Today’s tickers: HGSI, MSTR, INTC, FXI, EFA, AA, AVP, RDC, PLL, FSLR, MOT & AKAM
HGSI – Human Genome Sciences, Inc. – Shares of the biopharmaceutical company made a miraculous recovery since yesterday’s slaughter by exploding 13.25% higher during the session to $20.40. Traders populated various contracts with bullish plays after HGSI was raised to ‘overweight’ from ‘neutral’ with a 12-month target share price of $25.00 at JPMorgan. Heavy call volume in the November contract was likely driven by traders anticipating results of Phase 3 trials employed to evaluate the efficacy of HGSI’s potential drug treatment for lupus, Benlysta. Trading at the November 20/25/30 strike prices mimicked the butterfly spread strategy, and suggests perhaps that traders expect shares to rise to $25.00 by expiration. Investors bought at least 3,500 calls at the November 20 strike for 1.88 apiece as well as purchased 3,500 calls at the November 30 strike for 60 cents each. These contracts effectively mimic the wings of the spread while the 9,000 calls sold at the central November 25 strike perhaps represent the body of the spread. Call spreads were initiated in both the December and January contracts. The December transaction, for example, involved the purchase of 1,000 calls at the December 25 strike for 2.60 each, spread against the sale of 1,000 calls at the higher December 30 strike for 1.00 apiece. The net cost of the trade amounts to 1.60 per contract. Thus, the investor may accumulate maximum potential profits of 3.40 per contract if shares of HGSI rally up to $30.00 by expiration day in December.
MSTR – Microstrategy, Inc. – The software company appeared on our ‘hot by options volume’ market scanner this afternoon due to bullish options activity. Investors initiated optimistic plays on the stock despite the 1% decline in shares to $73.03. Profit-taking action appeared in the January 2010 contract while fresh positions were taken in the April 2010 contract. It looks like one investor originally purchased 3,600 calls at the now in-the-money January 70 strike for an average premium of between 3.00 to 3.50 per contract back on July 31, 2009. Today the trader sold the calls for a whopping 7.20 apiece. Net profits enjoyed on the closing sale amount to a minimum of 3.70 up to 4.20 each. Thus, total potential profits earned by the trader are anywhere from $1,332,000 to $1,512,000. In the April contract a bullish risk reversal suggests investors expect the stock to rise significantly by expiration. The reversal involved the sale of 3,600 puts at the January 60 strike for 2.45 apiece, spread against the purchase of 3,600 calls at the higher April 85 strike for 3.70 each. The net cost of the transaction amounts to 1.25 per contract. Profits are available in the event that shares surge at least 18% to $86.25 by expiration day in April. We note that shares have not traded higher than $85.00 since April 30, 2008.
INTC – Intel Corp. – Plain-vanilla call buying at the in-the-money December 19 strike caught our eye amid a 1% rally in shares of INTC to $19.23. Traders paid an average of 90 cents per contract to take ownership of more than 13,200 calls at that strike. Shares need only rise about 67 cents from the current price before investors holding the call options breakeven at $19.90.
FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the exchange-traded fund comprised of investments in 25 of the largest and most liquid Chinese companies edged more than 2.5% higher during the trading session to $43.30. It appears one investor initiated a cautiously optimistic stance on the fund by purchasing a large chunk of married put options in the December contract. The December 40 strike had approximately 40,000 put options purchased for an average premium of 1.20 per contract. It looks like the puts were bought in conjunction with an equivalent number of shares of the underlying stock. This indicates that the trader expects shares to appreciate over the remaining months of 2009 and perhaps beyond. The put options protect the investor in case shares actually decline ahead of expiration in December. Downside protection provided by the put options will kick in if the price per share slips beneath the effective breakeven point at $38.80.
EFA – iShares MSCI EAFE Index Fund – Two contrasting options strategies appeared in the December contract on the exchange-traded fund that includes stocks from Europe, Australasia, and the Far East. One of the transactions is a bullish play that pairs well with the more than 3% rally in shares of the fund to $55.26 today. This bullish risk reversal involved the sale of 3,100 puts at the December 55 strike for a premium of 1.95 apiece, spread against the purchase of 3,100 calls at the same strike for 2.20 each. The net cost of optimism in this case amounts to 25 cents per contract. Conversely, the larger of the two trades indicates bearish sentiment on the EFA through expiration in December. This transaction is a bearish risk reversal that involved the sale of 8,850 calls at the December 55 strike for 1.95 each, spread against the purchase of 8,850 puts at the same strike for 2.20 per contract. The net cost of taking a pessimistic stance on the fund also amounts to 25 cents apiece. The bullish play suggests shares will remain higher than $55.25, while the bearish trade expects the stock to fall beneath $54.75.
