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Staples Firm – Proctor & Gamble Options Suggest Further Upside

Today’s tickers: PG, CTXS, LINTA, HIG, CVS, UUP, VIX, AONE, SWKS, CLX, BCSI & NVDA

PG – The Proctor & Gamble Co. – Bullish action on Proctor & Gamble today suggests one investor expects shares to continue to rally ahead of expiration in November. Shares are currently trading 1% higher to $61.13. The trader purchased 10,000 calls at the now in-the-money November 60 strike for 1.39 each, and simultaneously sold 10,000 calls at the higher November 62.5 strike for 26 cents apiece. The net cost of buying the call spread amounts to 1.13 per contract and yields maximum potential profits of 1.37 each if shares rally up to $62.50 by expiration. Shares need only rally another 2.2% from the current price to reach the $62.50-level.

CTXS – Citrix Systems, Inc. – Software developer, Citrix Systems, attracted bullish option traders to the November contract today amid a 1% increase in shares to $38.80. Investors displayed optimistic sentiment on the stock by selling approximately 10,600 puts at the November 35 strike for 10 cents premium apiece. Put-sellers retain the full dime-per-contract as long as shares remain above $35.00 through expiration this month. Shares of CTXS have traded above $36.00 since September 4, 2009.

LINTA – Liberty Media Corp. – Shares of the broadcasting and entertainment company rallied 1% during the trading session to $12.14. Plain-vanilla call buying action on the stock today suggests some investors expect shares to rise significantly by expiration in January 2010. Traders purchased about 11,800 calls at the January 15 strike for an average premium of 25 cents apiece. Call-buyers will accumulate profits if shares surge at least 26% from the current price to surpass the breakeven point at $15.25 by expiration.

HIG – Hartford Financial Services Group, Inc. – Medium-term investors placed bearish bets on the insurance and financial services firm today. Shares are currently trading less than 0.25% higher to $24.16 after suffering significant erosion throughout the week. One pessimistic trader initiated a bearish risk reversal in the January 2010 contract. The investor sold 4,500 calls at the January 27 strike for an average premium of 78 cents apiece to partially finance the purchase of the same number of put options at the lower January 21 strike for 1.68 each. The net cost of the transaction is reduced to a more palatable 90 cents per contract, but does leave the investor exposed in the event of a rally of more than 11.7% by expiration in January. The HIG-bear may profit by expiration if shares decline 17% from the current price to breach the breakeven point at $20.10.

CVS – CVS Caremark Corp. – Shares of the retail pharmacy chain recovered slightly today after taking a severe beating yesterday. The stock is currently trading 2.5% higher to $29.58. One investor established a bullish stance on CVS in the December contract. It appears the trader put on a bullish risk reversal by selling 5,500 puts at the December 30 strike for an average premium of 1.70 apiece, thus more than offsetting the cost of purchasing the same number of calls at the same strike for 1.11 each. The investor pockets a net credit of 59 cents per contract. Additional profits may accumulate by expiration next month if shares rebound above $30.00.

UUP – PowerShares DB U.S. Dollar Index Fund – Call options continue to be bought again today in this ETF tracking the performance of the U.S. dollar index. We’re coming around to the view that rather than expecting a bullish perspective on the behavior of the dollar, some savvy options traders paid attention to the filing on Tuesday by the fund’s managers who noted that they may have to create more shares in order to meet growing demand. Heavy option activity followed, which may have created further liquidity issues at the fund and caused a short squeeze on Thursday when shares were halted pending this announcement. What is noteworthy is the fact that the UUP veered off in a direction all of its own, surging two percent at a time when the dollar index was practically unchanged. So we’re not quite sure what the buyers of November and December 23 strike calls are doing on the other side of this trade. It’s possible they have a ready made hedging or arbitrage position to offset as many calls as they can. Open interest in the November calls today grew to 310,000 from 40,000 on Monday, while the 20 cent premium today has seen a further 30,000 contracts change hands. The dollar did get a short-lived boost after the rate of unemployment broke the double-digit barrier earlier in the morning. Non-farm payrolls fell by 190,000 in October lifting unemployment to 10.2% – the highest in 26 years. Dollar buying as a safe haven quickly abated as investors came round to realizing that the economic gloom continues to clear.

