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Monday, March 4, 2024

Bullish Option Play at State Street Despite Weaker Shares

Today’s tickers: STT, HPQ, AMAT, PBR, BYD, AMD, VALE & ITUB

STT– The 1% decline in State Street’s shares to $43.75 today has not deterred one investor from enacting a bullish ratio call spread in the July contract. Hoping for a nearer-term rally in the stock, the trader bought 5,000 calls at the July 44 strike price for 4.70 each and sold 10,000 calls at the higher July 50 strike for an average premium of 2.20 apiece. The spread cost the investor just 30 cents (1*4.70 – 2*2.20 = 0.30) and yields a maximum potential profit of 5.70 if shares were to climb to $50.00 by expiration. The stock need only rise about 55 cents from the current value to surpass the breakeven point for the trade at $44.30. – State Street Corp.

HPQ – Shares have remained relatively flat today and are currently at $34.45. Our attention was drawn to two trades that appear to be covered calls initiated by investors looking for bullish movement in the stock. The first of the two transactions was the work of a nearer-term HPQ-optimist who looks to have purchased shares of the underlying stock and simultaneously written about 5,000 calls at the July 38 strike price for a premium of 55 cents each. This tactic limits potential gains for the investor but in return effectively reduces the price per share to $34.20 (assuming a purchase price of $34.75) and also provides an exit strategy should the July 38 calls land in-the-money by expiration. If the underlying shares are called away at expiration the trader will have realized total gains of 11%. The other covered-call-cohort we observed on HPQ targeted the August 40 strike price and wrote about 4,500 calls for a premium of 63 cents each. This individual effectively reduced the price of the underlying shares to approximately $34.19 (assuming a purchase price of $34.82) by writing the call options. The investor will bank gains of 17% on the trade if HPQ rallies through $40.00 and the underlying shares are called away from him at expiration in August. – Hewlett-Packard Co.

AMAT– The manufacturer and marketer of integrated circuit fabrication equipment for the global semiconductor industry, has experienced a more than 3% rally in shares to $11.30. Option traders drove the call-to-put ratio up to 11.18 indicating that more than 11 call options were traded for each put option on the stock. Transactions on AMAT were decidedly bullish in the July contract as investors positioned themselves for continued upward movement in shares. The in-the-money July 10 strike price saw more than 8,600 calls coveted for an average premium of 1.26 each while the higher July 11 strike, also in-the-money, had some 10,000 calls bought for about 95 cents per contract. Investors who were able to buy the July 10 strike calls for 1.26 have already begun to amass profits as shares have surpassed the breakeven point at $11.26. Traders are currently paying a higher premium of 1.64 for the same July 10 calls and would need shares to rise to a higher breakeven price of $11.64 before turning a profit. Individuals long of in-the-money July 11 strike calls are hoping for AMAT to rally through $11.95 by expiration. – Applied Materials, Inc.

PBR– Shares of the Brazilian oil and gas company are up by about 1% to $42.37 following the rise in crude oil above $63.00 a barrel in New York. We observed two interesting option players at work on the stock. One individual looked to the near-term June 44 strike price to establish a bought straddle. The transaction involved the purchase of 3,000 calls for a premium of 1.41 apiece along with the purchase of 3,000 puts for 2.78. The net cost of the straddle amounts to 4.19 and yields breakeven points at $48.19 to the upside and at $39.81 to the downside. The investor is expecting shares of PBR to move hard and fast by expiration. He requires a more than 13% rally to amass profits to the upside or about a 6% decline in the stock to reel in profits to the downside. While this investor appears uncertain as to the direction of PBR’s shares in the short-term, another trader is expecting medium-term bearish movement in the stock. The bearish trader put on a ratio put spread by purchasing 3,500 puts at the October 40 strike price for 3.80 apiece spread against the sale of 7,000 puts at the October 32.5 strike for a premium of 1.47 each. The spread incurs a net cost of 86 cents to the investor (1*3.80 – 2*1.47 = 0.86) and yields a maximum potential profit of 6.64 if shares decline to $32.50 by expiration. Shares of the state-controlled energy company would need to fall about 7% through the breakeven point at $39.14 before the investor begins to amass profits on the trade. – Petroleo Brasileiro SA ADR

