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Tuesday, February 27, 2024

Smithfield bulls like hogs

Today’s tickers: SFD, LTD, XLF, HNT, AIG, KEY, WMB & CSX

SFD Smithfield Foods, Inc. – Shares of the hog producer, pork processor, and beef processor have surged upwards by 6% to $10.50. Analysts in recent weeks used high feed prices and sluggish sales as reason enough to slash targets on food-producing companies, while there had also been concern on Smithfield’s ability to meet some forthcoming debt covenants. Corn prices have eased from $4.18 to $3.82 per bushel since the start of the month. Pork sales are also sensitive to the economy’s fortunes and sales have eased as consumers switch to cheaper grain-based foodstuffs and so perhaps today’s rally is based on expectations of a return to traditional consumption habits. Option investors crowded into the call-corral hoping that shares would continue to rise through expiration in June. The May 12.5 strike price had more than 7,200 calls purchased for 34 cents per contract while the June 12.5 strike witnessed some 2,300 calls coveted for 89 cents apiece. In order for these calls to land in-the-money, shares would need to continue to climb by another 19% from the current price. Option implied volatility has spiked to 102% from the value recorded at the start of the traded day of 77%.

LTD Limited Brands, Inc. – The specialty retailer of such brands as Victoria’s Secret and Henri Bendel has experienced a share price rally of 2% to stand at $10.88. LTD edged onto our ‘hot by options volume’ market scanner after one investor picked up a hefty chunk of puts in the August contract. Perhaps this bearish investor expects retailers to struggle through the summer months as consumers exchange their rally-caps for thrift-caps. This trader purchased 17,800 puts at the August 10 strike price for a premium of 1.25 per put option. It is possible that this trader is long the stock and is therefore utilizing the put options as downside protection should shares relapse over the next six months. The puts would begin to yield profits if shares were to decline by expiration, beginning at the breakeven share price of $8.75.

XLF Financial Select Sector SPDR – Shares of the financials ETF are slightly higher today by about 0.5% to $10.65. As usual, the fund was one of the top tickers on our ‘most active by options volume’ market scanner. One interesting trade we observed took place in the September contract. It appears that one investor established a ratio put spread by purchasing 10,000 puts at the September 11 strike price for 2.10 apiece spread against the sale of 20,000 puts at the September 7.0 strike for 48 cents apiece. The net cost of the spread amounts to 1.14 and yields a maximum potential profit of 2.86 if shares were to decline all the way to $7.00 by expiration. This trade suggests that this investor is less than optimistic on the outcome of the stress tests scheduled for next week and so wants to take a medium-term bearish on the XLF hoping to garner profits on downward movement in the price. It would take a decline in shares of XLF to $4.14 before the position become problematic for this investor.

HNT Health Net, Inc. – Shares of the managed care organization have jumped by more than 5% to $13.96 amid rumors reported by one news source regarding a potential takeover of the company by UnitedHealth Group, Inc. We observed traders taking bullish stances on the stock by purchasing 3,200 calls at the May 15 strike price for an average premium of 71 cents apiece while the higher May 17.5 strike price had 1,000 calls picked up for 32 cents per contract. One investor established a ratio bull call spread in the June contract by purchasing 2,000 calls at the in-the-money 12.5 strike price for 2.50 each spread against the sale of 4,000 calls at the June 17.5 strike for 55 cents apiece. The net cost of the spread amounts to 1.40 and yields a maximum potential profit of 3.60 to the trader if shares can rally by about 25% to $17.50 by expiration. This bullish investor will amass profits at any share price above the breakeven point at $13.90. Option implied volatility on the stock rose as high as 87% up from yesterday’s reading of 80%, but has since tapered off to the current value of 79%.

AIG American International Group, Inc. – AIG has rallied by nearly 3.5% to $1.50 and has attracted bullish investors to purchase boat-loads of call options in multiple contracts. The bullishness likely stems from today’s market turnaround and strengthening in financial stocks. It appears that approximately 15,000 calls were bought at the May 2.0 strike price for an average premium of 11 cents each. We note that given the open interest of more than 30,000 at the May 2.0 strike, this trade could represent the work of an investor closing a short position, although we don’t recall a build of recent short sales at that strike. Further along at the June 2.0 strike price another 15,000 calls were purchased for about 25 cents apiece on existing open interest of just 2,500 lots. The January 2010 2.5 strike had some 3,000 calls bought for 51 cents while one year further at the January 2011 2.5 strike had about 3,700 calls picked up for 85 cents.

KEY KeyCorp – Shares of Ohio’s second-largest bank continue to decline, slipping 8.5% today to $6.45, which is a scant 1.67 off the 52-week low on the stock of $4.78. The news of KEY’s dividend slash yesterday, compounded with a downgrade to ‘market perform’ from ‘outperform’ by BMO Capital Markets today, have weighed heavily on the stock, which was the biggest decliner in the S&P 500 index this morning. Investors expecting further gloom from KEY purchased more than 5,300 puts at the May 6.0 strike price for an average premium of 84 cents per contract. The bearish position will begin to yield profits to the downside beginning at a breakeven share price of $5.16, a mere 38 cents above the 52-week low attained in February of 2009.

WMB The Williams Companies, Inc. – Option traders appear to be setting the stage for a rally in shares at natural gas company, Williams Companies, where shares have risen slightly by less than 1% to $13.41. In looking at the chart, shares appeared to have bottomed out at around $9.50 in early March and traders seem hell-bent on expecting more from a near-term recovery. Investors looking for a rally concentrated their activity at the May 15 strike price where more than 5,700 calls were purchased for an average premium of 32 cents apiece. More optimistic individuals selected the May 17.5 strike and bought 1,600 calls for about 10 cents each and even looked to the June 17.5 strike to pick up 1,700 calls for 20 cents per contract. Bullish traders drove up the call-to-put ratio to more than 8-to-1, indicating that 8 calls exchanged hands for every single put option in play. The more than 20,000 lots traded thus far today represent about 20% of the total open interest on the stock of 102,000 contracts.

CSX CSX Corporation – The rail-based transportation services company has experienced a share price decline of more than 4% to $28.01 despite having received a revised outlook to ‘stable’ from ‘negative’ by Standard & Poor’s. The option market disputes the share price decline as investors position for a rebound in its fortunes. Perhaps the bullish options activity we observed on the stock was partially inspired by the more positive outlook awarded by S&P today. The May 29 strike price attracted optimistic investors who purchased 4,000 calls for an average premium of 1.65 apiece. Traders who were looking for even further upward price movement targeted the May 30 strike price where some 5,500 calls were bought for about 1.22 per contract. In order for the May 30 strike calls to land in-the-money by expiration, shares would need to rally by about 7% from the current depressed price.


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