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Monday, March 4, 2024

Option Bulls Covet Coal-Calls on ACI

Today’s tickers: ACI, MGM, EWJ, HSY, YHOO, TIE & GLD

ACI – Far-term option bulls were not discouraged from establishing optimistic positions on the coal producer today despite the nearly 2% decline in shares during the trading session to $17.84. Investors looking for shares to rally significantly by the start of 2010 purchased 2,000 calls at the January 23 strike for an average premium of 70 cents apiece. ACI would need to rally 33% higher for individuals long these calls to breakeven at $23.70 by expiration. Option traders also picked up 2,000 calls at the April 2010 22 strike for 1.50 per contract. Finally, curious call spreads appeared in the January 2011 contract. The trades were a bit blurred but it seems likely that the activity represents a ratio call spread. If this is the case, the investor responsible for the trade purchased about 3,000 calls at the January 30 strike for 1.40 each. These contracts were spread against the sale of some 6,000 calls at the higher January 35 strike for 93 cents premium. The trader receives a net credit of 46 cents on the transaction. He will retain the full credit and add to that amount if shares rally higher than $30.00 by expiration. Maximum potential profits on the spread amount to 5.00 (excluding the credit received today), achieved in the event that shares of ACI surge a whopping 96% from the current price by expiration in January 2011. – Arch Coal, Inc. –

MGM – The casino operator attracted bullish bets by option traders today amid a more than 7.5% rally in shares to $10.13. Notable near-term call interest was apparent at the September 11 strike price where more than 7,100 lots exchanged hands. Approximately 5,500 of the contracts were purchased for an average premium of 23 cents apiece. Investors long the calls will begin to accrue profits if shares of MGM can rise 11% higher to surpass the breakeven point at $11.23 by expiration in less than two weeks. Traders clearly favored MGM calls over puts during the session as evidenced by the call-to-put ratio of more than 3-to-1 on the stock today. – MGM Mirage, Inc. –

EWJ – The EWJ jumped onto our ‘most active by options volume’ market scanner this afternoon after one investor juggled massive chunks of calls on the stock. Shares of the exchange-traded fund are currently up 0.5% to $10.18. The trader originally purchased 50,000 calls at the now in-the-money September 10 strike for 10 cents each on July 20, 2009. Today he sold all 50,000 lots for 24 cents each, and reestablished a long call position at the higher December 11 strike, where the new call options cost him 20 cents per contract. Net profits on the sale of the near-term calls amounts to approximately 14 cents for a total of $700,000. The investor is hoping to see an encore performance by expiration in December. He will begin to realize profits on the new bullish position if shares of the EWJ rally about 10% higher to breach the breakeven price at $11.20. – iShares Japan Index Fund –

HSY – News that the chocolate and confectionary products firm has hired JPMorgan Chase & Co. to assist in outlining a potential counterbid for Cadbury Plc likely spurred the bullish call activity we observed on the stock today. Investors in the company are probably riding an intense sugar-high as shares of HSY have soared more than 5.5% to $41.42. Option traders expecting further bullish momentum in the stock looked to the October 45 strike where more than 9,000 calls were purchased for an average premium of 22 cents apiece. Hershey’s shares must rally 9% higher for these call buyers to breakeven at a price of $45.22 by expiration. Finally, optimism spread to the November 45 strike as investors picked up nearly 2,000 calls for 39 cents each. Individuals holding these contracts are hoping to see shares breach $45.39 by expiration day. We note that shares of HSY have not traded above $45.00 since October 10, 2007. Whatever happened to merger/arbitrage theory that says shares of the buyer go down while those of the acquired go up? – The Hershey Co. –

YHOO – Shares of the internet search engine have shifted nearly 2% higher to $14.75 today perhaps on news that the company purchased Maktoob.com Inc., an Arabic-language internet venture, for $175 million last month. One investor utilized a butterfly spread to position himself for further bullish movement in the stock by expiration in October. He established the spread by purchasing 6,000 calls at the October 12 strike for 2.76 apiece [wing 1], and by buying another 6,000 calls at the higher October 18 strike for 4 pennies per contract [wing 2]. The body of the butterfly was sandwiched between the wings through the sale of 12,000 calls at the October 15 strike for 52 cents premium. The net cost or maximum potential losses for the transaction amount to 1.76. Thus, the trader stands to accumulate maximum profits of 1.24 per contract if shares settle at $15.00 by expiration next month. Profits begin to amass when shares surpass the breakeven price of $13.76 and max out at $15.00. The stock need climb just 25 cents higher for the investor to attain the maximum potential gains available on the spread. – Yahoo!, Inc. –

TIE – Shares have finally burst to the upside at ferrous-metals producer, Titanium. During the last two months its share price has been gyrating between $7.50 to $9.00 but today finally managed to surge forward and has leapt 5.75% to $9.38 today. October options were well sought after with investors attaching a 42% probability that the 10.0 strike calls will land in-the-money within six weeks. Premiums paid to get long the underlying were 55 cents indicating a further upward move in shares of 12.5%. Some 14,000 calls changed hands at the strike price. Option implied volatility rose by 12% to stand at 65% in morning trade. – Titanium Metals Corp. –

GLD – The gold exchange-traded fund has continued higher during the trading session, adding approximately 0.5% to stand at $97.88. Two trades of note on the fund today suggest opposing sentiment by some investors. Heavy put activity in the October contract could indicate gold-plated-pessimism going forward, or could be the work of an investor seeking downside protection. It appears that 10,000 puts were purchased at the October 97 strike for a premium of 2.60 apiece and spread against the sale of 10,000 puts at the lower October 93 strike for 1.10 each. The net cost of purchasing the put spread amounts to 1.50. If the trader is long the stock then downside protection is provided by the puts in the event that shares slip through the breakeven point at $95.50 and fall to $93.00. The transaction would suggest a more bearish tone if the investor is short the stock and looking to accrue profits on downward movement in the price of the GLD. In contrast, a bullish risk reversal was displayed in the December contract. It appears the trader shed 5,000 puts at the December 97 strike for 5.10 apiece in order to purchase 5,000 calls at the same strike for 6.00 per contract. The investor spends just 90 cents on the transaction and breaks even if shares rally to $97.90 by expiration. The current price of the stock is just 2 pennies shy of the effective breakeven point. – SPDR Gold Trust ETF –

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