls for a premium of 2.31 at the May 32 strike price and simultaneously sold 22,500 puts at the same strike for about 1.71 per contract. The gross premium enjoyed on the trade amounts to 4.02 and will be fully retained by the individual if shares settle at $32.00 by expiration. Should shares swing outside of the breakeven points at $36.02 to the upside or $27.98 to the downside, this trader would amass losses in either direction. Given that shares have not traded below $28.00 since the end of March or above $36.00 since September of 2008, this trader appears well positioned to maintain some or perhaps the entire premium pocketed today.

CI CIGNA Corp. – Shares of the health-services organization have risen by more than 3% to $21.40, attracting fresh buying interest by option traders looking to get bullish on the stock. Today’s rally arrives just days after Fitch Ratings cut the default rating on Cigna this past Monday to “BBB+” from “A-“, although the firm counterbalanced the downgrade by raising its outlook on CI to ‘stable’ from ‘negative’. Investors heavily favored call options on the stock and drove the call-to-put ratio to 18.4 indicating 18 call options traded to each put in action today. The most heavily populated area was the May 25 strike price where more than 5,300 calls were purchased for an average premium of 62 cents apiece. Investors even picked up approximately 1,000 calls at the May 30 strike for about 14 cents. Option implied volatility on the stock is up today to 83% from yesterday’s reading at about 79%. The option volume of more than 26,000 contracts traded on the stock today represents nearly 23% of the total existing open interest of 114,000 lots.

HOG Harley-Davidson, Inc. – Shares of the motorcycle manufacturer have revved up and climbed by nearly 10% to $18.85 as its first-quarter earnings beat analyst expectations. The fact that HOG posted a nearly 37% decline in earnings per share as compared to one year ago did little to deter some investors from shedding puts in the May contract. At the May 15 strike price 1,300 puts were sold for a premium of 53 cents apiece while the May 19 strike witnessed the sale of 1,900 in-the-money puts for 1.85 each. Perhaps these traders are expecting that shares will remain on the rise through next month’s expiration.

KFT Kraft Foods, Inc. – The packaged foods and beverages magnate has slipped by more than 1.5% to stand at $22.46 amid a downgrade to ‘neutral’ from ‘buy’ today by an analyst at UBS. The downgrade is due to concerns that sales for the nation’s largest food maker may struggle as cash-strapped consumers opt to purchase private label (store brands) instead. Option traders seem to have filed such concerns under ‘I’d choose Oreo over Hydrox any day’ and were seen picking up calls in the June contract. Hoping for a rally in shares, traders picked up 5,000 calls at the June 24 strike price for 66 cents each. Shares would need to rally by about 7% in order for the June 24 calls to land in-the-money by expiration.

NUAN Nuance Communications, Inc. – The provider of speech and imaging solutions for businesses around the globe edged onto our ‘hot by options volume’ market scanner amid a 2.5% rally in shares to $12.65. One news source reported that Microsoft Corp. may be interested in NUAN and highlighted renewed takeover speculation. Option implied volatility has spiked today to 72% up from the 67% reading recorded yesterday. Investors looked to the now in-the-money April 12.5 strike price and scooped up more than 1,700 calls for about 32 cents apiece just one day before expiration. Other traders picked up over 2,300 calls at the higher May 15 strike price for an average premium of 33 cents per contract. In order to profit from the May 15 call options, shares will need to rally by an additional 21% to breach the breakeven point at $15.33 by expiration.

VMC Vulcan Materials Company – The producer of construction aggregates such as crushed stone, sand, and gravel has experienced a share price rally of nearly 3% to $50.04. One news source has reported renewed takeover speculation on Vulcan, which has perhaps contributed to the rise in option implied volatility on the stock to 61% from yesterday’s value of 58%. We observed option traders taking bullish stances today, positioning themselves for upward movements in the share price. The now at-the-money April 50 strike price attracted fresh buying interest from investors and had more than 3,100 calls purchased for an average premium of 70 cents per contract. More optimistic bulls targeted the May 60 strike and picked up 1,400 calls for about 50 cents apiece. Shares would need to shimmy upwards by about 21% to the breakeven point at $60.50 in order for May 60 strike investors to begin to garner profits by expiration next month.


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