AA – Alcoa, Inc. – Shares of aluminum producer, Alcoa, recovered significantly today, rising 8% to $12.90. Bullish investors hoping the stock continues to rebound purchased call options in the December contract. Approximately 5,200 calls were coveted at the December 13 strike for an average premium of 69 cents apiece. Shares of Alcoa must rally another 6% before investors breakeven at a price of $13.69. Call volume at the January 14 strike exceeded existing open interest nearly two-fold. Approximately 32,700 calls were exchanged at that strike versus existing open interest of just 18,094. It appears some traders purchased 18,690 calls for an average premium of 76 cents each. A large percentage of the call volume represents fresh activity. Although some portion of today’s volume at the December 14 strike could be the work of investors closing out existing positions.
AVP – Avon Products, Inc. – The global manufacturer of beauty products suffered sharp share-price declines at the start of the session, but recovered by midday to stand just 2% lower at $32.39. Avon posted a 30% decline in profits for the third-quarter versus the prior year. Earnings came in at 36 cents per share, hurt by the stronger dollar, which reportedly lowered revenue by 11%. Bearish traders threw in the towel on AVP, salvaging whatever premium they could by selling out-of-the-money call options in the November contract. The November 35 strike had 2,300 calls shed for 10 pennies apiece while the lower November 34 strike had 1,600 calls sold for 20 cents each. Call sales suggest investors expect no miracles ahead of expiration next month.
RDC – Rowan Companies Inc. – While shares of the domestic and international oil and gas drilling company are almost 4% higher after taking a drubbing during the course of this week, we note once again the growing pace of bearish put option plays in the January and April expiration months. Shares are trading at $24.57 and once again the January 25 and 22.5 strikes are most popular with today’s volume at the higher strike here almost four times the prevailing open interest of 2,731. Indeed both strikes have witnessed bearish posturing in the space of the last five days with open interest at both strikes growing from 2,500 to more than 7,000 contracts. Today’s volume will likely add a further 12,000 lots banking on a price decline at Rowan. The catalyst is likely the third quarter earnings data due on November 3 next week. The environment for the company has been harsh while in the medium term the prospects ought to improve. The issue for investors today is whether those future prospects are fully discounted in the prevailing share price. The bearish options positioning could therefore be the work of brave heart investors who dove into the stock, which has risen from $10 in March.
PLL – Pall Corp. – The supplier of filters to the Life Sciences and Industrial markets experienced a 5% rally in shares to $33.82 today. Perhaps the bullish move in share price stems from news that Credit Suisse AG reported the firm may be a takeover target. Option bulls reacted to the speculation by purchasing nearly 4,000 calls at the November 35 strike for an average of 85 cents per contract. Traders holding the call options will bank profits if shares of PLL increase 6% over the current price to surpass the breakeven point at $35.85 by November’s expiration day.
FSLR – First Solar, Inc. – Analysts at Barclays maintained an ‘equal weight’ rating on the manufacturer of solar modules today, but reduced the target share price to $150.00 from $160.00 citing weaker-than-expected third-quarter earnings. Meanwhile, FSLR’s target was slashed to $140.00 at Citigroup where FSLR is labeled as ‘hold’. Shares of First Solar are currently trading 17% lower to $125.64 despite reporting earnings of $1.79 per share that beat average expectations by about 5 cents. Option traders exchanged more than 40,000 contracts as of 10:15 am (EDT). Investors are initiating fresh call positions in the November contract at the November 125/130/140 strike prices.
MOT – Motorola, Inc. – Shares of the telecom company are soaring 9% higher to $8.68 after the firm posted its second consecutive quarter of positive profits. Positive guidance for the next quarter also helped lift shares as MOT forecast earnings of 7 to 9 cents per share. Option traders feasted on call options in the first 45 minutes of the trading session, exchanging more than 13 calls on the stock for each put option in play. Nearly 40,000 contracts changed hands on MOT as of 10:25 am (EDT).
AKAM – Akamai Technologies, Inc. – The provider of internet solutions and services posted third-quarter earnings of 38 cents per share, which exceeded average expectations of 35 cents per share. The stock is trading 11% higher to $22.39 as of 10:30 am (EDT). Early morning call activity could be the work of investors initiating bullish positions on the stock. Otherwise, traders are banking gains on the rally in shares.