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Monday, August 15, 2022

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Brocade Options Hyperactive

Today’s tickers: BRCD, WYN, CAR, TGT, CBST & KMB

BRCD – Shares of the telecommunications equipment provider continue to rally today. The stock gained more than 6.5% during the session and reached a new 52-week high of $9.65. The BRCD ticker symbol catapulted to the top of our ‘most active by options volume’ market scanner as investors exchanged more than 235,000 option contracts on the stock by lunchtime. It appears one investor executed a massive bull call spread in the November contract. The transaction involved the purchased of about 65,000 calls at the November 12 strike for an average premium of 37 cents each, spread against the sale of approximately 65,000 calls at the higher November 13 strike for 20 pennies apiece. The net cost of the trade amounts to 17 cents per contract for an approximate total price tag of $1,105,000. The investor stands to make 83 cents per contract for maximum potential profits of $5,395,000 if shares of BRCD rise 35% to $13.00 by expiration in November. – Brocade Communications Systems, Inc. –

WYN – Shares at the hotelier broke nicely to the upside earlier in the week and stand 3% ahead of a congestion zone at $18.00. Yesterday Goldman Sachs raised the stakes with an upgrade and a 12-month price forecast of $26 per share. With earnings scheduled for October 28, it appears that one investor has used a call option combination to target a move higher in WYN today. Option implied volatility remains high at 67% but is not rising as the shares surge. There was an outright buyer of 15,000 November 22.50 strike calls purchased for 45 cents, while the 20/25 call spread traded about 9,000 times at a net of 75 cents. To break even the share price needs to accelerate by a further 15% to $20.75 ahead of expiration. – Wyndham Worldwide –

CAR – The global car rental company’s share price contracted 4.5% this morning to $11.93 after firm announced the pricing of its offering of $300 million of 3.50% convertible senior notes due 2014. Despite the decline in shares, one investor utilized options in the January 2010 contract to take a bullish stance on the stock. It appears the trader financed the purchase of a call spread by selling out-of-the-money put options. The three-legged transaction involved the sale of 2,200 puts at the January 10 strike for 1.15 apiece, spread against the purchase of 2,200 calls at the January 12.5 strike for 1.95 each. Finally, another chunk of 2,200 calls were shed at the higher January 17.5 strike for an average premium of 50 cents apiece. The net cost of the bullish play amounts to 30 cents per contract. Profits will accumulate for the investor if shares of CAR rally at least 7% to the breakeven point at $12.80 by expiration. Maximum potential profits of 4.70 per contract are attainable if the stock surges 47% to $17.50. – Avis Budget Group, Inc. –

CBST – Despite a downgrade yesterday to ‘neutral’ from ‘outperform’ at R.W. Baird and Co., shares of the biopharmaceutical company rallied 2.5% this morning to $19.45. Bullish investors took to the October and November contracts to buy call options on the stock. CBST-optimists coveted 1,500 calls at the near-term October 20 strike for an average premium of 51 cents apiece. Super-bullish traders looked to the higher November 22.5 strike to purchase 1,000 calls for 49 cents premium each. Investors long the November 22.5 strike calls will accrue profits if shares of Cubist rise 18% from the current price to $22.99 by expiration next month. Option traders exchanged more than 8,600 option contracts on CBST, which represents 46% of the total existing open interest on the stock of 18,769 lots. The rise in demand for options today corresponds with the 13% increase in option implied volatility on CBST to 60% from 53%. We note that earnings are due for release in one week from today and unfortunately one day ahead of options expiration. That should be fun. – Cubist Pharmaceuticals, Inc. –

TGT – News that U.S. retail sales rose for the first time in 13 months helped boost Target’s shares more than 1.25% to $49.15. The stock also gained ground after Target revealed it expects third-quarter profits to exceed current analyst estimates of 43 cents per share. One investor, who exchanged 10,000 options in the November contract today, may be taking a bullish stance on Target. If the trade is indeed bullish, the trader funded the purchase of 5,000 calls at the now in-the-money November 48 strike for 2.70 apiece, by selling 5,000 puts at the same strike for 1.95 each. The net cost of the bullish reversal amounts to 75 cents per contract. Profits have already started to amass for the investor given the breakeven price at $48.75. However, the direction of the trade could be dramatically different from the reversal previously described. It is possible the investor put on a volatility play by selling a straddle. If this is the case, the trader receives a gross premium of 4.65 per contract by selling 5,000 puts and 5,000 calls at the November 48 strike. Maximum retention of premium occurs if shares settle at $48.00 by expiration. Losses would arise if shares stray above or below $48.00 by more than the combined 4.65 premium. – Target Corp. –

KMB – Health and hygiene company, Kimberly-Clark, edged onto our ‘hot by option volume’ market scanner due to call action in the January 2011 contract. Shares of KMB rose 0.25% during the session to stand at $58.86. It appears one investor shed approximately 6,000 calls at the January 65 strike for an average premium of 2.28 per contract. The investor likely holds a long position in the underlying shares. If this is the case, covered call selling was likely initiated to add premium to the trader’s portfolio income. The full 2.28 in premium is safe under the investor’s mattress as long as shares fail to breach $65.00 by expiration. The trader could have the underlying share position called from away by expiration if the calls land in-the-money. Finally, one other scenario is the trader is now effectively short the stock. In this case, he faces potentially unlimited losses to the upside if shares of KMB rally 14% and surpass the breakeven point at $67.28. – Kimberly-Clark Corp. –

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