BYD– Option bulls are looking to score coveted call options on the multi-jurisdictional gaming company amid a share price rally of more than 5.5% to $10.78. Investors bracing for further upside movement in the stock purchased more than 3,900 calls at the June 12.5 strike price for an average premium of 37 cents per contract. Shares of the casino operator must gain an additional 19% by expiration to breach the breakeven point at $12.87 before traders long of calls begin to amass profits. Option implied volatility spiked higher to 91% on this morning’s rally but has since tapered off slightly to the current reading of 86%. Moody’s recently reduced the company’s ratings outlook to negative, which took some shine off its share price, although earlier this month shares did trade above the $12.50 strike price for several days. – Boyd Gaming Corporation

AMD– The global semiconductor company appeared on our ‘most active by options volume’ market scanner after a slightly bullish trader initiated a call spread in the near-term June contract. Shares are currently higher by nearly 4% to stand at $4.71. The investor established his position by purchasing 10,000 calls at the June 4.0 strike price for a premium of 70 cents apiece spread against the sale of 10,000 calls at the June 5.0 strike for 18 cents each. The net cost of the spread amounts to 52 cents and yields a maximum potential profit of 48 cents if shares were to rally up to $5.00 by expiration. Given the current share price of AMD the investor has already begun to amass profits to the upside today as the breakeven point of $4.52 has already been surpassed. If the June 5.0 call options fail to land in-the-money by expiration, the trader will be able to take delivery of the underlying shares. But, the short call position currently held by the investor at the June 5.0 strike would require him to deliver shares to someone else in the event that shares rise above $5.00 effectively limiting his gains to just 48 cents. – Advanced Micro Devices, Inc.

VALE – The world’s largest iron-ore producer’s shares have lifted approximately 1% to $19.45 despite the downgrade to ‘neutral’ from ‘buy’ the mining company received from Goldman Sachs this morning. The downgrade was paired with a reduction in earnings forecasts for VALE for 2009 and 2010 due to lower metal prices and a stronger Brazilian currency. Option trading was put-heavy as investors exchanged more than eight puts to every call in action on the stock. The near-term June 15 strike price appears to have had some 18,000 puts purchased for a premium of 10 cents per contract. Such a trade could be the work of an investor long the stock looking for relatively cheap downside protection. If this is the case the protection would kick in if shares declined by about 23% from the current price through the breakeven point at $14.90 by expiration. Otherwise, the puts could have been scooped up by a bearish investor hoping to profit from a sharp decline in the stock over the next few weeks. We note that an additional 6,300 put options have traded at the higher June 18 strike price and could signal additional bearish sentiment for VALE following Goldman’s downgrade. – Companhia Vale do Rio Doce ADS

ITUB– Shares of Brazil’s largest bank have climbed nearly 3% to $16.15 amid an upgrade to ‘buy’ from ‘neutral’ by one analyst at Bank of America. The upgrade this morning comes on the heels of gains enjoyed by Brazilian stocks for the fourth day in a row led by oil’s six-month high and April’s reported increase in the country’s bank lending. ITUB jumped onto our ‘hot by options volume’ market scanner amid a frenzy of call transactions observed in the near-term June contract. Investors looking for continued bullish movement in the stock purchased a minimum of 5,500 calls at the June 17.5 strike price for an average premium of 32 cents each. More than 15,700 calls changed hands at the June 17.5 strike although 7,600 of the lots traded to the middle of the market. Those bracing for further upside will breakeven at a price of $17.82 and reel in profits if shares rally higher by 10% by expiration. Option implied volatility soared as high as 60% during the trading day up from this morning’s opening value of 45%. – Itau Unibanco Banco Multiplo SA

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