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JPMorgan-Bull Constructs Three-Legged Combo Play as Shares Rise

Today’s tickers: JPM, LVS, S, WFC, UAUA, NBR, PTEN, FIG, PCS, DAL & TPX

JPM – JPMorgan Chase & Co. – A three-legged combination play suggests one investor anticipates a significant rally in JPMorgan’s shares within the next few months. The stock is trading 2% higher this afternoon to $43.65. The trader utilized both calls and puts in the March contract in order to position for potential bullish movement in shares of the underlying. The investor sold 15,000 puts at the March 40 strike for an average premium of 1.18 apiece to partially offset the cost of buying a call spread. The call spread involved the purchase of 15,000 calls at the now in-the-money March 43 strike for an average premium of 2.58 each, marked against the sale of 15,000 calls at the higher March 47 strike for 90 cents premium apiece. The net cost of the three-legged strategy amounts to 90 cents per contract. Maximum potential profits of 3.50 per contract – a grand total of $5.25 million – are available to the investor if JPM’s shares rally through $47.00 by expiration day. Profits amass above the breakeven price of $43.50. The short put stance at the March 40 strike implies the investor is willing to have shares put to him at $40.00 apiece if the put options land in-the-money.

LVS – Las Vegas Sands Corp. – Reports of a large 48% increase in December revenue at Sands China – the Macau unit of Las Vegas Sands Corp. – pushed shares of LVS up 9.5% to $18.21 today. Option bulls, hoping good fortune and accurate foresight are on their side looked to the February contract to initiate plain-vanilla call buying strategies. The now in-the-money February 18 strike had roughly 2,700 calls picked up for an average premium of 1.29 apiece. The higher February 19 strike was the hot spot for bulls looking to bet on an LVS rally. Out of the 19,500 calls traded at that strike, more than 12,200 contracts were purchased for about one dollar per contract. Call options exchanged at the February 19 strike vastly outnumber previously existing open interest at that strike of just 2,725 lots. The higher February 20 strike received bullish interest as well, with about 2,000 contracts coveted by traders for an average premium of 66 cents each. As of 3:15 pm (EDT), investors traded just under 127,000 option contracts of LVS, which represents approximately 21% of the 604,863 contracts of total open interest on the stock.

S – Sprint Nextel Corp. – Shares of the mobile communications company increased 6% during the trading day to $4.14. Notable options activity on the stock took place in the May contract where one investor established a bullish risk reversal. The trader sold 11,000 puts at the May 3.5 strike for a premium of 30 cents apiece in order to partially finance the purchase of 11,000 calls at the higher May 5.0 strike for 35 cents each. The net cost of the reversal play amounts to 5 pennies per contract. Profits accumulate on the reversal strategy if Sprint’s shares rally at least 22% from the current price to breach the breakeven point at $5.05 by expiration in May.

WFC – Wells Fargo & Co. – A long-term short straddle play on Wells Fargo suggests one investor expects shares to rally 7.5% to $30.00 in the next twelve months to expiration in January 2011. WFC’s shares are up more than 2% today to stand at $27.90. It appears the optimistic trader sold 7,700 puts at the January 2011 30 strike for a premium of 5.65 each, and sold 7,700 calls at the same strike for about 3.30 apiece. The straddle-strategist rakes in a gross premium of 8.95 per contract on the trade. The investor keeps the full amount of premium pocketed today if WFC’s shares rally 7.5% from the current price within the next year to settle at $30.00 by expiration.

UAUA – UAL Corporation – Healthier passenger loads in December sparked a break to a 52-week high above $13 for United Airlines parent, UAL Corp. The news inspired an interesting option play that we’re still trying to discern using the January 2011 contract. The play involved 2,500 contracts in each of the $10 strike puts and the $20 strike call options. The trade is marked by the exchange as a spread indicating one was bought and one was sold, although data also suggested options were bought at both strikes. What we believe makes the most sense on today’s price move is that an investor has most likely written the $10 strike puts and bought the $20 strike calls. Shares were last seen trading 8.4% higher at $13.87. Post recovery bullishness is possibly making its shares look more appealing especially as they test higher ground not seen since October 2008. Option implied volatility at around 80% helps keep the premiums swollen, which is possibly why the investor is reaching almost unreasonably high for a bullish play while writing off any prospects to the downside. The combined premium of $4.60 to us looks unreasonably high on a breakeven basis to make this combination a long strangle, although such a play would benefit from a surge in implied volatility. Many analysts argue that the VIX is ridiculously cheap at present. But a net premium of zero in the event of a reversal play makes us believe that this trade is a bullish play on the airline.

