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Beazer Homes bounces on sales data, inspiring covered calls

Today’s tickers: BZH, AG, TSN, XLF, XRT & JNPR

BZH Beazer Homes USA, Inc. – The builder of single-family homes across the United States has experienced an enormous share price rally of more than 21.5% to $2.14 following today’s upbeat new home sales data. BZH jumped onto our ‘hot by options volume’ market scanner after one investor established what appears to be a covered call in the June contract. The covered call was initiated by buying shares of the underlying stock and selling 10,000 calls at the June 5.0 strike price for a premium of 17 cents apiece. This investor receives the premium on the sale of the options as well as positions an exit strategy at the June 5.0 strike by maintaining a short position on the calls. If shares can rally through $5.00 come June, the shares will likely be called away from him at expiration. Should this come to fruition, he will have enjoyed gains of 134% on the stock from the current price of $2.14 in addition to the 17 cent premium.

AG AGCO Corporation – Shares of the manufacturer of agricultural equipment have skyrocketed by more than 10% to $26.00 ahead of its earnings release expected on Tuesday, April 28th. One news source has reported unconfirmed takeover speculation surrounding the company perhaps leading option traders to position themselves for a continued near-term price rally. The more than 16,000 lots that have exchanged hands on AGCO thus far today represent 70% of the existing open interest on the stock of 23,000 contracts. Furthermore, we have observed that nearly 12 call options have been traded to each single put option in action. At the now in-the-money May 25 strike price investors picked up 1,300 calls for an average premium of 1.71 apiece. More optimistic individuals targeted the May 30 strike price where more than 6,300 calls were purchased for 53 cents per contract. In order for the May 30 strike call to land in-the-money by expiration, shares would need to continue to rise by an additional 15% from the current share price. Option implied volatility is up slightly on the day from 71% to the current reading of 74%.

TSN Tyson Foods, Inc. – The processor and marketer of chicken, beef and pork products has attracted bullish investors to the pigpen amid a share price rally of about 1% to $11.15 today. Tyson’s shares have been on the rise since touching down to a 52-week low of $4.32 on November 20, 2008. The modest share price rally and the bullish sentiment experienced today may be the result of the U.S. Department of Agriculture’s forecast that food prices in the U.S. will rise up to 4% this year. Option traders stampeded the call side on the stock, driving the call-to-put ratio to 25-to-1 which indicates that 25 call options traded to every put in action. The May 12.5 strike price attracted the most volume with more than 7,000 calls purchased for an average premium of 46 cents apiece out of the 12,000 lots that exchanged hands at that strike. Optimism spread to the June and July contracts where traders picked up about 2,000 calls at the June 12.5 strike price for 90 cents each and more than 4,100 calls at the July 12.5 strike for an average of 1.10 apiece. The most bullish investors targeted the June 15 strike price and bought more than 2,300 calls for about 29 cents per contract. Option implied volatility has jumped from 70% at the start of the trading day to the current reading of 79%.

XLF Financial Select Sector SPDR – The financials ETF is up slightly by about 0.5% to $10.75. One investor looking for upward price movement over the next several months established a call spread in the June contract. The purchase of 15,000 calls at the June 12 strike price for 68 cents apiece was spread against the sale of 15,000 calls at the higher June 15 strike price for a premium of 13 cents each. The net cost of the bullish trade amounts to 55 cents and yields a maximum potential profit of 2.45 if shares can rally all the way to $15.00 by expiration. Both strike prices selected are currently out-of-the-money. Thus, shares would need to gain at least 17% from the current price in order to breach the breakeven point at $12.55 at which point this investor begins to amass profits on the spread.

XRT Retail Select Sector SPDR – Once again the retail ETF has appeared on our ‘most active by options volume’ market scanner amid a share price rally of more than 2% to $26.95. A couple of near-term optimistic trades caught our attention on the fund today. In the May contract one trader is hoping for a 9% rise in shares to a breakeven share price of $29.46 by expiration in order to profit from the purchase of 2,000 calls at the May 29 strike price for a 46 cent premium each. Further along, a more reserved investor is looking for shares to stabilize at the $27.00 level as he sold a straddle at the June 27 strike price. The sale of 6,000 calls at the June 27 strike for 1.80 each combined with the sale of 6,000 puts at the same strike for 2.21 apiece yields a gross premium of 4.01 to this trader. He will retain the full 4.01 premium if shares can settle at $27.00 by expiration in June. However, he would face increasing losses should shares should swing in either direction through the breakeven points located at $31.01 to the upside and at $22.99 to the downside. Shares need only rise by 5 cents from the current price for this investor to attain the best possible outcome of the straddle strategy employed.

JNPR Juniper Networks, Inc. – The second-largest maker of networking equipment has experienced a significant share price rally of more than 14% to $22.00 after the firm announced that it expects to be more profitable this quarter. Despite the bullish forecast from JNPR option traders were heavily favoring the put side on the stock. In the near-term May contract, traders were seen picking up 5,300 puts for an average premium of 89 cents apiece at the May 21 strike price. The in-the-money May 22 strike price also attracted buying interest as investors coveted 3,100 puts for 1.35 each. Further along, the June 20 strike price saw some 4,100 puts purchased for 1.15 each while the in-the-money July 23 strike witnessed more than 3,200 puts bought for 2.40 per contract. Perhaps the surge in share price has attracted bearish traders to snap up put options at reduced premiums as they expect the rally to reverse over the next several months.


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