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Wednesday, February 21, 2024

D.R. Horton Rally Attracts Option Bulls

Today’s tickers: DHI, MBI, CROX, CSC

DHI– Shares of the largest U.S. homebuilder by sales have surged more than 8% to $13.60 after the firm was added to Goldman Sachs’ ‘conviction buy list’. Investors were observed employing various option strategies on the stock in order to take advantage of today’s bullish move. Plain-vanilla bullish call buyers targeted the November 17.5 strike price where nearly 5,000 calls were picked up for an average premium of 35 cents apiece. The stock would need to jump 31% by expiration in November before these traders breakeven at a price of $17.85. Additionally, a sold strangle was initiated in the nearer-term September contract by a more conservative bullish player. The sale of 2,500 puts at the September 12 strike for 50 cents each was combined with the sale of 2,500 calls at the higher September 14 strike for 65 cents. The investor enjoys a gross premium of 1.15 on the transaction and retains the full amount as long as the price of the stock remains ‘strangled’ between the strike prices described through expiration. Such a trade suggests that this trader believes the current rally has likely maxed out at the current level, at least through the third week in September. The short strangle position leaves the investor vulnerable to potentially unlimited losses above the breakeven point to the upside at $15.15, as well as exposed to losses to the downside beneath the breakeven point at $10.85. – D.R. Horton, Inc.

MBI– Shares of the bond insurer surrendered a fraction of gains enjoyed during the more than 26% rally during yesterday’s trading session to a high of $6.95. The stock is currently 2.75% lower today to stand at $6.01. Bullish options activity continued this morning despite the slight dip down in shares. One investor appears to have effectively established a bullish reversal in the January 2010 contract by shedding puts to purchase calls. Though the transactions were not marked as spreads, they were executed within four seconds of one another. The January 5.0 strike had 10,000 puts sold for a premium of 90 cents apiece, and the higher January 10 strike had 18,000 calls purchased for 55 cents per contract. The investor will retain the full premium on the sale of the put options as long as the stock remains higher than $5.00 by expiration. Shares of MBIA would need to rally a whopping 76% higher in order for the investor to breakeven at a price of $10.55 on the purchase of the calls. – MBIA Inc.

CROX– The designer of colorful and casual footwear and apparel has experienced a massive surge in shares, jumping more than 35% to $5.77. CROX was upgraded to ‘overweight’ from ‘neutral’ at Piper Jaffray amid new earnings guidance from the firm. The company revealed that they expect a maximum loss of 14 cents per share, which is much narrower than the 20 cent loss analysts had previously anticipated. Option traders reacted to the news by picking up bullish call options on the stock in the August and September contracts. The near-term August 6.0 strike had about 1,000 calls purchased for an average premium of 32 cents apiece. Heavier volume was seen at the September 6.0 strike where approximately 4,000 calls were coveted for 63 cents each. Shares must climb 15% higher by expiration in order for investors long the September 6.0 strike calls to breakeven at a price of $6.63. Option implied volatility collapsed from yesterday’s high of 139% to the current reading of 109% following the earnings guidance. – Crocs, Inc.

CSC– The information technology and professional services company edged onto our ‘hot by options volume’ market scanner following bullish action in the August contract. Shares of CSC have lifted nearly 2% higher to $49.50 today after the firm reported first-quarter profits which exceeded analyst expectations by 44%. Additionally, Citigroup upgraded the company to ‘hold’ from ‘sell’. Bullish traders shed nearly 5,000 puts at the in-the-money August 50 strike price for an average premium of 1.72 per contract. These individuals may be expecting shares to rise above $50.00 by expiration, thereby retaining the full premium received on the sale. Put-sellers pocket the 1.72 premium in exchange for bearing the risk of having shares of the underlying put to them by expiration at an effective price of $48.28 per share. – Computer Sciences Corp.

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