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Popular Bank Shares Surge as Option Player Stakes a Claim

Today’s tickers: BPOP, LNCR, EEM, XLK, XL, PALM, LIZ & MI

BPOP - The ‘popular’ bank popped up on our screens this afternoon after a large-volume risk reversal was established on the stock. The massive trade was likely the work of an investor with knowledge of commercial banks as approximately 60,000 contracts were exchanged on BPOP amid a more than 12% rally in shares of the underlying to $2.60. It appears the trader purchased 30,000 now in-the-money October 2.5 strike calls for an average premium of 33 cents apiece. He funded the purchase of the calls by selling 30,000 puts at the January 2.5 strike for 43 cents each. The investor received a net credit on the transaction of 10 pennies per contract. The motivation is perhaps that this individual is swimming with the rising tide of financial names today and expects a far larger rally lifting shares towards $3.75-resistance level. If this is the case, he is likely to exercise the calls by October’s expiration and take delivery of the underlying shares to ride with the stock’s upward momentum. Even if the move continues somewhat, it would likely reverse the structure of this trade to his advantage. – Popular, Inc. –

LNCR - The provider of oxygen and respiratory therapy services attracted option bulls today with shares of the firm standing more than 13% higher for the session to $29.85. Option implied volatility on LNCR exploded 50% higher from a low of 32% this morning to an intra-day high of 48%. The burst in volatility is likely due to increased investor demand for calls on the stock as well as greater uncertainty regarding future price movements in shares of Lincare. Perhaps the rise in uncertainty stems from news that Deutsche Bank raised LNCR’s target price from $33.00 to $38.00 today and maintained their ‘buy’ rating on the stock. Investors gobbled up 2,200 September 30 strike calls for an average premium of 31 cents. The contracts will expire worthless unless shares breach the $30.00-level to land in-the-money by Friday. Bullish sentiment spread to the October 30 strike where traders coveted 2,400 calls for about 71 cents premium. Investors long the calls will begin to amass profits if shares rally through the breakeven point at $30.71 by expiration in October. – Lincare Holdings Inc. –

EEM - The emerging markets exchange-traded fund jumped higher on our ‘most active by options volume’ market scanner this afternoon after a massive call spread was initiated in the January contract. Shares are currently trading higher by more than 2.5% to $39.19. It appears the investor implemented the trade by buying approximately 91,000 call options at the January 45 strike for an average premium of 56 cents each, spread against the sale of 91,000 calls at the higher January 48 strike for 19 cents premium apiece. The net cost of the transaction amounts to 37 cents per contract. Perhaps optimism that the recession may be over inspired the investor to target out-of-the-money call options. The parameters of the trade indicate that the trader expects shares of the EEM to rally at least 16% higher by expiration to surpass the breakeven point at $45.37. The investor will reel in maximum potential profits of 2.63 per contract if shares of the underlying surge 22% to $48.00. The enormous size of the position will yield total profits of $23,933,000 if the stock can rally to the $48.00 level by January’s expiration day. – iShares MSCI Emerging Markets Index –

XLK - Option traders devoured call options on the tech-sector exchange-traded fund in anticipation of further upside potential for the stock by expiration in December. Shares of the XLK are currently trading slightly higher by less than 0.5% this morning to stand at $20.77. Investors purchased approximately 42,000 calls at the December 22 strike by shelling out an average premium of 45 cents per contract. The heavy call volume at the December 22 strike evokes a sense of déjà vu given that a chunk of 35,000 calls were picked up at the same strike for about 43 cents each last week on September 11, 2009. Investors long the calls are hoping shares of the fund experience at least an 8% rally by expiration so they may breakeven at a price of $22.45. We note that shares of the XLK have traded beneath the breakeven point since September 2, 2008. – Technology Select Sector SPDR –

XL - Investors coveted call options on XL Capital today amid a more than 3% climb in shares to $17.92. The most heavily trafficked strike is the now in-the-money September 17.5 strike where traders purchased approximately 10,000 calls for an average premium of 65 cents per contract. Investors may have targeted the September 17.5 strike because they aim to exercise their right to take delivery of the shares of the underlying stock ahead of expiration on Friday. Another possible tactic, in lieu of exercise, may result in profits to traders if they can sell the calls for more than the 65 cents paid to take ownership today. – XL Capital Ltd. –

PALM - Shares of the mobile device maker are currently 1.5% lower to $14.58 ahead of tomorrow’s much anticipated quarterly results release. The earnings report represents the firm’s first full quarterly results since the Pre smart phone’s induction into the marketplace. Options activity in the near-term October contract suggests bullish sentiment on Palm through expiration next month. It looks like an investor, who originally purchased 4,000 calls at the October 15 strike for 86 cents apiece back on September 14, rolled the position to a higher strike price. The trader made a closing sale of the 4,000 calls by selling the lots for 1.35 each. He spread the sale against the purchase of 4,000 calls at the higher October 18 strike for 45 cents per contract. The investor banked profits of 49 cents on the closing sale and reestablished a bullish position on Palm. Shares must rally about 27% from the current price by expiration day for the trader to break even at $18.45. – Palm, Inc. –

LIZ - The apparel and accessories company appeared on our ‘hot by options volume’ market scanner this morning after one investor initiated a covered call on the stock. Shares of LIZ enjoyed a more than 3.5% rally to $6.16. The covered call likely involved the purchase of shares of the underlying stock for approximately $6.02 each in conjunction with the sale of 4,000 calls at the January 10 strike for 35 cents premium per contract. The premium received on the sale of the calls allows the investor to take ownership of the stock at $5.67. Now he is positioned to accumulate any potential gains should shares continue higher. The short call position provides an effective exit strategy for the trader if shares of LIZ breach $10.00 by expiration in January. If this occurs, the underlying shares will be called from him at $10.00 and the investor will realize total gains of 76%. – Liz Claiborne, Inc. –

MI - The commercial banker is enjoying its day in the sun today as its share price adds almost 12% to stand at $8.33. Heavy options volume of around 23,000 contracts appears to have been caused by a single purchase of put options expiring in December that would insulate declines in the share price beneath the $7.50 strike price. An investor paid a 1.0 premium today to get long of enough insurance to cover a 2 million share position. Premiums on both calls and puts are in decline as implied volatility slips on account of a rally for its shares. Today’s rally for financial stocks helping to propel stock prices to fresh peaks for 2009, is lifting MI despite a Moody’s ratings warning yesterday. Marshall’s shares have surged through resistance at $7.50 and well beyond today. – Marshall & Ilsley Corp. –

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