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Creeping Confidence Emerging In Citi?

Today’s tickers: C, WLP, ORCL, PCAR, EK, TLB & RVBD

C – Not sure what’s going on at Citigroup today, at least in the options patch. Base salaries might be up 50% for some employees who chose to weather the storm as its share took a battering along the way to ceding some ownership to the government, but one options strategy today could imply better times for the banker within 18 months. Using the January 2011 put options, we spy a 20,000 lot spread in which we observe the 2.5 puts were bought for 74 cents. Against this, we see identical volume at the 7.5 strike, which by the spread definition must have been sold at 4.84. That combination would leave the investor with a credit spread for a premium coming his way of 4.10. Losses accrue beneath a share price of $3.40, which is the point of using the 2.5 strikes to limit losses. If we’re looking at this trade correctly and both sides were opening bargains, then this investor would appear to be predicting better times ahead for Citi on the assumption that it’s getting its house in order. The question mark becomes whether the investor is closing old positions at either strike, where admittedly there is a ton of open interest. – Citigroup Inc.

WLP– The Indiana-based health benefits company edged onto our ‘most active by options volume’ market scanner after one investor appears to have established a ratio call spread in the August contract. Shares of the firm are up slightly by about 1.5% to $49.71. Hoping for continued bullish movement, the trader purchased 5,000 calls at the just out-of-the-money August 50 strike price for a premium of 3.50 each and simultaneously sold 10,000 calls at the higher August 55 strike for 1.54 per contract. The net cost of the transaction amounts to 42 cents and yields maximum potential profits of 4.58 if shares can rally up to $55.00 by expiration. The investor would begin to amass profits if shares increase just 71 cents from the current price to surpass the breakeven point at $50.42 by expiration in a couple of months. – WellPoint, Inc.

ORCL – Shares of the second-largest software maker have surged 8% to $21.41 and bullish option traders have taken the rally in stride by getting long call options on the stock in the August contract. The rise in shares is likely fueled by Oracle’s fourth-quarter earnings which were announced yesterday. Profits for the company came in 2 pennies greater than analysts had expected to 46 cents per share. Oracle-bulls hoping for continued upward movement in the price of the underlying coveted 12,000 calls at the August 24 strike price for an average premium of 19 cents per contract. Traders long the call options will realize profits if shares can gain 13% over the current price and breach the breakeven point at $24.19 by expiration. Other options activity of note was the purchase of more than 7,000 puts at the September 21 strike price for 1.25 per contract. Perhaps put-buyers are merely picking up downside protection in order to lock in gains experienced during the rally. – Oracle Corp.

PCAR – The world’s leading designer of light-, medium-, and heavy-duty trucks attracted one bullish investor to initiate a buy-write strategy on the stock amid a share price rally of 3.5% to $31.75. The trader is hoping for upward movement in PCAR through expiration in January 2010 as he was seen purchasing shares of the underlying stock at approximately $31.57 each in addition to writing 4,000 puts at the January 30 strike price for a rich premium of 4.43 per contract. Writing the puts effectively reduces the investor’s cost of getting long the shares to $27.14. – Paccar, Inc.

EK– One wary investor chose today’s rally in the imaging company’s shares as his “Kodak moment” to scoop up downside protection on the stock. Shares of the firm are higher by about 2% to $2.71. The EK ticker symbol jumped onto our ‘hot by options volume’ market scanner after the bearish trader purchased 10,000 puts at the October 1.0 strike price for 9 pennies per contract. The already bruised and battered stock would need to crash through the 52-week low of $2.01 and erode approximately 65% from the current price before profits are realized on the long put position. We note that the trader responsible for the transaction could also see profits by selling to close the position in the event that options premium on the puts increases by expiration. That could conceivably happen if implied volatility on the stock increases. Option implied volatility on the stock has climbed up from the opening reading of 90% to the current value of nearly 100%. – Eastman Kodak Company

TLB – Shares of specialty retailer are higher by 4% today at $5.97 and while that’s still off from last Friday’s $7.22 high, it’s a long, long way from December’s $1.20 low. Actually, it was early November that its shares broke from $7.50 and reached that 52-week low within just one month. Are the scary times over for the fashion retailer? Well that’s the opinion of one options bull today who appears to have sold 15,000 put options at the 5.0 strike expiring in January. We feel that this investor possibly senses that the recent consolidation at $5.00 on the charts before its shares catapulted higher is now a strong area of chart support, which means he’s unlikely to be able to purchase at that price in the near future. By writing put options, he stands the risk of having shares put to him at the price. In exchange for accepting that risk the investor takes in a 1.25 premium. In essence, if shares are put to him at $5.00 each, he’s really only paying $3.75 for them. This is a bullish trade and while not necessarily arguing for lower volatility ahead it’s a nice example of how to use options to your advantage so long as you understand the risks involved. – Talbots Inc.

RVBD– The telecommunications equipment firm, which specializes in wide-area network optimization, has experienced a nearly 4.5% increase in its share price to $24.39 amid a recommendation of ‘market perform’ by an analyst at FBR Capital Markets today. One option trader chose to take a more bullish stance on the stock by rolling a long call position up one strike. The investor appears to have originally purchased 5,000 calls at the July 22.5 strike price for a premium of 1.90 apiece back on June 11, 2009. Today he sold the same 5,000 lots at the 22.5 strike for 2.60 each and established a new long position in the amount of 5,000 contracts at the higher July 25 strike price for a premium of 1.15. This individual received profits of 70 cents for rolling up a strike increasing confidence in making a fresh position higher up the ladder. Additional profits would amass if shares were to rally 4% to breach the breakeven point at $25.45 by expiration next month. – Riverbed Technology, Inc.

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  1.  I noticed a huge trade on VLO’s JAN2011 12.50 PUTs & 20 CALLs.  Both strikes had a volume of 20,000.  Although I can’t  tell wheter they sold the puts to buy the calls or vice versa?