American Express Investor Trades Puts for Calls

July 21, 2009

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Today’s tickers: AXP, EFA, XL, LXK, AVP, WERN, ISRG & CHK

AXP – An investor hoping for a medium-term rally in AXP put on a bullish reversal in the October contract. Shares of the global payments and travel company are currently trading a wee-bit higher, up 0.25% to $28.94. The reversal involved the sale of 7,500 puts at the October 26 strike price for a premium of 1.45 each spread against the purchase of 7,500 calls at the higher October 31 strike for 1.85 apiece. The investor paid a net 40 cents for the transaction. He will realize profits on the trade if shares can rally 9% higher to breach the breakeven point at $31.40 by expiration. Interestingly, we essentially observed the antithesis of the trade we just described, last Friday July 17, 2009. Rather than getting long call options, an investor last week sold calls at the October 30 strike to buy put options at the October 25 strike. The direction in which the price of the underlying moves over the next few months will determine whether today’s bullish reversal or last week’s risk reversal result in profits to those individuals responsible for the trades. – American Express Co.

EFA – Shares of the exchange-traded fund have dipped 0.25% to stand at $47.63 this afternoon. The EFA caught our attention after a couple of bullish reversals were established in the December and January 2010 contracts. One investor sold 5,000 puts at the December 49 strike price for a premium of 3.90 apiece in order to purchase 5,000 calls at the same strike for 2.72 each. The trader received a net credit of 1.18 per contract for the transaction. Additional profits are available if shares rally above $49.00 by expiration at the conclusion of 2009. Another bullish-reversal was enacted at the January 49 strike price, although the trade involved the sale of 1,100 puts against the purchase of 1,100 calls for a net credit of 1.53 to the investor. – iShares MSCI EAFE Index ETF

XL – The provider of insurance and reinsurance coverage edged onto our ‘hot by options volume’ market scanner after a large-volume transaction was initiated in the January 2010 contract. Shares of XL are currently off by 2% to $12.53. At first glance, the 20,000 put options purchased at the January 5.0 strike price for 35 cents apiece, smells of bearish. However, it appears that the trade was tied to stock and is likely the work of an investor who has purchased shares of the underlying and an accompanying number of protective put options. The trader is hoping to see the price of XL appreciate, but is protected in case shares plummet 63% and fall beneath the breakeven point at $4.65 by expiration. – XL Capital Ltd.

LXK – Shares have plummeted nearly 20% today to $15.16 for the printing and imaging solutions provider after reporting second-quarter earnings per share of 55 cents which failed to meet consensus estimates of 60 cents. Option traders who had initially taken long-term bullish stances on the stock threw in the towel today by shedding calls in the January 2010 contract. Investors sold 7,300 calls at the January 17.5 strike price for 1.02 apiece and surrendered another 5,000 calls at the higher January 20 strike to capture 35 cents option premium. Long-term bearish sentiment on LXK was confirmed with the purchase of 1,000 puts at the January 15 strike price for 1.75 per contract. Investors long the put options will begin to realize profits beneath the breakeven point at $13.25. – Lexmark International, Inc.

AVP – The global manufacturer and marketer of beauty products received an upgrade to ‘outperform’ at BMO Capital Markets today, boosting shares up by more than 2.5% to $29.17. Analysts at BMO Markets also assigned the stock a price target of $40.00. Bullish option traders were seen selling put options in the near-term August contract. Approximately 1,500 put options were sold at the now out-of-the-money August 29 strike price for an average premium of 95 cents apiece. Investors will retain the full 95 cent premium as long as the puts land out-of-the-money by expiration. Otherwise, traders may have shares of the underlying put to them for an effective price of $28.05 each in the event that the stock is trading beneath $29.00 before the third Friday of the month. Additional bullishness was seen at the August 30 strike price where about 1,000 calls were coveted for an average price of 95 cents per contract. Shares must rally higher by about 6% before investors begin to amass profits beginning at the breakeven point of $30.95. – Avon Products, Inc.

WERN – Shares of the trucking and logistics company have tumbled 9% today to $17.56 after the firm reported second-quarter profits have slumped 30% on continued weakness in demand for shipping. WERN edged onto our ‘hot by options volume’ market scanner after one option trader established a sold strangle in the December contract. The investor shed 2,500 puts at the December 12.5 strike price for a premium of 42 cents apiece in conjunction with the sale of 2,500 calls at the December 22.5 strike for 52 cents each. The gross premium received for the transaction amounts to 94 cents. If shares remain ‘strangled’ within the strike prices described through expiration, the trader will retain the full 94 cent premium. This individual does not seem to believe that shares are likely to slip beneath the 52-week low for the stock of $12.59 attained back on March 9, 2009. We note that the premium from the trade run out of juice below a share price of $11.56 and above an upside prce of $23.44. –Werner Enterprises, Inc.

ISRG – The maker of a robotics system for assisting minimally invasive surgery has experienced a rally in shares of more than 1.5% to $167.15. The firm received an upgrade to ‘outperform’ yesterday by analysts at William Blair & Co., perhaps encouraging the bullish activity observed on ISRG today. Investors positioning for significant upward movement in the price of the stock, looked to the August 190 strike price to purchase 1,800 calls for an average premium of 4.16 apiece. Other traders picked up approximately 1,100 calls at the higher August 195 strike for 3.15 each. Shares of ISRG must surge 16% to $194.16 for traders long the August 190 strike calls to breakeven, versus a jump of about 19% in the stock to $198.15 for call-buyers at the August 195 strike price to begin to amass profits. – Intuitive Surgical, Inc.

CHK – Shares of the natural gas and oil exploration and production company are higher by more than 1.5% today to stand at $20.72. Investors piled into both calls and puts at the August 21 strike price. Perhaps some traders are protecting recent gains on the stock while others are positioning for continued near-term bullish movement. Some 7,200 call options were purchased at the August 21 strike for 1.00 apiece. Investors will realize profits if shares can jump at least 6% to breach the breakeven point at $22.00 by expiration. Put-buyers coveted about 9,000 lots at the same strike price for 1.20 per contract. If traders happen to be long the stock, downside protection provided by the put options would kick in beneath the breakeven share price of $19.80. – Chesapeake Energy Corp.

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