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Wednesday, April 17, 2024

Ford Call Options Gone Wild as Bulls Populate January 2011 Contract

Today’s tickers: F, IPG, MBI, DAL, XLF, XHB, CROX, GME, BBBY & NVTL

F – Ford Motor Co. – Yesterday we reported on a short strangle play, which implied the automaker’s shares would likely remain within the realm of $10.00 to $12.00 for the next six months to expiration in June 2010. Today we observed bullish options activity in the January 2011 contract, which points to significantly higher shares for Ford in the next twelve months. The stock rallied again today, gaining 2% to reach a new 52-week high of $11.60 with just under 30 minutes remaining in the session. Bullish indications came in the form of a call spread and plain-vanilla call buying strategies. It looks like one investor purchased a large chunk of 50,000 calls at the January 2011 $17.50 strike for an average of $0.58 apiece. The trader responsible for the transaction benefits from this position only if Ford’s shares explode 56% over the current price to surpass the breakeven point at $18.08 by next January. The parameters of the call spread also implies a significant increase in shares of the motor company by 2011, but the nature of the spread limits upside profit potential, whereas the plain-vanilla call buyer’s profits are potentially limitless. The investor responsible for the spread selected the more conservative January 2011 $15 strike to purchase approximately 6,000 calls for an average premium of $1.06 per contract. The other half of the debit spread involved the sale of the same number of calls at the higher January 2011 $22.50 strike for about $0.20 each. The net cost of the bullish play amounts to $0.86 per contract and positions the investor to accrue profits above the breakeven price of $15.86. Maximum potential profits of $6.64 per contract are available to the trader if Ford’s shares rally a whopping 94% from the current value to $22.50 by expiration in January of 2011.

IPG – Interpublic Group of Companies, Inc. – A long straddle strategy initiated on the advertising and marketing company implies one investor expects greater volatility in the price of the underlying through expiration in February. The inherent nature of the long straddle suggests shares of IPG may swing dramatically in the next few weeks. Interpublic’s shares are currently off 2.5% to stand at $7.27 in afternoon trading. The straddle-player purchased about 2,000 puts at the February $7.50 strike for an average premium of $0.55 apiece and bought the 2,000 calls at the same strike for $0.45 each. The net cost of the transaction amounts to one dollar per contract. The investor responsible for the straddle likely expects to garner profits given either a 17% rally to the upside above the breakeven price of $8.50, or a 10.5% decline in shares beneath the lower breakeven point at $6.50, by expiration next month. Higher option implied volatility within the time period specified above is advantageous to the investor because higher option premiums may allow him to sell-to-close the straddle at a profit. Volatility on the stock increased 15.53% during the session from an intraday low of 44.02% up to a high of 50.86%.

MBI – MBIA Inc. – Shares of the insurance company surged more than 16.5% today to a high of $5.26 prompting some investors to increase bullish bets on the firm. Traders exchanged more than 59,600 contracts on MBI by 2:30 pm (EDT), which represents about 21% of the total open interest on the stock of 280,252 contracts. Call options traded more than 4.5 times to every put option exchanged during the session. It appears investors banked gains by selling more than 15,000 calls at the now in-the-money January $5 strike for $0.25 apiece and purchased about the same number of calls at the higher January $6 strike for one nickel per contract. With a breakeven point of $6.05 on the new calls, MBI’s shares must jump another 15% from the intraday high before investors can accrue profits.

DAL – Delta Air Lines, Inc. – Bearish option traders bombarded Delta with pessimistic strategies today after the firm stated total December traffic declines 7.5% versus the same time in the previous year. Despite the decline in traffic, shares of the U.S. carrier are up nearly 6% to $12.82, perhaps because ‘load factor’ – or the percentage of available seats filled with passengers – increased 0.4% last month to 81.2%. Option traders populating the March contract on the stock are wary of a pull-back in shares in the next several months. One investor established a large-volume put spread by purchasing 25,000 puts at the March $11 strike for $0.70 each, spread against the sale of 25,000 puts at the lower March $9 strike for $0.20 apiece. The net cost of the bearish play amounts to $0.50 per contract and establishes downside protection for the trader should shares slip beneath the breakeven price of $10.50 by expiration. Call-selling by other investors suggests the current state of shares is as good as it’s going to get. Option traders sold 7,100 calls at the March $13 strike for an average premium of $1.10 per contract, perhaps taking the premium available today in case Delta shares descend in the near-term.

