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Lights back on in Vegas

Today’s tickers: MGM, DFS, MOS, WFR, LVS, XHB, KFT & HNZ

MGM MGM Mirage, Inc. – Shares of the biggest casino owner on the Las Vegas Strip have skyrocketed by more than 42% to $13.41 amid reports from the company that occupancy has recovered and convention cancellations have lessened. More than 112,000 option contracts on the stock traded today with a number of bullish plays by investors looking for continued strength in its share price. The company also received an upgrade by – surprise, surprise – Bank of America/Merrill Lynch to ‘buy’ after also upgrading fellow casino giant, Las Vegas Sands Corp., as well. Early bird investors were able to buy call options that have since landed in-the-money during the rally at the May 12.5 strike price for an average premium of just 83 cents. Now (post 2pm EST) getting long of those same calls cost 1.75 apiece. More optimistic traders looked to the May 15 strike where more than 8,000 calls were traded. At least 3,000 of those calls were purchased for about 38 cents each earlier today. However, the premium has since increased to the current ask price of 65 cents. Option implied volatility on the stock is currently at 150% down from 200% recorded last Thursday.

DFS Discover Financial Services – The credit card issuer and electronic payment services firm is up by less than 1% to $9.02. Option investors were observed buying bullish call options on the stock despite concerns over weaker earnings for the first-quarter across the board for credit card issuers. At the May 10 strike price traders exchanged calls about 15,000 times with more than 8,300 contracts bought at an average premium of 24 cents each. Optimism spread to the June contract where about 3,400 puts were shed at the June 7.5 strike for a VWAP of 43 cents. The June 10 strike witnessed the purchase of 3,500 calls for about 72 cents apiece. The most bullish individuals discovered calls available for the taking at the July 12.5 strike price where some 1,100 were coveted for 33 cents per contract. The more than 29,900 contracts traded on the stock today represent 54% of the existing open interest on DFS of 55,244 lots.

MOS The Mosaic Company – The producer of potash and animal feed has experienced a rally in shares of more than 4% to $46.04 amid rumors reported by one news source regarding renewed speculation over a potential takeover by BHP Billiton. Mosaic has gone ex-dividend today, but the cutoff date for the company’s quarterly dividend did not squelch investor interest in bullish call options. Nearly 8,000 calls were purchased at the May 50 strike price for an average premium of 50 cents apiece. Shares would need increase by another 9% for traders to amass profits beginning at the breakeven price of $50.50 by expiration this month.

WFR MEMC Electronic Materials, Inc. – A provider of wafers to major semiconductor device and solar cell manufacturers, MEMC, has enjoyed share price gains of 3% to $18.65 today despite having reported that sales halved from one year ago. Perhaps the bullish options trading observed on the stock stems from MEMC’s reported cost cutting measures as well as its wad of $1.3 billion in cash combined with its minimal debt level. These positive highlights likely serve to dissipate the recent weak earnings given the harsh economic environment facing the semiconductor industry. Option bulls stampeded the March contract, picking up more than 8,300 at the May 20 strike price for an average premium of 50 cents apiece. Optimism spread to the higher May 22.5 strike where some 1,800 calls were coveted for 15 cents. Shares would need to rise by another 21% for the May 22.5 options to land in-the-money by expiration.

LVS Las Vegas Sands Corp. – The owner and operator of a number of casino resorts continues to rally, up by more than 14.5% to $10.88 amid an upgrade to ‘neutral’ from ‘underperform’ by Bank of America/Merrill Lynch. Option investors exhibited a mixture of activity on the stock with some individuals looking to get long of bullish call options while others locked in gains by picking up downside protection in the near-term May contract. LVS has made a significant comeback over the past couple of months since touching down to its 52-week low of $1.38 on March 9th, 2009. Shares have rapidly advanced over the past 58 days gaining an astounding 678% from the March low to today’s current price, although the stock is still light years away from the 52-week high of $76.50 recorded approximately one year ago. Some investors were seen banking gains by selling May 11 strike calls, while others purchased the contracts for about 1.00 apiece looking for shares to rally through the breakeven point at $12.00 by expiration. More optimistic traders purchased calls as high as the May 12.5 strike for an average premium of 50 cents each. Fresh buying was observed on the put side as investors sought to lock in gains by scooping up downside protection. Some 3,000 puts were purchased at the May 10 strike price for about 70 cents each. One more bearish individual who perhaps sees the rally imploding over the next few weeks established a put spread. He picked up 2,000 puts at the May 7.5 strike for a premium of 20 cents each spread against the sale of 2,000 puts at the May 5.0 strike price for a nickel per contract. The net cost of the protection amounts to 15 cents, although shares would need to more than halve to $5.00 in order for the trader to reel in the maximum potential profit on the spread of 2.35.

XHB Homebuilders Select Sector SPDR – Shares of the homebuilders ETF have slipped by 1.3% to $13.90. XHB appeared on our ‘most active by options volume’ market scanner after one investor looks to have initiated a bearish position through the short sale of shares of the underlying fund in the expectation that shares will continue to fall. Perhaps this slightly contrarian trade in the face of a broad market rally stems from this individual’s assessment that the rally has reached a peak at this time. The improvement in home sales in March and home starts in February were not significant enough to convince the trader of continued bullish moves in the fund. Thus, the short sale was positioned in conjunction with the purchase of 20,000 calls at the September 17 strike price for an average premium of 87 cents apiece, thereby initiating an effective stop loss. The calls serve to cap the trader’s losses in the event that shares rally by expiration in September. The maximum losses faced on the trade amount to approximately 3.10, or the difference between the sale price of the shares and the September 17 strike price. The maximum loss is derived as such because the investor would be able to take delivery of shares of the underlying should the stock rally through $17.00 by expiration.

KFT Kraft Foods, Inc. – The retail food behemoth that manufactures and sells packaged foods and beverages around the globe has experienced a 7% rally to $25.97. The bullish move in shares is due to a 15% increase in its first-quarter profit to 45 cents per share on rising prices and cost savings. Option traders hungry for calls looked to the May and June contracts to get their fill. At the nearly in-the-money May 26 strike price, some 1,400 calls were scooped up for an average premium of 45 cents apiece. Further along, one trader looks to have banked significant gains on the sale of 5,000 calls for a hefty premium of 2.30 at the in-the-money June 24 strike price. It appears that he originally purchased the calls on April 16th for just 65 cents, yielding gains of about 1.65 by closing the position today. Bulls looked as high as the June 27.5 strike and bought about 1,300 calls for 40 cents each.

HNZ H.J. Heinz Company – Shares of the food products company, and master artisans of delicious ketchup and other condiments, have rallied by about 1% to $35.40 on the heels of Kraft’s bullish earnings release. Call buyers selected the May 36 strike and picked up about 2,900 lots for a premium of 57 cents apiece. More optimistic individuals coveted 2,800 calls at the higher May 37 strike price for about 28 cents each. Investors drove the call-to-put ratio to more than 17-to-1 clearly demonstrating their preference for call options today. Option implied volatility is up slightly on the stock from 28% yesterday to the current reading of 33%.

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