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Wednesday, February 21, 2024

Investor Uses Options to Strangle Ford’s Share Price through June 2010

Today’s tickers: F, WLP, IBN, SWHC, UNG, SNDK, MU, DTV, FDO & MON

F – Ford Motor Co. – A short strangle play in the June contract on Ford suggests shares of the automaker are likely to remain range-bound through the next six months to expiration. Ford’s shares continued to rally during the current session following yesterday’s news that the firm enjoyed a 33% increase in December auto sales over the previous year. Shares reached a new 52-week high of $11.42 today on a 4.20% increase over Tuesday’s close. The sold strangle transaction implies one investor expects the recent boom to dissipate along with option implied volatility. The strangler sold 15,000 puts at the June $10 strike for a premium of $0.80 cents apiece in combination with the sale of 15,000 calls at the higher June $12 strike for $1.10 each. The investor pockets a gross premium of $1.90 per contract, which he keeps if Ford’s share price stays within the confines of the strike prices described through expiration. The premium received provides limited protection should shares swing outside the boundaries. But, the investor faces losses in the event that shares move above the upper breakeven price of $13.90, or trade beneath the lower breakeven point at $8.10 by expiration in June. It is possible the strangle-seller expects to benefit from a move lower in volatility. Option implied volatility on Ford rose significantly by 18.87% over the past 48-hours, from a low of 40.85% on Tuesday morning, to today’s high of 48.56%. Shrinkage in the reading of volatility on Ford may allow the investor to close out the short position at a profit because, as a general rule, declines in volatility weigh down option premiums.

WLP – WellPoint, Inc. – Shares of the health and benefits company reached another new 52-week high of $61.45 today, adding to gains experienced earlier this week. The stock appreciated 5.5% from $58.27 on the final day of 2009, up to $61.45 today, the highest price attained in the past 12 months. Option traders displayed diverse strategies on WellPoint during the trading day. Near-term players banked gains by selling 7,000 calls at the now in-the-money January $60 strike for a premium of $1.70 apiece. One trader rolled 3,500 calls forward to a higher strike by selling-to-close 3,500 lots at the January $60 strike for $2.00 each, and buying up 3,500 calls at the higher February $62.5 strike for a premium of $2.55 per contract. Finally, we observed protective positioning at the February$ 60 strike where investors purchased 6,000 puts for an average premium of $2.55 apiece.

IBN – ICICI Bank Ltd. ADS – The India-based bank attracted a bullish trader today despite the 1.5% decline in shares of the underlying to $38.69. It appears the investor banked gains by closing out a previously established long call position in the January contract, and extended bullish sentiment on the stock by doubling up on calls in the March contract. Analysis of existing open interest at the January $40 strike suggest the trader originally bought 10,000 calls at that strike for $40 cents premium apiece back in May of 2009. Today, the investor sold 10,000 calls at the January $40 strike for $0.65 cents per contract. By our calculations, this leaves the investor with net profits of $0.25 cents per contract. Next, it looks as though the trader bought 20,000 calls at the March $40 strike for a premium of $2.75 apiece. The fresh bullish stance positions the trader to accrue profits if IBN’s shares rally 10.5% from the current price to surpass the breakeven point at $42.75 within the next several months to expiration.

SWHC – Smith & Wesson Holding Corp. – Firearms and ammunition manufacturer Smith & Wesson hasn’t had a real nice time of it lately with shares missing out largely on the broader rally. Are guns the first thing to go in a recessionary environment? We doubt it – not during days of heightened terror alerts and an increasing number of personal background checks. Those are a prerequisite for buying a gun, legally at least. The attempted share price rally to $6.98 ran out of ammo in July yielding to a persistent assault on breaking ground below $3.87 during December. But it wasn’t to be and a 6.7% jump today has lifted it back to $4.50. We believe we’re seeing a couple of options strategies in play. Outright call buying is evident in the February contract at the $5.0 strike where a 25 cent premium has changed hands on around 1,100 call options granting rights to buy the stock 11% higher than it stands today. Only 345 contracts were held by investors before today. Another strategy appears in the July contract where the $5.0 straddle appears to be in play with investors selling to reap the $1.60 premium thanks to a still lofty 72% reading for implied volatility. The strategy is optimized at expiration in six months in the event that the share price idles at the $5.00 strike price, but the investor makes money so long as shares remain range bound within $3.40 and $6.60. The latter would see spirits lifted back towards the July 2009 peak.

