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Bank of America Call Options Fly Off the Shelves

Today’s tickers: BAC, GE, SEED, EWZ, DE, STLD, LCC, SEED & DLTR

BAC – Bank of America – Long-term Bank of America bulls are out in full force today, scooping up call options like they’re going out of style. BAC’s shares are off slightly by less than 1% to $16.19. Plain-vanilla call buying in the January 2011 contract indicates investors expect shares to surge over the next 13 months. A large chunk of 50,000 calls were picked up at the January 25 strike for an average premium of 86 cents apiece. Shares must rally 60% from the current price to breach the $25.86 breakeven point on the trade. Twice as many calls were coveted at the higher January 30 strike where 100,000 calls were purchased for 45 cents each. The investor responsible for the massive position breaks even if shares jump 88% to $30.45 by expiration. Finally, another BAC-optimist established a ratio call spread in the same contract. The investor purchased 20,000 calls at the January 20 strike for 1.95 apiece, spread against the sale of 40,000 calls at the higher January 30 strike for 46 cents premium each. The net cost of the spread amounts to 1.03 per contract and positions the trader to profit if shares exceed $21.03 by expiration in January of 2011. Maximum potential profits available on the transaction amount to 8.97 per contract. Option implied volatility on Bank of America is currently 38.65% – a scant 2.93% above the 52-week volatility low of 35.77% – attained back on October 20, 2009.

GE – General Electric – A massive bullish bet on General Electric today indicates one investor expects shares to surge 43.8% in the next 13 months. Shares are currently up just under 1% to $16.16. It looks like a staggering 131,500 calls were purchased at the January 2011 22.5 strike for a premium of 76 cents per contract. The trader is apparently expecting GE’s shares to jump at least 43.8% to the breakeven point at $23.26 by expiration in January of 2011. Option implied volatility on General Electric is down to a one-year low of 29.46%.

SEED – Origin Agritech Ltd. – Frenzied options activity continues today on Beijing-based seed producer, Origin Agritech, following yesterday’s announcement that the firm received approval from China’s Ministry of Agriculture to sell its genetically modified phytase corn. Shares are currently up 4% to $10.86, down from an intraday high – and 52-week high – of $11.75. Bullish investors took root in the December contract, purchasing 6,900 calls at the December 12.5 strike for an average premium of 87 cents each. SEED-optimists also engaged in put selling at the December 10 strike where 5,300 contracts sold for about 1.02 apiece. Many traders employed covered-call selling during yesterday’s trading session, and it appears a number today’s investors followed suit. Approximately 7,000 calls were sold – likely against long stock positions – at the December 12.5 strike for roughly 87 cents premium apiece. Finally, uber-bullish traders picked up 2,600 calls at the December 15 strike for 36 cents per contract. SEED’s shares must surge a whopping 41% over the current price in order for December 15 strike call-buyers to breakeven at $15.36. Investor uncertainty, as measured by option implied volatility, is up 15.37% to 115.15%, which is slightly lower than the intraday high of 134%.

EWZ – iShares MSCI Brazil Index ETF – December-contract option trading patterns today suggest a shift in investor sentiment on the Brazil Index ETF. One investor unraveled a large-volume bearish butterfly spread, while another trader initiated a bull call spread on the fund. Shares of the EWZ are slightly lower by 0.75% to stand at $75.69. On November 4, 2009, a Brazilian-bear established a December 60/65/70 butterfly spread at a net cost of 59 cents per contract. Today the trader banked net profits of 39 cents per contract by closing out the 15K/30K/15K spread. Maximum available profits on the butterfly spread were 4.41 per contract if shares of the ETF had declined to $65.00 by expiration. Thus, the trader left significant profits on the table. This implies the investor essentially threw in the towel, and merely took in what premium was available on the spread today. Perhaps the trader unraveled the trade because he expects shares of the EWZ to rise ahead of expiration. Bullish sentiment on the fund took the form of a plain-vanilla call spread. One investor purchased 5,000 calls at the December 76 strike for 2.49 apiece, and simultaneously shed the same number of calls at the higher December 82 strike for 55 cents premium each. The net cost of the optimistic transaction amounts to 1.94 per contract. Maximum potential profits of 4.06 apiece are available if shares surge 8% to $82.00 by expiration in December.

DE – Deere & Co. – Shares of the agricultural equipment manufacturer are up 1.25% to $52.47. Option traders established bullish stances on the stock by selling put options in the December contract. Investors sold more than 5,100 puts at the December 50 strike for an average premium of 1.19 each. Put-sellers retain the full premium received on the sale as long as shares of DE remain above $50.00 through expiration. The short sale of the puts suggests investors are happy to have shares of the underlying stock put to them at an effective price of $48.81 apiece in the event that the put options land in-the-money.

STLD – Steel Dynamics, Inc. – Long-term bullish plays on the manufacturer of steel products indicates shares are not likely to move much lower by expiration in May 2010. STLD’s shares are down 1% to $16.45 as of 12:30 pm (EDT). Option traders sold approximately 8,000 puts at the May 15 strike for an average premium of 1.60 apiece. Investors retain the full 1.60 premium if Steel Dynamic’s shares remain above $15.00 over the next six months. Put-sellers stand prepared to have shares of the underlying stock put to them at $13.40 if the put options land in-the-money by expiration. We note that shares of STLD traded down to $13.40 as recently as October 30, 2009.

LCC – US Airways Group, Inc. – Shares of US Airways are up more than 1.5% this morning to $3.15 on news the firm is delaying delivery of 54 Airbus jets at least until 2013. LCC’s CEO, Doug Parker, stated that the deferral will likely increase the firm’s available cash by $450 million at the conclusion of 2010. Bullish option traders reacted quickly to the news by purchasing more than 10,250 calls at the January 4.0 strike for 25 cents premium per contract. Call-buyers apparently expect shares to rally at least 35% to the breakeven price of $4.25 by expiration in January.

SEED – Origin Agritech Ltd. – Option traders exchanged more than 37,000 contracts on the third-largest Chinese seed producer by 10:25 am (EDT). Options volume on SEED this morning will no doubt surpass total existing open interest on the stock of 41,527 lots. Shares or Origin Agritech are trading 11% higher to a new 52-week high of $11.60. More than 11,000 calls changed hands at the December 12.5 strike. It appears investors are exhibiting a mix of plain-vanilla call buying and covered call selling at that strike. Stay tuned for more in depth analysis.

DLTR – Dollar Tree, Inc. – Option implied volatility on the retail chain contracted 22.29% to 26.74% after the firm posted third-quarter profits of 76 cents per share, which beat average analyst expectations by 10 cents per share. Shares of DLTR surged as much as 5.5% to $51.80. Option traders exchanged 3,428 calls at the now in-the-money December 50 strike for about 2.05 apiece as of 10:35 am (EDT).

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  1. I noticed the activity too on BAC and GE, however I have a lot of the activity being hit at the bid price for the contracts. Can you explain why you think this is bullish? Thanks

  2. Most options are not held until expiration. The speculators on the BAC calls, for example, could make a tidy profit on a moderate rise in the underlying. A 12% rise in BAC in the near term would translate to a 50% profit on the Jan 2011 25 calls, assuming volatility remained the same. So these investors may not be betting on holding until BAC  rallies past $25.