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NRG Takeover Spills Into Curious Option Combo

Today’s tickers: EXC, NRG, PALM, ANF, CAL, AMTD & PAYX

EXC – The company has been increasingly less successful in trying to persuade shareholders at NRG – NRG Energy– to tender their shares to the company in what has become an ugly battle. Shares in both companies are on the rise today at $51.08 (Exelon) and $23.70 (NRG). Two sizeable footprints were left for analysts to explore in options trading. Here’s what we think is happening. Perhaps the easier half of the trade is a nearby July 22.50/17.50 put spread on shares of NRG. An investor bought 50,000 higher strike puts at 72 cents and sold 25,000 puts at the 17.50 for a nickel per contract. The investor likely expects that management at NRG will be successful in convincing its investors that the Exelon deal isn’t a good fit. The CEO mailed his thoughts urging investors to remain loyal to his leadership. In the event that the takeover fades, as appears the case, this investor might benefit from some of the hot money hopping out of the stock. Exelon options were a little more convoluted. An investor appears to have bought 50,000 July calls at the 55 strike at 39 cents and taking a sizeable credit on the sale of the same amount of calls expiring in August at the 50 strike. He’s possibly thinking that the near-term prospects for the company in the event of a botched deal would buoy the shares. Thereafter some of the optimism might fade. – Exelon Corp.

PALM – Shares of the Pre-maker, which launched earlier in June, are stable at $13.96 ahead of earnings data after the closing bell on Thursday. The fact that sales of the Pre won’t materially impact the bottom-line earnings numbers means we may have to wait longer for further developments from the company. However, investors have been in a buying tizzy for stock in the company all year and have driven shares from $1.14 to $15.25 recently. The options market, however, has been forced to maintain a careful eye on developments given the depths to which the shares plummeted earlier this year and still attributes a relatively high reading of implied volatility of 90% on options on the stock. That makes hedging a little more expensive that it ought and heading into earnings today, one investor appears to have tried to do so by implementing a put spread using the August contract. The trade involved 5,000 puts at the 12.5 strike traded at 1.25 while another 5,000 contracts at the 9.00 strike traded at 32 cents, and what we believe happened here is that the same investor may have used the premium proceeds from the sale of the lower strike puts to help cheapen the cost of the 12.5 strike. So instead of paying a raw 1.25 premium for protection against an ugly drop in the shares later today, the investor reduced his outlay to 93 cents. Potential profits from such a spread are limited to 2.57 should Palm’s shares reach the lower strike at expiation. – Palm Inc.

ANF– The company recently announced that it would nix its Ruehl brand and chain of stores, which had losses of $58 million in the year through January. The stores sold $44 T-shirts and $24 boxer shorts and failed to maintain its store traffic as a result of the economic slump. The company recently announced that store closures might cost cash and non-cash sums totaling $116 million. However, they recently warned that such costs might actually be materially more. Investors today appeared to implement two identical but nevertheless bearish strategies on the clothing retailer while its shares were trading at around $26.14. An August put spread and a November put spread, both using 26 and 21 strike prices were put into action on volumes of 13,000 and 14,000 lots respectively. Net premiums paid 1.80 and 2.20 respectively leading to potential profits of 3.20 and 2.80 in each case should Fitch slide to $21 by expiration. – Abercrombie & Fitch

CAL – The U.S. air carrier has enjoyed a significant rally of more than 5.5% today to arrive at $8.84. Perhaps the bullish move was fueled by the International Air Transport Association’s (IATA) belief that depressed global airline travel may have touched down to a bottom after passenger traffic plummeted 9.3% last month. One option trader active on CAL today is hoping for a moderate recovery in the underlying by the end of 2009. The investor was seen purchasing approximately 7,000 calls at the December 10 strike price for an average premium of 1.75 per contract. Shares of the airline would need to soar higher by 33% from the current price in order for the trader to begin to amass profits at the breakeven point of $11.75. – Continental Airlines, Inc.

AMTD – The provider of securities brokerage services and technology-based financial services attracted bullish call buyers to the options arena perhaps amid speculation that the firm may be a likely candidate to put in a bid for E*Trade Financial Corp. (ETFC). Shares of AMTD have enjoyed a rally of more than 3% to $17.93. The near-term July 20 strike price saw more than 5,200 calls purchased for an average premium of 10 cents per contract. Shares of the underlying would need to add about 12% to the current price before traders long the July 20 calls begin to garner profits starting at the breakeven point of $20.10 by expiration next month. – TD Ameritrade Holding Corp.

PAYX – The payroll, human resource, and employee benefits outsourcing solutions firm has experienced a decline in shares of approximately 6% to $25.06 after it reported fourth-quarter earnings that failed to meet analyst expectations. Further impetus for today’s bearish move was guidance from PAYX that forecasts a 10% slump in sales for 2010. In line with the disappointing profit report, option traders picked up bearish puts in the near-term July contract. More than 4,000 puts were coveted at the July 22.5 strike price for an average premium of 19 cents apiece. Perhaps investors expect to see additional downward movement before expiration next month. The puts will begin to yield profits if shares slip another 11% to the breakeven point at $22.31. – Paychex, Inc.


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