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Option Player Reenergizes Bullish Stance on RRI Energy, Inc.

Today’s tickers: RRI, USO, GLD, MT, AEM, INTC, ESRX, C, KO & GEOY

RRI – RRI Energy, Inc. – A large-volume call option combination play launched RRI Energy onto our ‘most active by options volume’ market scanner this afternoon. The investor responsible for the activity banked profits by selling-to-close a previously established long call position. The trader also initiated a new bullish stance on the stock to position for a near-term rebound in shares of the underlying. RRI’s shares are down more than 2.5% today to $5.58. It appears the investor originally purchased 35,000 calls at the now deep in-the-money December 4.0 strike for a premium of 1.30 apiece in early November when shares were at $5.15. Today the trader sold the chunk of call options for 1.55 each, banking net profits of 15 cents per contract. Finally, the RRI-optimist established a fresh bullish stance at the in-the-money January 5.0 strike by buying 35,000 calls for a premium of 85 cents apiece. Shares must rally about 5% from today’s price in order for the investor to break even at $5.85 by expiration next month. The increase in demand for option contracts on the stock lifted option implied volatility significantly. Volatility on RRI Energy increased 21.66% from an intraday low of 55.31% to a high of 67.29%.

USO – United States Oil Fund LP – Shares of the USO fund slipped slightly lower during the trading session, falling less than 1% to $36.50, as of 3:00 pm (EDT). Short strangle plays in the July contract suggest shares of the fund are likely to remain range-bound for the next seven months to expiration. Investors shed 2,500 calls at the July 38 strike for a premium of 3.56 apiece, in conjunction with the sale of the same number of puts at the lower July 33 strike for a premium of 2.75 each. Short-stranglers receive a gross premium of 6.31 per contract on the trade. They keep the full amount of premium if USO’s shares trade within the strike prices described through expiration. Shares of the fund traded within the range of $33-$38 for the four month period starting July 15, 2009, and ending October 12, 2009. Perhaps today’s short strangle sellers expect to see similar inertia in USO shares for the next seven months to expiration.

GLD – SPDR Gold Trust ETF – A bullish risk reversal on the gold exchange-traded fund suggests one investor anticipates a rebound in the price of gold bullion in the next several months. Shares of GLD declined more than 3% today to $108.05. The price per share of the fund has fallen 9.65% since December 2, 2009, when shares were at $119.40, down to an intraday low of $107.87. The contrarian trader selected the March 2010 contract to employ a bullish strategy on the ETF. The investor sold roughly 6,500 in-the-money puts at the March 109 strike for a premium of 5.90 apiece in order to offset the cost of picking up 6,500 calls at the same strike for 5.26 each. The trader pockets a net credit of 64 cents per contract on the transaction, which is safe in the bank if the puts land out-of-the-money by expiration. Additional profits accumulate if shares rally through the breakeven price of $109.00. Option implied volatility on the GLD rose nearly 9% over Wednesday’s closing reading of 22.98% to an intraday high of 25.04%.

MT – ArcelorMittal – A jump in the value of the dollar has undermined commodity prices today. As much as yesterday’s crude oil price rise supported energy stocks, the opposite is happening today as shares at metals and mining stocks respond to the sharply higher dollar. Since commodities are priced in dollars, demand for raw materials tends to rise as the dollar loses value and therefore earnings allegedly suffer. One large option trade seems to be predicated on taking advantage of such a trend – long lived or not. The investor appears to have written some 20,000 put options expiring next month on this steel producer at the 40 strike. Since share in Arcellor recently touched a new 52-week high just yesterday, it’s possible that this investor is hoping for a second bite at the cherry to establish a long position by having shares put to him before the contract expires on January 15. Currently shares are down 1.2% on the day and stand at $42.92. The cost of insurance (in this case the premium received by the put seller) is 75 cents, which means that the investor would have shares put to him at an effective share price of $39.25 or a discount of 8.5% to the current price. If the share price garners support above the striking price, he retains the entire premium.