VIX – CBOE Vix index – Equities traded either side of unchanged after nerves were soothed in the wake of the unemployment reading. Yet now that the Dow industrials average has reclaimed 10,000 and the earnings reports at eight-out-of-10 S&P 500 index constituents have beaten estimates, fear has once again slipped. This time last week saw heavy demand for the protection that option premium offers investors but a week later the vix index has slipped back to 24.73. There was contrarian call option buying to be found though. Investors bought 5,000 calls maturing in January at the 27.5 strike and twice as many calls at the 35 strike for what’s shaping up to be a rich 1.35 premium. Elsewhere there appears to be significant put selling at the December 22.5 strike where almost 28,000 lots have traded at 50 cents. Either someone has a strong desire to sit on an attractive 50 cent bid, making room for arbitrage selling or someone is abandoning a long position as the whole volatility trade goes sour.

AONE – A123 Systems Inc. – Heavy-duty lithium battery manufacturer took a Thursday thumbs-down from CNBC’s Jim Cramer, who in his infinite wisdom proclaimed that the easy money has been made on the stock. As a result today shares are down 3.5% to $17.00. Only two months ago did the company see its stock jump draw a crowd when the IPO saw its capitalization rally by 50% right out of the gate. Option sellers turned up to short call options expiring in December with a 22.5 strike price. By writing calls at the strike for a 45 cent premium, these investors guarantee delivery of stock in the event that the share price recovers by 32% from its current price. It doesn’t appear as though this activity suggests covered call strategies given the pace with which the stock is in decline today.

SWKS – Skyworks Solutions, Inc. – Shares of the semiconductor maker surged 8.5% today to $11.91 after the firm set a profit target above analysts’ expectations and stated revenue will likely grow in the current quarter. SWKS posted fourth-quarter earnings of 24 cents per share, beating street estimates by 2 pennies, on revenue of $228 million. Bullish options action took place in the January 2010 contract where one investor initiated a call spread. The trader purchased 5,000 calls at the now in-the-money January 10 strike for a premium of 2.00 apiece, spread against the sale of 5,000 calls at the higher January 12.5 strike for 60 cents each. The net cost of the transaction amounts to 1.40 per contract. The trader may pocket maximum potential profits of 1.10 per contract if shares rally up to $12.50 by expiration in January, but the decision to buy in-the-money call options suggest a desire to take ownership at expiration. Option implied volatility contracted 30% following earnings to arrive at the current intraday low of 49%.

CLX – The Clorox Company – Option implied volatility on the maker of household and consumer products jumped 8.31% to 21.69% amid increased demand for call options on the stock and a 0.5% rally in shares to $59.83. The firm reported a 23% increase in first-quarter net income on Monday and raised its full-year profit outlook. The supplier of bleach said profits were lifted by increased sales of disinfectant wipes to stave off the H1N1 flu virus. Investors exchanged more than 2,500 calls at the December 65 strike within the first 45 minutes of the trading session.

BCSI – Blue Coat Systems, Inc. – Early morning put activity pushed the supplier of proxy appliances onto our ‘hot by options volume’ market scanner. Shares are slightly off by 1% to $25.02. BCSI announced plans yesterday to cut approximately 10% of its staff as part of a new restructuring plan. Blue Coat also revealed it will acquire S7 Software Solutions – a software R&D firm based in Bangalore, India – for approximately $5.25 million. Implied volatility edged up from 54% to the current reading of 57%.

NVDA – NVIDIA Corp. – Third-quarter earnings of 19 cents per share for the semiconductor company beat street estimates by about 9 cents and sent shares up more than 6% to $13.04. Option implied volatility contracted 22.22% to 41.78% following earnings. Investor exchanged more than 8 call options to each put contract in play on the stock. Upwards of 27,300 option contracts changed hands on NVDA by 10:30 am (EDT).


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