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Risk Reversal Pops Up on Biotech-Company, Life Technologies

Today’s tickers: LIFE, FL, VTR, WFC, RRI, WFR, CAR, FRX, SWK, BNI & WFR

LIFE – Life Technologies Corp. – Biotechnology company, Life Technologies, popped up on our ‘hot by options volume’ market scanner this morning after one investor initiated a risk reversal in the December contract. Shares are relatively flat on the day at $47.58. The reversal is most likely the work of a bullish individual positioning for a rally in shares of LIFE by expiration next month. It appears the trader sold 5,200 puts short at the December 45 strike for an average premium of 1.30 apiece to finance the purchase of the same number of call options at the higher December 50 strike for 1.20 each. The investor receives a credit of 10 cents per contract on the transaction. The 10 cent credit is money in the bank as long as shares remain above $45.00 through expiration. Additional profits on the trade require the stock to surge to a new 52-week high of $50.00. Shares must rally 5% from the current price before the investor begins to accumulate profits. The 10,400 contracts exchanged in the spread represent about 23% of the total existing open interest on LIFE of 45,963 lots.

FL – Foot Locker, Inc. – A long-term bullish play in the January 2011 contract pushed the global retailer of athletic footwear and apparel onto our ‘hot by options volume’ market scanner this afternoon. Shares are currently up nearly 1% to $10.25. It looks like the trader initiated a bullish risk reversal by selling 3,500 puts at the December 7.5 strike for 1.10 each, and by buying the same number of calls at the higher December 12.5 strike for 1.10 apiece. The investor put on the trade for free and hopes to see shares rise above $12.50 by expiration in 14 months. Profits begin to accumulate if the stock rallies 22% over the current price to surpass the breakeven point at $12.50. We note that shares of FL have traded beneath $12.50 since November 11, 2008.

VTR – Ventas, Inc. – Shares of the real estate investment trust edged slightly higher by less than 0.25% to $40.56 during the trading day. An investor expecting shares to appreciate by expiration in December put on a bullish risk reversal strategy. The trader sold 3,000 puts at the December 35 strike for 60 cents premium and simultaneously purchased the same number of calls at the December 45 strike for 60 cents each. The transaction was initiated at no cost to the investor. Thus, profits are available in the event that shares increase a minimum of 11% to breach the breakeven price of $45.00 by expiration day. The current 52-week high on the stock of $41.46, attained during yesterday’s session, is $3.54 beneath the $45.00-level.

WFC – Wells Fargo & Co. – A large-volume ratio put spread in the January 2010 contract on Wells Fargo today suggests one investor is bracing for potential share price erosion. Shares are currently flat in late-afternoon trading to stand at $27.60. The bearish transaction is consistent with a number of protective stances observed on individual financial stocks recently, as well as on the Financial Select Sector SPDR ETF (XLF). The investor responsible for the spread purchased 35,000 puts at the January 26 strike for 1.91 each, and sold twice as many contracts – 70,000 lots – at the lower January 21 strike for an average premium of 67 cents apiece. Selling twice as many lower strike put options reduces the net cost of the protective play to just 57 cents per contract. The puts provide downside protection to the trader should shares of Wells Fargo slip beneath the breakeven point at $25.43 by expiration.

RRI – RRI Energy, Inc. – Yesterday afternoon one investor purchased 10,000 calls at the December 4.0 strike for 1.30 apiece despite the fact that shares were down 3% to $5.10. The seemingly contrarian strategy suggested shares of RRI were likely to rebound by expiration in December. Yet, the investor only needed to wait 24 hours because the stock is currently trading 2% higher to $5.25. The same individual was rewarded today for assuming an optimistic stance on RRI because he sold all 10,000 calls this morning for 1.45 apiece. Net profits on the closing sale amount to 15 cents per contract for a grand total of $150,000 – not bad for one day’s work.

WFR – MEMC Electronic Materials, Inc. – Option traders driving call volume in the November contract are in fact taking bullish positions on the stock by purchasing the options. We noted earlier today that heavier than usual option activity was driving implied volatility higher. Volatility is now up 20.25% to 68.92% versus this morning’s reading of 65.16%. Shares retreated slightly by lunchtime but are still up more than 1% to $12.45. Some traders targeted the in-the-money November 11 strike where 1,400 calls were picked up for an average premium of 1.49 apiece. Other investors selected the now in-the-money November 12 strike to take ownership of 2,900 calls for about 83 cents each. Bullish individuals expecting shares to continue higher paid an average of 49 cents to purchase 6,100 calls at the November 13 strike. The stock must rise another 8% to $13.49 before investors holding the November 13 strike calls breakeven.

CAR – Avis Budget Group, Inc. – Shares of the rental car company surged 8% to $9.12 today after the firm posted third-quarter earnings of 54 cents per share. Avis Budget Group reported staggering losses of $9.91 per share in the same period last year. Option players populated the November and December contracts with fresh call trading. It looks like some 5,100 call options were purchased at the November 10 strike for an average premium of 48 cents apiece. Next, approximately 1,000 calls were coveted at the December 10 strike for 80 cents premium. December contract call-buyers will accrue profits by expiration if shares rise at least 18.5% to surpass the breakeven price of $10.80.

FRX – Forest Laboratories – An interesting options strangle combination appears to have been put in place on Tuesday morning with one investor appearing to sell around 3,000 calls at the 30 strike in November and the same amount of puts at the 27.5 strike price also expiring this month. The current share price is $27.75, with the stock rebounding off last week’s $27 low. The company announced favorable results for its constipation drug, linaclotide, in development with Ironwood Pharma. The 17-day option combination creates a gross premium of 1.10, which implies the investor sees lower volatility going forward in a more favorable post-trial environment. The share price must now remain hemmed between $26.40 and $31.10 for this trade to remain profitable and within the two strike prices in order to see the investor retain the entire premium. Implied volatility is marginally lower at 37.5% today.

SWK – The Stanley Works – Shares of the worldwide supplier of tools and durable household products jumped 4.5% to $47.19 on news the firm agreed to acquire Black & Decker (BDK) in an all-stock deal worth $4.5 billion. Investors initiated fresh call activity at the December 47.5 strike within the first 35 minutes of the trading session. Option implied volatility imploded as news of the takeover agreement alleviated investor uncertainty. Volatility is down approximately 16.5% to 26.5% as of 10:10 am (EDT).

BNI – Burlington Northern Santa Fe Corp. – The railroad company’s shares began the trading session 28% higher, attaining a new 52-week high of $97.88, after Warren Buffet’s Berkshire Hathaway revealed plans to acquire the remaining 77.4% of the company it does not yet own. Option implied volatility on the stock is in a free-fall having declined 69% already to stand at 10.35% as of 10:15 am (EDT). Bullish investors established fresh call positions at the November and December 100 strike prices – the highest available strike in either contract.

WFR – MEMC Electronic Materials, Inc. – Investors are taking new positions in near-term call options on the manufacturer of solar wafers. Shares are up 2% to $12.56. Investor uncertainty – as measured by option implied volatility – is higher by 13.69% to 65.16% suggesting greater fluctuation in the price of the underlying shares. The move higher in volatility is likely fueled, in part, by increased demand for call options on the stock. Investors exchanged more than 8,600 calls at the November 13 strike within the first hour of the trading day.


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