UNG – U.S. Natural Gas Fund LP – The good news is that as cold as it is today, one investor seems prepared to discount the uncomfortable conditions and is expecting a return to normal temperatures. The bad news is that you can expect a return to normal by July according to an option combination apparent at that expiration. It appears that an investor took advantage of the extended freeze around the world to make a contrarian play in the natural gas fund by selling around 1,000 call options at the July $13 strike for 75 cents in order to get long the same expiration $10 strike puts for $1.11 each. The fund surged again today in line with a jump in energy prices. Heating oil remains the exception but crude oil is up at $82.65 while the price of natural gas is almost 6% higher at $5.97 per btu. The UNG fund, which mirrors the performance of the price of natural gas is 4.7% higher at $10.80. It hasn’t traded above $12.22 since August 2009. The fund bottomed out on December 3 at $8.50, which is likely the fear embedded in this investor’s mind as he targets cheaper downside protection.

SNDK – SanDisk Corp. – Investors planted bullish omens across multiple contracts on SanDisk today as shares of the firm rallied 4.5% to a new 52-week high of $31.97. SNDK received an upgrade to ‘buy’ from ‘average’ with a target share price of $37.00 at Caris & Company, as well. Near-term optimists shed 2,000 put options at the January 31 strike for an average premium of 75 cents apiece. Put-sellers retain the full 75 cent premium received on the trade if SNDK’s shares trade above $31.00 through expiration. The nature of the short put sale implies investors are willing to have shares put to them at an effective price of $30.25 apiece should the put contracts land in-the-money. Plain-vanilla call buying took place at the February 33 strike where approximately 1,500 calls were picked up for an average premium of 2.14 each. Investors holding these contracts accrue profits if SanDisk’s shares surge 10% to breach the breakeven point at $35.14. Finally, longer-term bulls bought 2,000 calls at the April 32 strike for 3.40 apiece. These individuals profit if shares of the firm jump 10.7% to $35.40 in the next several months to expiration.

MU – Micron Technology, Inc. – Option traders initiated diverse strategies on the manufacturer of semiconductor devices today. Nearer-term bullish activity took place in the April contract, while far-term bearish sentiment settled in the January 2011 contract. Micron’s shares are up slightly by 0.25% to $11.20 as of 12:30 pm (EDT). One investor revealed optimistic sentiment on the stock by rolling a long call position up to a higher strike price. It appears the trader originally purchased 10,000 calls at the now deep in-the-money April $8.0 strike for an average of $1.10 apiece back on October 26, 2009. Today the investor sold the calls for $3.30 per contract. Net profits on the transaction amount to $2.20 apiece. Next, the trader reestablished a bullish stance on MU by purchasing 10,000 calls at the higher, albeit in-the-money, April $11 strike for $1.30 per contract. Profits are available to the MU-bull if shares rally above the breakeven price of $12.30 by expiration in April. In contrast, a seemingly bearish trader put on a short straddle strategy in the January 2011 contract. The investor sold 3,000 puts at the January 2011 $10 strike for $1.72 each in combination with the sale of 3,000 calls at the same strike for a premium of $2.98 apiece. The gross premium of $4.70 per contract on the straddle is retained in full by the investor only if shares fall 10.50% from the current price to $10.00 by expiration next year. We note that the straddle may also merely expect lower volatility on Micron, which would aid in his ability to buy back the short position for less than the total premium received, for a net profit.

DTV – The DIRECTV Group, Inc. – The 2.50% decline in shares of the subscription-based television services provider to $33.10 this morning did not deter DTV-bulls from establishing optimistic positions on the stock. Plain-vanilla call buying implies, perhaps, investors expect shares to rebound by expiration in February. Bullish traders are likely relishing today’s reduced premiums on out-of-the-money call options. Approximately 2,500 calls were purchased at the February 35 strike for an average premium of 77 cents per contract. Individuals long the calls anticipate at least an 8% rally in DTV’s shares to the breakeven price of $35.77 by expiration. Option implied volatility is up 6.83% to 32.37% from the opening reading on the stock of 30.30%.

FDO – Family Dollar Stores, Inc. – Shares of the operator of discount retail stores surged 11% to $30.55 in morning trading after the firm posted first-quarter profits of 49 cents per share, which exceeded average analyst estimates of 47 cents per share. Option implied volatility contracted significantly following the earnings announcement, falling 20.88% to 28.12%, as of 10:30 am (EDT). Morning movers made bullish plays on FDO by picking up about 3,100 now in-the-money call options at the January 30 strike for an average premium of 1.01 per contract. Call-buyers profit if FDO’s shares increase a scant 1.50% to surpass the breakeven price of $31.01 by expiration day.

MON – Monsanto Company – Shares of the world’s largest seed producer are down 0.50% to $84.55 as of 10:40 am (EDT). The price of the stock fell as low as $82.98 in the first 15 minutes of the trading session after Monsanto reported a first-quarter loss of 2 cents per share, which disappointed analysts who expected the firm to break even. Bearish investors bought 1,700 puts at the February 75 strike for 75 cents per contract. Perhaps put-buyers expect Monsanto’s shares to fall significantly by expiration next month. The breakeven point on the puts at $74.25 requires that shares fall more than 12% from the current price. Option implied volatility is down 11.54% to 27.56% following the earnings report.


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