NBR – Nabors Industries Ltd. – Land drilling contractor, Nabors Industries, attracted options-optimists to the February contract today with shares of the company trading up nearly 8% to a new 52-week high of $25.00. Plain-vanilla call buying activity took place at the February 25 strike with 1,500 calls purchased at the strike for about 95 cents premium apiece. Another 1,500 calls were probably bought at the higher February 26 strike for an average premium of 80 cents each. Higher-strike call buyers stand ready to profit if NBR’s shares increase 7% to surpass the breakeven point at $26.80 by expiration next month. A more conservative bullish trader initiated a covered call spread by buying shares of the underlying stock and writing call options. It looks like the investor sold 6,000 calls at the February 26 strike for an average premium of 73 cents per contract. The sale of the calls reduces the price paid per share of the stock by the amount of premium received. Additionally, the short call position establishes an effective exit strategy for the investor if the calls land in-the-money by expiration.

PTEN – Patterson-UTI Energy, Inc. – Shares of the provider of contract services to the North American oil and natural gas industry jumped nearly 7.5% during the trading session to $17.40. Option-bulls dominated the February contract on PTEN today, suggesting perhaps that shares will continue higher by expiration next month. Approximately 6,200 calls were picked up at the February 17.5 strike for an average premium of one dollar per contract. Call-buyers amass profits if PTEN’s shares appreciate 6% from the current price to $18.50 – the breakeven price on the calls – by expiration.

FIG – Fortress Investment Group LLC – Asset management firm, Fortress Investment Group, realized a nearly 8% increase in the price of its shares today to $5.07. The rally in shares spurred a bullish feeding frenzy in January 2011 contract call options. Investors purchased approximately 6,000 calls at the now in-the-money January 2011 5.0 strike for an average premium of 1.19 per contract. Call-buying option traders break even on the transaction if FIG’s shares surge 22% to $6.19 in the next twelve months to expiration.

PCS – MetroPCS Communications, Inc. – Investors threw in the towel on wireless communications provider, MetroPCS, this morning with shares of the firm trading flat at $7.97 as of 10:35 am (EDT). Roughly 12,000 in-the-money call options were sold at the February 7.5 strike for about 80 cents premium each. Open interest levels at that strike suggests call-sellers are closing out previously established long call positions to take in the available option premium on the contracts. Today’s selling momentum in the February contract indicates bearish sentiment by investors through expiration next month.

DAL – Delta Air Lines, Inc. – Delta-bulls picked up call options on the airline this morning as shares rallied 9% to $12.24. News that December unit revenue at Continental Airlines fell the least in eleven months spurred upward share price moves at most of the large U.S. carriers today. Option traders purchased approximately 10,000 calls at the now in-the-money February 12 strike for an average premium of one dollar per contract. Elsewhere, it appears other traders may be taking profits off the table by selling 5,000 deep-in-the-money calls at the March 9.0 strike for roughly 3.17 apiece.

TPX – Tempur-Pedic International, Inc. – Investors holding bullish positions in Tempur-Pedic can probably rest easy tonight as shares of the underlying stock are up 6% to a new 52-week high of $25.89. Some option traders initiated optimistic stances on TPX by using both calls and puts. It appears the majority of the 4,000 puts exchanged at the February 25 strike sold for about 1.82 apiece, and partially offset the price paid to purchase most of the 4,000 call options traded at the same strike price for an average premium of 2.25 each. The bullish risk reversal strategy employed at that strike cost traders an average of 43 cents per contract, and positions them to profit above the breakeven price of $25.43.


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