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PepsiCo sees large put volume

Today’s tickers: PEP, XLY, ITT, PFE, HUM, HSY, ERTS & NTRS

PEP PepsiCo, Inc. – The global beverage, snack, and food company’s shares have rallied by more than 1% to stand at $49.75. PEP popped onto our ‘most active by options volume’ market scanner after a large volume bullish transaction was observed in the October contract. One optimistic individual targeted the October 50 strike price and sold 30,000 puts for a premium of 4.20 apiece out of some 35,000 puts sold in total at the strike. There is no existing open interest at the October 50 strike, and thus, the trade represents short selling in anticipation that shares will rise beyond $50.00 by expiration in October. This could also represent a covered put strategy (short stock and sold puts) indicating the investor’s expectation that shares might fall further. At expiration if shares are below the strike the investor would have stock put to him at $50.00 but the premium from the puts effectively reduces that price to $45.80.

XLY Consumer Discretionary Select Sector SPDR – Shares of the ETF have risen by about 0.5% to $22.60 as the ticker edged onto our ‘most active by option volume’ market scanner this afternoon due to one investor who established a ratio put spread in the June contract. It appears that this trader is looking for downside protection on the fund and so bought 12,500 puts at the June 22 strike price for 1.30 apiece spread against the sale of 25,000 puts for 65 cents at the June 20 strike price. The put spread was initiated at no cost the trader given the premium of the respective puts. If shares should decline all the way to $20.00 by expiration this individual will have reeled in the maximum profit of 2.00 possible on the trade. Profits will begin to amass to the downside at any share price below $22.00. Despite carrying a net short put position below a share price of $20.00 losses would not accrue unless shares slipped beneath $18.00, but would rise penny-for-penny thereafter.

ITT ITT Corporation – Shares of the multi-industry company engaged in the design and manufacture of engineered products have remained relatively flat for the day and currently stand at $40.73. ITT appeared on our ‘hot by options volume’ market scanner after one investor initiated a sold straddle in the July contract. It appears that the straddle was established by the sale of 4,790 puts at the July 40 strike price for 2.77 apiece as well as the sale of 4,790 calls at the same strike price for 2.93 each. The gross premium enjoyed on the trade amounts to 5.70 and yields breakeven points at $45.70 to the upside and at $34.30 to the downside. The full 5.70 premium will be retained by the trader if shares settle at $40.00 by expiration. However, losses would be incurred at any share price above or below the breakeven points described above.

PFE Pfizer, Inc. – The global pharmaceutical company’s shares have slipped by 1% to $13.35 perhaps due to the fact that while first-quarter earnings of 54 cents beat analyst estimates of about 49 cents per share, profits declined by 2% as revenues declined for its Lipitor cholesterol medication and its smoking treatment, Chantix. Ignoring the near-term prospects for the company, one option trader looked to the January 2011 contract to establish a bullish stance on Pfizer. It appears that the investor purchased 27,820 calls for 44 cents apiece at the January 22.5 strike price. Over the next two years shares would need to increase by about 69% from the current price in order for the calls to land in-the-money by expiration at the start of 2011.

HUM Humana Inc. – The full-service benefits solutions company has experienced a 2.5% share price rally to $29.97 amid a report from analysts at Oppenheimer who believe Humana is undervalued and have reaffirmed their ‘outperform’ rating on the stock. The HUM ticker jumped to the top of our ‘hot by options volume’ market scanner after one investor populated the May and June contracts. It appears that this investor has taken advantage of the fall in implied volatility by closing out a sold-strangle established back on April 7, 2009. It looks like the trader originally sold 5,000 puts at the May 25 strike price for 1.70 each and also sold 5,000 calls at the May 30 strike for 1.90 apiece when shares were trading at $27.92 and volatility stood at 72.3%. The gross premium enjoyed by the investor amounted to 3.60 for the strangle, which today appears to have been bought back, less than three weeks later at 1.90. Today, with implied volatility down as low as 60% on the stock, the trader closed out the strangle at the same strikes described above by purchasing 5,000 puts for 35 cents per contract and 5,000 calls for 1.55 each. The investor has pocketed a net premium of 1.70 by closing out his position in the May contract. Further along at the June 32 strike price it looks as though the same investor was hungry for more premium and established a new short position by selling 5,000 calls for 1.60 apiece.

HSY The Hershey Company – The chocolate and confectionary products company has experienced a sweet share price rally of about 1% to $36.23. Bullish option investors looking for a sugar-high have scooped up more than 7,000 calls at the May 40 strike price for an average premium of 22 cents apiece. Shares would need to improve by another 11% from the current price in order for these optimists to amass profits beginning at the breakeven point of $40.22 by expiration. Other traders hungry for a rally targeted the June 40 strike where more than 1,500 calls were coveted for about 51 cents each. The frenzy of activity had more than 20,000 option contracts in play today which represents 62% of the total open interest on HSY of 32,106 lots. Option implied volatility has spiked to 37% up from yesterday’s reading of 31%. Perhaps the rise in volatility stems, in part, from renewed takeover speculation reported by one news source who indicated that Nestle may be interested in acquiring the company.

ERTS Electronic Arts, Inc. – The maker of software games is up by about 1% to $20.11 today. The call-to-put ratio has been driven up to more than 7-to-1 as optimistic investors looking for a rally in shares have traded more than 7 calls for every put in action on the stock. The May 22.5 strike price attracted bullish investors who purchased more than 4,200 calls for an average premium of 49 cents per contract. Those traders seeking an even more dynamic shift in shares looked to the May 24 strike and picked up some 1,200 calls for about 26 cents each. Further out in the June contract some investors were seen banking gains by selling 4,100 calls at the in-the-money June 20 strike price for about 1.91 each, while other individuals got long of 1,900 calls at the same strike. Option implied volatility on ERTS jumped as high as 67% today from yesterday’s reading of 63%, but has since come off slightly to stand at 65%.

NTRS Northern Trust Corporation – Shares of the TARP-funding recipient have dipped by more than 2.5% to stand at $53.63 amid reports that the company is looking to sell $1.25 billion in common stock and senior notes in order to fund a repurchase of the stake it previously sold to the US Treasury. Some option traders took advantage of the decline in shares to sell more than 6,600 put options at the May 50 strike price for an average premium of 2.03 per contract. Perhaps investors are taking the repayment of TARP funds as a positive sign for NTRS amid research published last week by Morgan Stanley that noted that the company was one of four who were, “very unlikely to need capital.” The sale of puts can be taken as a bullish sign that some option traders are able to shed downside protection at the May 50 strike. Option implied volatility has come way off for NTRS to the current value of 58% from the 68.97% reading taken at the start of the trading day.


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