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Bank of America Bearish Option Position Closed – Shares Rally

Today’s tickers: BAC, MCD, ADM, XRT, CVS, STT, PFE, CVS, FSYS & AEO

BAC – Bank of America Corp. – One investor banked profits today by unraveling a massive bearish credit spread established back on October 28, 2009. The trader’s decision to take profits ahead of expiration could be a bullish sign for BAC. Shares are trading up 2% near the end of the trading day to stand at $15.00. The investor originally sold approximately 130,000 calls at the November 16 strike for an average premium of 49 cents apiece, spread against the purchase of the same number of calls at the higher November 17.5 strike for 15 cents each. The trader received a net credit of 34 cents per contract on the transaction. Today, the investor left money on the table by closing out ahead of expiration. It appears he sold the upper strike calls for 4 pennies and bought back the lower strike calls for 19 cents apiece. Net profits received for unraveling the spread amount to 19 cents per contract for a total of $2.47 million. One might interpret such a decision as a bullish signal for BAC because the trader decided to walk away with 19 cents – half of the maximum profit potential of 34 cents. The investor would only have been able to retain the full 34 cents if shares traded beneath $16.00 through expiration day in November.

MCD – McDonald’s Corp. – A bullish risk reversal in the January 2010 contract significantly reduced the price paid by one investor establishing an optimistic stance on the fast-food chain. Shares of MCD are trading 1.5% higher today to $61.20 despite yesterday’s downgrade to ‘hold’ by analysts at EVA Dimensions. The investor sold 13,000 put options at the January 60 strike for an average premium of 1.91 apiece to partially offset the cost of purchasing 13,000 in-the-money calls at the same strike for 2.51 each. The net cost of the reversal amounts to 60 cents per contract.

ADM – Archer Daniels Midland Co. – Food products company, Archer Daniels Midland, jumped onto our ‘most active by options volume’ market scanner this afternoon due to bullish activity in the March 2010 contract. Shares edged 0.5% higher to $32.37 during the trading session after the firm revealed better-than-expected first-quarter profits of 77 cents per share. One investor sold out-of-the-money put options to partially finance the purchase of a bull call spread. The call spread involved the purchase of 9,000 calls at the March 35 strike for 1.60 each, spread against the sale of the same number of calls at the higher March 40 strike for 40 cents apiece. The third-leg of the combo was the sale of 9,000 puts at the March 27 strike for 85 cents. The net cost of the bullish play amounts to 35 cents per contract. The investor will profit if shares rally at least 9% from the current price to surpass the breakeven point at $35.35 by expiration. We note that ADM’s shares have remained beneath $35.00 since June 11, 2008.

XRT – SPDR S&P Retail ETF – Disappointing earnings from a number of retailers such as Aeropostale and American Eagle Outfitters, declining same-store sales at Whole Foods, and gloomy guidance at CVS Caremark Corp are just some of the factors weighing down the retail exchange-traded fund today. Shares of the XRT started the trading session higher but have since edged 1% lower to $33.97. Curiously, dismal data from the retail sector this morning is not curtailing overall market gains. Option trading by one investor on the fund suggests shares are likely to trend lower by expiration in December. The trader appears to have established a short strangle in combination with a long put position. The strangle portion of the strategy involved the sale of 5,000 calls at the December 35 strike for 92 cents apiece and the sale of 5,000 puts at the December 30 strike for 56 cents premium. The gross premium of 1.48 on the strangle more than offset the cost of purchasing 5,000 puts at the December 33 strike for 1.45 apiece. The investor pockets a 3 cent credit on the three-legged transaction, which he retains in full as long as shares of the XRT remain ‘strangled’ within the confines of the 30/35 strike prices through expiration. Additional profits accumulate if shares decline beneath $33.00. The trader will benefit from lower volatility as well as bearish movement in the price of the underlying shares through expiration in December.