XLF – Financial Select Sector SPDR ETF – Option volume on the financial exchange-traded fund burst as investors ramped up bullish positions to prepare for potential upward momentum in the price of the underlying. Shares of the XLF rallied 2% to $15.29 during the session. One investor, holding a monster-sized portion of calls in the January contract, elected to take profits by selling the contracts and reestablished a fresh chunk of calls in the February contract. It is likely the trader originally purchased about 154,000 calls at the January $15 strike for an average of $0.16 per contract back on December 22, 2009. Today it looks like the investor banked average profits of $0.07 per contract by selling the 154,000 calls for $0.23 apiece. Expecting continued bullish momentum, the trader then purchased roughly 154,000 fresh calls at the higher February $16 strike for $0.17 per contract. The trader breaks even on the new call position if shares of the XLF rally 5.75% from the current price to $16.17 by expiration next month. Finally, a more cautious individual picked up a large chunk of put options in the June contract. The investor bought 52,500 puts at the June $13 strike for $0.47 per contract. Perhaps this trader is long the stock and picking up medium-term downside protection on the position in order to hedge against potential declines in the price of the fund in the next six months to expiration.

XHB – SPDR S&P Homebuilders ETF – Option traders displayed mixed sentiment on the homebuilders ETF today. Some investors made bullish moves, which seem to be in line with the 3.5% rally in shares of the underlying to $16.05. One optimist initiated a call spread by purchasing 2,000 calls at the now in-the-money February $16 strike for $0.70 each, marked against the sale of 2,000 calls at the higher February $17 strike for an average of $0.28 apiece. The trader paid a net premium of $0.42 per contract for the spread. He stands ready to accrue maximum potential profits of $0.58 each if shares of the XHB rally up to $17.00 by expiration. Pessimistic traders, who do not expect XHB’s shares to surpass $17.00, sold 12,400 calls at the February $17 strike for a premium of $0.24 per contract. Short sellers retain the full $0.24 premium on the trade if shares of the fund trade beneath $17.00 through expiration next month.

CROX – Crocs, Inc. – Bullish traders tried a pair of Crocs on for size and apparently loved the way over-sized clogs fit. Shares of the casual footwear manufacturer rallied 5.25% to $6.61 today, inspiring a call-option feeding frenzy. Near-term CROX-lovers bought roughly 10,000 calls at the now in-the-money January $6 strike for an average premium of $0.53 per contract. Optimism spread to the in-the-money February $6 strike where another 2,000 calls were coveted for $0.85 apiece. February contract call-buyers profit if CROX’s shares rise above $6.85 by expiration next month.

GME – GameStop Corp. – Shares of the video game products retailer were hammered down 18% this morning to a new 52-week low of $19.64. GameStop’s share price took a beating after the firm lowered its forecast for both fourth-quarter and full-year earnings. Average analyst projections for full-year earnings at GME centered around $2.56 per share, but the Texas-based company expects earnings to settle in the range of $2.23-$2.27 per share. Option traders reacted to the disappointing news by purchased 1,000 puts at the now in-the-money January $20 strike for an average premium of $0.74 cents per contract. Put-buyers stand ready to amass profits if GME’s shares continue beneath the breakeven price of $19.26 by expiration. Contrarian traders picked up out-of-the-money calls at the January $21 strike where about 1,300 contracts were bought for $0.25 cents apiece. These hopefully individuals profit if GameStop’s shares rebound through $21.25. Finally, pessimistic traders threw in the towel – at least in the near-term – on the firm by shedding roughly 1,000 calls at the higher January $22.5 strike to take in a paltry $0.07 cents per contract. Option implied volatility jumped 12.16% on the morning’s news to 46.43%.

BBBY – Bed Bath & Beyond, Inc. – The largest home-furnishings retailer received an upgrade to ‘neutral’ from ‘underweight’ and a 12-month price target of $43.00 per share at Piper Jaffray this morning. The upgrade follows BBBY’s statement that full-year profit is likely to be as high as $2.11 per share over previous estimates of $1.79 per share. Bed Bath & Beyond’s shares are trading 9.25% higher to a new 52-week high of $42.87 as of 10:50 am (EDT). Shares leapt as high as $43.12 in earlier trading. Some option traders reveled in the rally by selling in-the-money calls and banking profits. Roughly 1,600 calls were sold for a premium of $3.03 apiece at the January $40 strike. Fresh positioning at higher strikes attracted two-way traffic. Investors exchanged 1,500 calls at the January $43 strike and more than 1,000 calls at the higher January $44 strike. Option implied volatility on BBBY contracted significantly following the upward revision of full-year profits. Volatility is currently down 26.78% to stand at 24.89%.

NVTL – Novatel Wireless, Inc. – Option implied volatility on the provider of wireless broadband access solutions jumped 20.59% to 52.41% today with shares of the firm also sharply higher by 5% to $8.55. The heavier than normal demand for options on NVTL is perhaps adding to the increase in volatility today. Investors initiated some interesting transactions on the stock using call options. It appears some bearish traders sold 3,700 in-the-money call options at the February $7.5 strike for an average premium of $1.10 apiece. But, the higher February $10 strike had roughly to same number of calls purchased for $0.15 cents each. Perhaps traders are effectively creating credit spreads on NVTL because they expect today’s rally to be short lived. In such a scenario, investors pocket a net credit of $0.95 cents per contract on the transaction, which they keep if shares slip beneath $7.50 by expiration in February.


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