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Thursday, November 30, 2023

Wells Fargo Put Spreaders Back in Town

Today’s tickers: WFC, AMR, PG, DRYS, DTV, M, EMC, WYNN, TOL & SFD

WFC – Wells Fargo & Co. – A popular option strategy frequently employed on Wells Fargo, the ratio put spread, appeared once again in the January 2010 contract. The bearish play was initiated despite the more than 2% rally in shares during the trading session to $28.75. The ratio spread involved the purchase of 7,500 puts at the January 27.5 strike for an average premium of 1.60 apiece, marked against the sale of 15,000 puts at the lower January 24 strike for 67 cents each. The net cost of the protective play amounts to 26 cents per contract. Thus, downside protection will kick in if shares decline beneath the breakeven price of $27.24 by expiration in January.

AMR – AMR Corp. – American Airlines operator, AMR Corp., attracted a large bullish play by one investor targeting the January 2010 contract. Shares of AMR are up more than 4% to $5.83 with just under one hour remaining in the trading day. An AMR-optimist initiated a call spread by purchasing 15,000 calls at the January 7.5 strike for an average premium of 35 cents each, marked against the sale of 15,000 calls at the higher January 9.0 strike for 10 cents premium apiece. The net cost of the bullish transaction amounts to 25 cents per contract. Profits are available to the call-spreader if shares of AMR rally at least 33% to breach the breakeven point at $7.75 by expiration. Maximum potential profits of 1.25 per contract for a total of $1.875 million are attained by the trader if shares surge 54% to $9.00.

PG – The Proctor & Gamble Co. – Options activity in the January 2011 contract on the consumer products company today indicates one investor expects little fluctuation in shares over the next 14 months. Shares of PG are slightly up by less than 0.25% to stand at $61.90. The trader initiated a sold strangle by selling 2,000 puts at the January 60 strike for 5.73 each, and by selling 2,000 calls at the higher January 65 strike for a premium of 3.82 apiece. The gross premium pocketed on the sale amounts to 9.55 per contract. The strangle-seller retains the full premium if shares of PG remain ‘strangled’ within the parameters of the strike prices described. The investor will benefit from lower option implied volatility on the stock, as well as from the inevitable erosion of extrinsic value (time decay) over the life of the option contracts.

DRYS – DryShips, Inc. – Investors initiated bullish positions on the Greek drybulk shipping company. Shares of the firm rallied 1.5% to $6.32. Option traders favored the call spread today and utilized the strategy in the January 2010 contract to position for continued upward movement in the price of the underlying by expiration. Approximately 25,000 calls were purchased at the January 7.5 strike for an average premium of 45 cents each, spread against the sale of roughly the same number of calls at the higher January 9.0 strike for 15 cents apiece. The average net cost of the bullish transaction amounts to 31 cents per contract. DryShips’s shares must rally 23% in order for call-spreaders to breakeven at $7.81. Investors stand ready to accumulate maximum potential profits of 1.19 per contract if the stock surges 42% over the current price to $9.00 by expiration in January.

DTV – The DIRECTV Group, Inc. – Shares of the second-largest pay television provider in the U.S. are up 1.5% to $29.52. DTV posted third-quarter revenue of $5.47 billion yesterday, exceeding average analyst expectations of $5.4 billion. One option trader tuned in to profits today by rolling an existing bullish position to a higher strike price. The investor originally purchased 4,000 calls at the now deep in-the-money November 25 strike for 1.95 apiece on October 13, 2009. The trader sold the calls for 4.80 each today, taking in net profits of 2.85 per contract, for a total of $1.14 million. Next, the same investor reestablished a long call position at the in-the-money December 29 strike, purchasing 4,000 calls for a premium of 1.80 each. The DTV-bull can accrue additional profits if shares rally at least 4% from the current price to surpass the breakeven point at $30.80 by expiration.

M – Macy’s Inc. – It could be that Macy’s below par fourth quarter forecast will result in nothing more than the current 8.2% share price decline to $17.84. The return of the consumer had helped provide wind behind the sails for many retailers, but ongoing doubts about its veracity periodically yields overly zealous expectations and results in declines seen today. The option market doesn’t predict especially stormy seas ahead and some appear to sense the worst is already baked in the cake today. Option traders employed a limited potential put spread strategy using December expiration put options at the 17 and 16 strikes. That suggests rather limited declines in the underlying. Elsewhere we noted a bullish reversal play in which January 15 strike puts appear to have been sold at 55 cents in order to fund bullish expectations at the 19 strike. Implied volatility gave way despite the share price decline to a 53% reading from 60% ahead of earnings data.

EMC – EMC Corp. – Massachusetts-based computer hardware company, EMC Corp., attracted a large-volume bearish risk reversal to the January 2010 contract today. Shares are trading 1% higher to $17.22. The investor sold 20,000 calls at the January 17.5 strike for an average premium of 75 cents apiece in order to partially offset the cost of purchasing the same number of in-the-money put options at the same strike for 1.10 each. The net cost of assuming the pessimistic stance on EMC amounts to 35 cents per contract. The trader responsible for the reversal may hold a long position in the underlying stock. If this is the case, the put options serve as downside protection in the event that shares of EMC decline beneath the effective breakeven point at $17.15 by expiration.

WYNN – Wynn Resorts Limited – Option implied volatility on the operator of casino resorts jumped 15.42% this morning to 58.90%, while shares increased more than 3.5% to $66.45 after Bank of America/Merrill Lynch reiterated its ‘buy’ rating on the firm. Nearly 10,000 option contracts changed hands on Wynn Resorts within the first 45 minutes of the trading session.

TOL – Toll Brothers, Inc. – Shares of the luxury home building company are soaring 15.5% this morning to $21.27 after the firm revealed new contracts are up 42%. Toll Brothers also stated fourth-quarter revenue will likely exceed analyst expectations. Option traders exchanged nearly 15,000 contracts on TOL by 10:20 am (EDT) with calls outweighing put trades by more than 3-to-1. Option implied volatility currently stands at 47.16%.

SFD – Smithfield Foods, Inc. – Hog producer and pork processor, Smithfield Foods, was upgraded to ‘buy’ from ‘hold’ and received a revised target share price of $20.00 from $12.00 at Deutsche Bank today. Shares surged 8.5% to $16.95 – a new 52-week high – following the upgrade. Early-morning option traders are initiating fresh call positions at the November 17.5 strike where 1,860 contracts changed hands as of 10:25 am (EDT). Option implied volatility jumped to an intraday high of 56.09% up from yesterday’s closing reading of 50.91%.

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