CVS – CVS Caremark Corp. – Shares dipped 22% lower to $28.13 as the trading session approached midday (EDT). Option traders employed both bearish and bullish strategies in the November contract, while longer-term investors were decidedly bearish on the pharmacy chain. Investors who are not yet ready to throw in the towel on CVS took advantage of today’s significant share price declines by buying out-of-the-money call options. The November 29 strike had 4,600 calls picked up for an average premium of 95 cents each while the higher November 30 strike attracted buying of 10,000 calls for a 68 cents premium. Other traders initiated bullish positions by selling 3,600 puts short at the November 26 strike for 38 cents each. Put-sellers pocket and retain the premium if shares remain above $26.00 through expiration. The short sale of put options at that strike implies traders are happy to have shares put to them at an effective price of $25.62 should the contracts land in-the-money. Bearish traders purchased 1,800 in-the-money puts at the November 29 strike for 1.50 apiece. Another 7,600 put options were scooped up at the lower November 27.5 strike for 76 cents each. Long-term uber-bearish traders bought 5,100 puts at the January 22.5 strike for 34 cents apiece. Finally, the May 2010 25 strike had nearly 3,000 puts picked up for an average of 1.60 per contract. Investors exchanged more than 133,950 contracts – a whopping 40% of existing open interest on the stock of 334,788 lots – before noon-time (EDT).

STT – State Street Corp. – Bullish options activity in the December contract on the financial holding company suggests one investor expects shares to improve significantly by expiration next month. State Street’s shares rallied about 1% today to $41.01. Optimism on STT took the form of a plain-vanilla call spread. The transaction involved the purchase of 10,000 calls at the December 46 strike for 98 cents each, spread against the sale of the same number of calls at the higher December 50 strike for 28 cents apiece. The net cost of the bullish play amounts to 70 cents per contract and yields maximum potential profits of 3.30 if the stock jumps to $50.00 by expiration. Shares must rise at least 14% from the current price in order for the investor to breakeven at $46.70. A rally of 22% ensures the trader banks maximum profits of 3.30 per contract for a total of $3.3 million. We note that shares of STT were trading above $55.00 just a few weeks ago on October 12, 2009.

PFE – Pfizer, Inc. – Global pharmaceutical company, Pfizer, attracted bullish players to the June 2010 contract. Shares rose slightly earlier on in the trading session but are currently trading 0.5% lower to stand at $16.87 by midday. Investors expecting shares to improve by expiration in June initiated plain-vanilla call buying tactics. Traders scooped up approximately 10,500 calls at the June 20 strike for an average premium of 56 cents apiece. Call-buyers will accrue profits by expiration if shares of PFE rally 22% to breach the breakeven point at $20.56. Pfizer’s shares last traded above $20.00 back on May 19, 2008.

CVS – CVS Caremark Corp. – Shares of the pharmacy retail chain are trading nearly 20% lower this morning to $29.00 after the company stated its Caremark pharmacy benefits management unit lost $2 billion in business in the past few months. The stock plummeted despite the fact that CVS posted a 39% increase in third-quarter profits this morning. Option traders exchanged more than 56,000 contracts on the stock within the first 30 minutes of the trading session. Fresh positions were taken in both calls and puts in the November contract. Nearly 10,000 put options traded at the November 27.5 strike. Perhaps investors expect shares to surrender another 5% by expiration.

FSYS – Fuel Systems Solutions, Inc. – The supplier of fuel components and systems enjoyed a 24% rally in shares to reach a new 52-week high of $41.94 this morning after posting better-than-expected third-quarter profits. FSYS reported earnings of 88 cents per share, which smashed average analyst expectations of just 43 cents per share. The firm also raised its revenue forecast range from previous estimates of $370-$380 million to $415-$425 million for fiscal year 2009. Fresh call action appeared at the November 45 strike. Option implied volatility imploded following earnings. Volatility sunk 26% from yesterday’s closing value of 85% to an intraday low of 63%.

AEO – American Eagle Outfitters, Inc. – Shares of teen clothing retailer, American Eagle Outfitters, fell more than 12% in early morning trading to $15.68. Analysts were expecting a 1.7% increase in same-store sales for the third-quarter but the firm actually reported that sales fell 5% in the quarter. Bearish investors exchanged more than 3.5 put options on the stock for each call option in play. Option implied volatility is up 9.5% from 52% at the close on Wednesday to stand at the current value of 57%.

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