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Wednesday, February 21, 2024

Option Trader Prescribes Bullish Risk Reversal on CVS

Today’s tickers: CVS, LIZ, ITMN, MA, V, RF, KG, HW, WSM, AEP & NTAP

CVS – CVS Caremark Corp. – Shares of the pharmacy retail chain are up 1.5% to $31.11 perhaps due, in part, to the ‘buy’ rating it received at UBS today. Optimistic options activity took place in the December contract as one investor initiated a bullish risk reversal. It appears the trader sold 4,400 puts at the December 31 strike for an average premium of 94 cents apiece in order to finance the purchase of the same number of calls at the higher December 32 strike for 63 cents each. The investor pockets a 31 cent credit on the trade, which he retains in full as long as shares remain above $31.00 through expiration. Additional profits accumulate if CVS’s shares rally above $32.00.

LIZ – Liz Claiborne, Inc. – A 15,000-lot covered call in the January 2011 contract on Liz Claiborne today suggests shares are likely to recover, albeit at a glacial pace. Shares of the apparel and accessories retailer suffered a 5% decline to $4.55 during the trading session. One investor effectively purchased shares of the underlying stock for $3.30 apiece by selling 15,000 calls at the January 2011 5.0 strike for a premium of 1.25 each. Thus, the trader stands ready to accrue gains of 51% if shares of LIZ appreciate to $5.00 by expiration. The long-term positioning of the covered call play provides several advantages to the investor. One advantage is that the call options do not expire for another 13 months, which leaves ample time for LIZ’s shares to appreciate up to the strike price of $5.00. The 15,000-lot call transaction represents nearly 50% of the total existing open interest on LIZ of 31,502 contracts. Note that shares last traded above $5.00 yesterday at approximately 10:35 am (EDT).

ITMN – InterMune, Inc. – A bull call spread on the biotechnology company today suggests shares could rally significantly by expiration in April 2010. Bullish options activity on the stock belies the more than 3% decline in ITMN’s shares during the session to $10.94. The call spread involved the purchase of 3,750 calls at the April 15 strike for an average premium of 2.25 each, marked against the sale of the same number of calls at the higher April 25 strike for 75 cents apiece. The net cost of the transaction amounts to 1.50 per contract. The optimistic investor is positioned to amass maximum potential profits of 8.50 per contract if shares of the biotech firm explode up to $25.00 by expiration in April. Shares must rise at least 50% in order for the investor to breakeven at $16.50. The stock traded higher than the breakeven price on September 18, 2009, when shares were at $16.91. Finally, we note that shares of ITMN have not breached the $25.00-level since July 18, 2007.

MA – Mastercard Inc. – A GAO report concluded that lowering processing fees charge by card payment processors charged at stores might not save consumers money, who might also end up paying more for purchases. As we stare at a sea of red on our market scanners today, options activity at two companies stands out to display healthy call activity. Meanwhile both share prices have jumped higher as investors respond to the lower likelihood of reduced profits at Mastercard, whose shares are 3% higher at $234.15. Option traders proved just how treacherous such movements in the underlying can be in the context of soon-to-expire options. For example the premium on put options expiring at the weekend with a 230 strike price dropped from 7.0 to just 65 cents as investors exchanged more than 5,000 contracts. On the other side of the coin investors drove up the call premium at the 230 strike from 50 cents to 6.00. In perhaps bolder bets, the 240 strike calls rose from 15 cents to 85 cents at one point on volume of almost 5,000 lots.

V – Visa Inc. – The relief from the same GAO report allowed shares in Visa to rise just 1% to $81.10 but not before shares traded at a 10-day low earlier in the session. But that’s where the fun started with options on the card-processor. November calls at the 80 strike traded 2,600 times at a 46 cent premium before a spike in the share price sent premiums surging to as high as 1.16. At that point it looks like early call buyers banked handsome gains. As premiums eased to 90 cents we show two 10,000 lot blocks trading. Further share price gains propelled the same premium to as high as 1.84. Implied volatility gained around 12% this morning as traders responded to the news.

RF – Regions Financial Corp. – Near-term investors displayed bearish sentiment on Regions Financial today, while longer-term traders took to the February 2010 contract to establish bullish positions. The banking company’s shares are currently lower by 0.5% to $5.36. Investors purchased at least 2,300 puts at the December 4.0 strike for an average premium of 4 cents per contract. Perhaps put-buyers are scooping up cheap downside protection in case shares of RF collapse 25% by expiration next month. The same strike price was targeted in the February 2010 contract, but investors here utilized puts to get bullish. Approximately 8,000 puts were sold short at the February 4.0 strike for an average premium of 20 cents each. Put-sellers retain the full 20 cent premium on the trade if shares of RF remain higher than $4.00 through expiration. The short sale of the contracts indicates investors are happy to have shares of the underlying stock put to them at an effective price of $3.80 apiece if the put options land in-the-money by expiration.

KG – King Pharmaceuticals, Inc. – Shares of the pharmaceuticals firm are up 6% today to a new 52-week high of $11.86. Bullish investors took to the November and December contracts to exchange call options on the stock. One trader maintained a bullish stance on KG by inducing a calendar roll. It appears the investor originally purchased 2,000 calls at the November 12.5 strike for 35 cents apiece on October 14, 2009. Today he sold the November 12.5 strike calls for just one nickel per contract in order to reestablish a 2,000-lot long call position at the December 12.5 for 20 cents each. King’s shares must rally at least 5% over the current high before the December 12.5 strike calls land in-the-money. Plain-vanilla call buyers also targeted the December 12.5 strike where about 2,800 calls were picked up for an average premium of 28 cents apiece. Call-buying traders break even if shares of KG rise to $12.78 by expiration next month.

HW – Headwaters Corp. – The provider of building materials and fixtures edged onto our ‘hot by options volume’ market scanner due to seemingly bullish activity in the January 2010 contract. The more than 6.5% rally in shares to $4.85 today inspired one investor to sell put options. The trader sold 5,000 puts at the in-the-money January 5.0 strike for an average premium of 80 cents per contract. It is unclear, given the previously existing open interest of 13,792 lots at that strike, whether the investor is taking a new bullish position or unraveling an existing bearish one. Either way, the sale indicates bullish sentiment on Headwaters today.

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