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Vale Options Bulls Continue to Charge as Shares Slumber

Today’s tickers: VALE, AMZN, TAP, FDO, SYMC, MON, MFA & TLB

VALE - Option traders set up long-term bullish trades across several contracts on the world’s largest iron-ore producer. Shares edged 0.25% lower this afternoon to $23.82 despite the upgrade to ‘buy’ from ‘neutral’ and the increase in target price to $31.00 from $25.00, at Goldman Sachs Group, Inc. One investor reeled in profits by closing out an existing short put position. He originally sold 6,500 puts at the March 23 strike for a premium of 3.35 apiece. Today he made a closing purchase of all the contracts for 2.40 each. Net profits on the transaction amount to 95 cents each or total gains of $617,500. Next, it seems the same investor initiated a new bullish stance on the stock by employing the same short-put strategy at the January 2011 22.5 strike where he sold 6,500 puts for 4.00 per contract. The next optimistic transaction today was a bullish risk reversal. One investor shed 10,000 puts at the January 2011 20 strike for 2.87 each in order to partially finance the purchase of 10,000 calls at the January 25 strike for 4.00 per contract. The net cost of the reversal amounts to 1.13. Thus, profits are available on the trade if VALE’s shares rally a minimum of 10% by expiration, to surpass the breakeven price of $26.13. – Vale S.A. –

AMZN - Shares of e-tailer,, are up 3% to $93.61. A bullish risk reversal in the November contract today suggests at least one option trader expects to see significant near-term gains in the stock by expiration. The reversal involved the sale of 5,000 puts at the November 80 strike for an average premium of 1.80 apiece. The short sale of the put options partially financed the purchase of 5,000 calls at the November 105 strike for 2.30 each. The net cost of the trade amounts to 50 cents per contract. If the investor is to accumulate profits by expiration, shares of AMZN must add at least 13% to the current price to breach the breakeven point at $105.50. –, Inc. –

TAP - The beer brewing company appeared on our ‘hot by options volume’ market scanner due to bearish options action in the January 2011 contract. Shares edged 0.5% higher during the trading session to $49.52. The investor responsible for the trade sold 5,000 calls at the January 55 strike for 3.50 each, and simultaneously bought 5,000 puts at the lower January 45 strike for 4.85 apiece. The net cost of the transaction amounts to 1.35 per contract. Perhaps the trader is long shares of the underlying stock. If this is the case, he is covered in case shares surge through $55.00 by expiration. But, the direction of the trade suggests the investor is protecting himself in case shares of TAP decline. By selling the calls he reduced the cost of downside protection and raised the effective breakeven point on the puts. Thus, the long stock position is protected in case shares fall 12% from the current price below the breakeven point at $43.65. We note that shares of TAP last traded beneath $43.65 in July of 2009. – Molson Coors Brewing Co. –

FDO - Option traders got off on the wrong foot after better results from the cheap-and-cheerful variety retailer reported better than expected earnings, blaming a late return to school for unexpected profits. Its shares surged to $29.69 after the opening bell, enticing eager sellers of bearish put options to write premium for 85 cents. The contracts would expire worthless if shares in Family Dollar are at or above the $30 strike price by expiration next weekend. During the morning, however, its shares have eased to stand just 1.1% better at $28.82 sending the best offer on these puts to 1.45. The most actively traded contract so far today is the 30 strike call expiring in October where 6,700 calls have traded and whose premium has decayed to 24 cents after closing yesterday at 65 cents. Option implied volatility has cratered by one-quarter to just 33.3% in today’s action. – Family Dollar Stores –

SYMC - Less than twenty minutes of the trading session had elapsed this morning when one investor exchanged approximately 30,500 option contracts on Symantec Corp. A portion of the trade looks like a closing transaction while the remainder of the activity represents fresh bullish positioning. Shares of the software company are currently trading 0.5% higher to stand at $16.49. It appears the trader originally purchased some 12,000 calls at the October 16 strike for an average premium of 1.42 apiece, back on May 8, 2009, when shares of SYMC were at $15.00. Today, the investor sold the lots to close out the now in-the-money call position for just 65 cents each. The apparent 77 cent loss on the closing sale is likely due, in part, to the eroding extrinsic (or time) value of the option premium on the calls. The loss, however, did not deter the investor from taking a new options approach on the stock. It appears he initiated a bullish risk reversal in the November contract by selling 9,300 puts short at the November 15 strike for 40 cents each, spread against the purchase of 9,300 calls at the higher November 17 strike for 75 cents apiece. The net cost of the reversal amounts to 35 cents per contract. The investor will amass profits on the trade if shares of Symantec rally at least 5% to surpass the breakeven point at $17.35 by expiration in November. – Symantec Corp. –

MON - Shares of the world’s largest seed manufacturer have a slightly hang-dog look at $74.90 this morning after the company turned a small profit rather than a small loss. Notably its option implied volatility has dropped by 10% to 31% following the release, which unexpectedly reaffirmed its 2010 outlook, while some analysts had expected a less optimistic revision. Strong seed sales for corn and vegetable produce helped pad the bottom line despite the drag from restructuring costs as the company down sizes. The decline in uncertainty saw call and put option premium decay after the news. The at-the-money October straddle for example closed last night at 4.05 implying swings between now and expiration for Monsanto’s share price between $70.95 and $79.05. Today the volatility burst has the same combination reduced to just 3.0. On balance investors remained optimistic using its options given the weight of call buying at the October 75 and 80 strike calls where average premiums of 1.67 and 25 cents changed hands. One investor initiated a 500 lot covered call in which shares were purchased at $75.63 and 80 strike call options expiring in November were sold at a 1.49 premium. Effectively the investor gets long the stock at the share price minus the price received from the writing the calls. – Monsanto Co. –

MFA -  Self-advised REIT business, MFA Inc. attracted a sizeable option trade during this morning. The share price of this company, which dabbles in hybrid and adjustable rate mortgages, is lower by 1.1% at $7.96 today. One investor made a 20,000 lot option play using in-the-money call options set to expire in 12 days time. We can see a large chunk of stock trading at the same time, but can’t tell what this investor’s motivation is. The calls changed hands at 45 cents and represent three-times the current open interest in all options on this company’s shares, just to give you a sense of the magnitude of today’s activity. We are left guessing that the investor behind today’s trade is a bull and looking to lock in to buying rights on this company in the expectation they will remain in-the-money when it comes to expiration. – MFA Financial Inc. –

TLB - Shares of women’s clothing retailer, Talbots, surged 17% to $11.22 at times during the trading session after the ‘outperform’ rating on the firm was reiterated at FBR Capital Markets. Bullish option traders expecting continued gains in the stock coveted 2,000 calls at the November 12.5 strike for an average premium of 76 cents apiece. TLB rose to its highest price in about one year when shares climbed to an intraday high of $11.37. However, investors long the November 12.5 strike calls will not profit unless shares rise 18% from the current price to breach the breakeven point at $13.26. We note that the stock has remained below the breakeven price of $13.26 since October 2, 2008. – The Talbots, Inc. –

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