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Monday, July 15, 2024

Caterpillar Bulldozes Higher

Today’s tickers: CAT, S, INTC, YHOO, GE, XHB & HAL

CAT – Caterpillar, Inc. – Shares of the world’s largest maker of construction equipment have gained nearly 3.5% during the trading session to stand at $47.06 despite reports of accelerated declines in machinery sales to retailers during the month of July. At first glance, the 20,000 put options purchased at the January 2010 40 strike price for 2.72 apiece, looks bearish. However, we believe the puts are likely tied to the acquisition of an equivalent number of shares of the underlying stock, and is thus a bullish play. The purchase of married put options provides the investor with downside protection through expiration day in January. This individual is hoping to see the price of CAT appreciate, but is immune from losses beneath the breakeven share price of $37.28. We note that the puts are deep out-of-the-money. Thus, downside protection would not kick in unless the investor had already experienced a more than 20% decline in the value of the underlying shares.

S – Sprint Nextel Corp. – The communications company edged onto our ‘most active by options volume’ market scanner this afternoon following a burst of options activity in the November contract. Shares of the firm are currently higher by about 2.5% to $3.92. Investors essentially established short straddles at the November 4.0 strike price by shedding 15,000 calls for a premium of 45 cents apiece and selling 15,000 puts for about 50 cents each. Such positioning indicates that traders expect shares of Sprint to settle near $4.00 by expiration. If this occurs, investors will retain the 95 cent gross premium received on the sale. The premium pocketed today compensates traders for bearing the risk that the stock shifts away from the $4.00 level. If shares were to rally higher, investors are exposed to potentially unlimited losses above the breakeven point to the upside at $4.95. On the other hand, losses would begin to amass to the downside if shares slip beneath $3.05 by expiration.

INTC – Intel Corp. – The semiconductor chip maker has enjoyed a 0.5% increase in shares today to $18.80, but a bullish reversal play on the stock suggests one investor is positioning for more significant gains. It appears that the trader shed 8,800 puts at the January 2010 17.5 strike price for a premium of 1.13 apiece in order to finance the purchase of 8,800 calls at the higher January 20 strike for 1.08. This individual receives a net credit of a nickel per contract on the trade. He will add to his profits if shares surge approximately 6% from the current price to breach the $20.00 level by expiration. The 5 cent credit is retained by the trader as long as shares remain higher than $17.50. Intel has not traded through $20.00 since September 12, 2008, but the stock came very close when it reached a 10-month high of about $19.48 on July 24, 2009.

YHOO – Yahoo!, Inc. – Bullish options activity in the January 2011 contract this morning suggests that at least one investor is expecting shares of the internet company to recover over the next 16 months. The stock has improved slightly today to stand about 0.5% higher to $14.78. Trading on the stock today perhaps indicates that investor optimism surrounding the company is on the mend. Shares of the stock plummeted following the announcement of a partnership with Microsoft Corp, the terms of which seemed unfavorable to many investors. Today, an analyst at RBC Capital Markets has postulated that the shift in search-related costs at YHOO to Microsoft may augment Yahoo’s EBITDA margins over the next few years. Perhaps the longer-term positive guidance from RBC has coaxed the bullish trader we observed in the January 2011 contract today. The investor funded the purchase of call spread by shedding 3,000 puts at the January 12.5 strike price for a premium of 1.82 apiece. The call spread involved the purchase of 3,000 calls at the January 15 strike for 3.05 each against the sale of 3,000 calls at the higher January 20 strike for 1.33 per contract. The trader receives a net credit of 10 cents on the transaction and has positioned himself to amass additional potential profits of 5.00 in the event that YHOO reaches $20.00 by expiration. Shares need only appreciate by approximately 1.5% in order for the investor to begin to profit at the breakeven price of $15.00. The 10 cent credit is retained in full as long as shares remain higher than $12.50 through expiration.

GE General Electric – With the S&P 500 index up 1.7%, many large cap stocks are roaring ahead. Mr. Bernanke’s continued “leveling out” optimism is playing right into the hands of those bullish investors wanting to take stock of events. General Electric naturally stands to gain from an end to the recession given its broad exposure to several sensitive economic areas and its shares have risen in stature at almost double the pace of the official benchmark. At $14.26 shares are trading at 10.6 times trailing earnings and the next target to the upside is the $14.88 peak of three weeks ago. Option trading patterns don’t appear to vilify the performance. Call options expiring in both September and January securing buying rights at the fixed price of $14.00 per share piqued our interest today given the fact that the bias appears to be selling. This suggests a lack of conviction that investors would remain as optimistic going forward. It is plausible that there maybe some profit taking going on from early-bird investors, but why not wait for a rally to the August peak? It’s more likely the case that some investors are listening to Mr. Bernanke’s “leveling out” expression and wondering if that’s consistent with further gains for equities.

XHB – SPDR Homebuilders ETF – Shares of the homebuilders exchange-traded fund have increased more than 4% to $15.40 after data showed a jump in existing home sales beyond any gains from records kept since 1999. Some 31% of the 5.24 million homes sold in July (annualized data) were homes sold short or at some stage of foreclosure. The potential for a reduction in the housing market’s bloated inventory is likely a catalyst today for share price gains for builders. One investor who had positioned himself for the current rally was rewarded for his optimism and banked gains this morning by selling to close large chunks of call options. It appears that 20,000 calls were originally purchased for a premium of 75 cents apiece at the near-term September 14 strike price back on July 24, 2009. Today, the investor responsible for the trade sold the calls for 1.30 per contract, taking in profits of 55 cents for a total of $1,100,000. Another lot of 20,000 calls, which were originally bought at the December 16 strike for 65 cents each, were also established on July 24, 2009, at the same exact time. These calls were sold today for 90 cents per contract, yielding profits of 25 cents for a total of $500,000. The trader responsible for the transactions has likely raked in net profits of $1.6 million by closing out the positions today.

HAL – Halliburton Co. – The Texas-based oil and gas company has realized a more than 3% rally in shares to stand at $25.10. It appears that one investor may have established a covered call on the stock today by purchasing shares of the underlying and simultaneously shedding 6,000 calls at the October 27.5 strike for 64 cents premium per contract. He likely bought the shares for $24.97 and then reduced that price by the premium received for an effective price per share of $24.33. The short call position mandates an exit strategy for the investor if shares are trading higher than $27.50 by expiration in October. Shares of HAL must rise another 10% before the calls land in-the-money and the investor has the underlying shares called away from him. If this should come to fruition, the trader will have realized maximum potential gains of about 11.5% by utilizing the covered call strategy.

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