AEM – Agnico-Eagle Mines Ltd. – Shares of the Canada-based gold mining company declined 9.5% to $54.49 today and received a downgrade to ‘hold’ from ‘buy’ at TD Securities. Despite current share price erosion, one investor initiated a medium-term bullish play on Agnico-Eagle Mines. Trading activity suggests this options-optimist anticipates a rebound in AEM shares by expiration in May 2010. The investor established a call spread by purchasing 4,000 calls at the May 60 strike for 5.55 each, marked against the sale of the same number of calls at the higher May 75 strike for 2.68 apiece. The net cost of the contrarian play amounts to 2.87 per contract. The investor is in position to accumulate maximum potential profits of 12.13 per contract if AEM’s shares surge 38% over the current price to $75.00 by expiration in May. The trader breaks even if shares rebound 15% to $62.87 in the next five months. Investor uncertainty, as measured by option implied volatility, is up 7.1% today to 49.27%.

INTC – Intel Corp. – Chip maker, Intel Corp., realized a 1.25% decline in the value of its shares to $19.13 today as gloomy forecasts regarding global semiconductor sales hit the press. According to one Bloomberg article, which cited market researcher Gartner Inc., the world’s semiconductor sales are likely to drop 11.4% this year to $226 billion, whereas global sales dipped just 4.4% in 2008. The sales-shrinkage report did not seem to faze one INTC option trader, who initiated a bullish stance on the stock in the July 2010 contract. It appears the investor sold 5,000 puts at the July 19 strike for an average premium of 1.80 apiece. The bullish trader keeps the full 1.80 premium on the sale if INTC’s shares remain above $19.00 through expiration in July. The short sale of the put options implies the trader is happy to have shares put to him at an effective price of $17.20 apiece if the put contracts land in-the-money by expiration.

ESRX – Express Scripts, Inc. – A short strangle play by one investor suggest shares of the provider of pharmacy benefit management services are likely to remain range-bound through expiration in January. Shares rebounded slightly in early morning trading today after experiencing significant declines during yesterday’s session. But, the stock is currently down again by about 0.5% to $83.60 as of 12:30 pm (EDT). One trader established a sold strangle by selling 1,000 puts at the January 80 strike for a premium of 1.28 each, and by selling 1,000 calls at the higher January 90 strike for 1.52 apiece. The gross premium pocketed on the transaction amounts to 2.80 per contract. The investor retains the full 2.80 premium if shares remain within the boundaries of the strike prices described through expiration next month. We note that shares of ESRX have traded in the range of $80-$90 since November 2, 2009.

C – Citigroup, Inc. – Citi’s shares are off 7.5% to $3.19 this morning on news the firm priced a hefty offering of 5.4 billion shares at $3.15 to amass net proceeds of $17 billion. Investors in the financial institution have suffered 36% declines in Citi shares since October 15, 2009, when shares were at $4.99, to today’s current share price of $3.19. Option trading on the stock is booming this morning as more than 800,000 contracts changed hands within the first hour of the trading session. Investors traded upwards of 1 million contacts each of the past few days, and it looks like today will be no different. Option implied volatility is up 4.5% to 67.63% this morning. Volatility on the stock jumped 70.56% over the past two weeks, from 39.75% on December 4, 2009, to the current reading of 67.63%.

KO – Coca-Cola Co. – Option implied volatility on Coke is up 6.03% to 17.58% as of 10:40 am (EDT), while shares are nearly 2% lower to $57.30. KO’s shares are down despite reports the firm raised its earnings outlook for 2009 and announced plans to initiate a share buy-back program. Investors exchanged upwards of 13,000 option contracts on the stock in the first 75 minutes of the trading session. Option traders are favoring put options over calls by a factor of nearly 2-to-1.

GEOY – GeoEye, Inc. – Shares of the satellite imagery company plummeted 19% to $25.59 this morning on reports an “irregularity in the antenna of its GeoEye-1 satellite” could weigh down 2010 revenue for the firm by 10 percent. The news sent option implied volatility sharply higher by 60.46% to 54.98%. Investors exchanged approximately 3,900 contracts on the stock by 10:50 am (EDT). The day’s volume represents 93% of total existing open interest on GeoEye of 4,206 contracts.


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