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Sara Lee Tempts Call Buyers

Today’s tickers: SLE, TPX, ODP, AUY & BAC

SLE - Cake baker, Sara Lee, attracted bullish investors to the January contract this morning amid a 3% rally in the price of shares to $10.40. Traders thirsting for a rally in SLE by the start of 2010 purchased more than 8,000 calls at the January 12.5 strike for an average premium of 21 cents apiece. Investors holding the calls are now positioned to accumulate profits if shares of Sara Lee surge 22% higher to breach the breakeven price of $12.71 by expiration. We note that SLE has not traded higher than $12.71 since October 6, 2008. – Sara Lee Corp. –

TPX - The manufacturer of luxurious mattresses experienced a 1% decline in shares to $18.04 today despite having received an upgrade to ‘outperform’ from ‘neutral’ and a 12-month price target of $23.00 at Wedbush Morgan Securities. Investors employed two different strategies using options in the October contract. One tactic observed was a bullish risk reversal. The trader shed 1,000 puts at the October 17.5 strike for an average premium of 97 cents in order to partially finance the purchase of 1,000 in-the-money calls at the same strike for 1.85 apiece. The net cost of the reversal amounts to 88 cents per contract. The bullish trader stands ready to breakeven on the transaction if shares can breach the breakeven point at $18.38 by expiration next month. Another investor targeted the same strike to implement a short straddle. This individual sold 2,000 puts for 75 cents each and 2,000 calls for 1.80 per contract at the October 17.5 strike to pocket a gross premium of 2.55. The short straddle indicates that the trader expects shares of TPX to settle at $17.50 by October expiration. If the stock moves 54 cents lower to $17.50, the investor will keep the entire 2.55 premium received on the sale. Otherwise, greater volatility in the price of TPX could result in losses if shares shift outside of the breakeven point to the upside at $20.05, or beneath the breakeven to the downside at $14.95. – Tempur-Pedic International, Inc. –

ODP - Shares of the global supplier of office products slumped 8% lower at the start of the session to $5.86. The stock recovered somewhat by 11:30 am (EDT) with shares down 4% to $6.12. Some investors braced for continued declines in ODP by initiating put spreads in the October contract. It looks like 6,300 puts were purchased at the October 6.0 strike for 50 cents apiece and spread against the sale of 6,300 puts at the lower October 5.0 strike for 15 cents premium per contract. The net cost of the bearish positioning amounts to 35 cents. Perhaps put spreaders are long the underlying stock and seeking downside protection through expiration in October. If this is the case, downside protection kicks in if shares fall 8% to breach the breakeven point at $5.65. Investors employing the put spread strategy could also be short the stock, in which case they stand to accrue maximum potential profits of 65 cents per contract if ODP slips to $5.00. Finally, the January 5.0 strike price attracted heavy volume in both calls and puts. It seems likely that traders are either closing out existing positions or swapping calls for puts given today’s decline in the stock. – Office Depot, Inc. –

AUY - The Canadian gold producer appeared on our ‘most active by options volume’ market scanner today after a call spread was established in the January 2010 contract. The spread appears to be the work of one investor expecting that today’s 2% decline in shares to $10.87 will be short-lived. The transaction involved the purchase of 5,000 calls at the January 11 strike for an average premium of 1.45 each against the sale of 5,000 calls at the higher January 15 strike for 35 cents apiece. The net cost of the bullish position amounts to 1.10 per contract. Maximum potential profits of 2.90 are available to the trader in the event that shares of AUY rally a whopping 38% to $15.00 by expiration. Profits begin to amass if the stock rises 11% from the current price to surpass the breakeven point at $12.10. AUY last traded above $15.00 on July 7, 2008. – Yamana Gold, Inc. –

BAC - The October options contract saw noteworthy activity as one investor appeared to implement a protective collar combination likely to defend against an underlying stake in the company. With its shares trading at a price of $17.57 today we can see two blocks of options at the 13 put and the 22 strike call both for around 29,000 contracts. Given that both strikes are approximately 25% away from the prevailing price of its shares this seems an unusual strategy since the prospects for reaching either side appear remote. A collar uses the sale of call options to fund the purchase of puts that would rise in value in the event that the share price fell ahead of expiration. Should the shares reach the call strike before then, they could conveniently be called from the option writer effectively flattening the position for a profit since the underlying has rallied. In this case, the prospect of a 25% movement is fairly reflected by the low premium at both series today where the 6 cent income was equally offset by the same cost for the put. – Bank of America –


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