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Analyst Upgrade Fuels Bullish Option Plays on Iron-Ore Giant Vale

Today’s tickers: VALE, MBT, FXI, NWL, CSE, VZ, XLV, CBY, HSY & SYMC

VALE – Vale S.A. – Shares of the world’s largest producer of iron-ore surged 2.75% in afternoon trading to stand at $31.18 after the firm received an upgrade to ‘overweight’ from ‘equal weight’ with a target share price of $39.00 at Barclays Capital. Indications of like-minded optimism are apparent in today’s option trading patterns on the stock. It looks like one investor initiated a put credit spread in the March contract. The bullish transaction involved the sale of 5,000 puts at the March $31 strike for a premium of $1.67 apiece, spread against the purchase of 5,000 puts at the lower March $28 strike for an average premium of $0.66 each. The credit spread results in a net credit of 1.01 per contract to the investor, who keeps the full premium received if VALE’s shares trade above $31.00 through expiration in March. The width of the spread indicates maximum potential losses on the trade of $1.99 per contract if shares of the iron-ore maker slump to $28.00 ahead of expiration.

MBT – Mobile Telesystems OJSC – The Russian provider of wireless communication services appeared on our ‘hot by options volume’ market scanner this afternoon due to near-term bullish options activity. Optimistic option plays fit neatly with the current 3.5% rally in shares of the underlying to $52.25 today. Traders sold 2,500 puts at the February $47.5 strike for a premium of $0.70 per contract, while the same number of calls were purchased at the higher February $55 strike for about $1.05 apiece. Another chunk of 2,500 puts were shed at the March $40 strike for approximately $0.33 each. All three transactions indicate bullish sentiment on Mobile Telesystems. If the trades are perhaps the work of one individual, the three-legged combination creates a clear directional play. In such a case, the investor will have paid a net $0.02 per contract for the calls by selling short the put options as described above. The long call stance positions the trader – in this example – to accrue profits if shares of MBT rally another 5.30% to surpass the effective breakeven price of $55.02 by expiration next month. We note that shares of the firm traded as high as $55.71 on October 21, 2009.

FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the FXI, which invests assets in 25 of the largest and most liquid Chinese companies, improved 3% during the trading session to $42.72. Near-term call activity on the exchange-traded fund today suggests some investors are positioning for continued bullish movement in the price of the underlying through expiration in February. Approximately 10,500 call options were picked up at the February $44 strike at an average premium of $0.59 per contract. Investors buying the calls stand ready to accumulate profits if shares of the FXI rally 4.4% over the current price to breach the breakeven point at $44.59 by February’s expiration day. Option implied volatility on the fund is down 12.24% on the day, reaching an intraday low of 23.43%.

NWL – Newell Rubbermaid Inc. – Option bulls bombarded the household products manufacturer with optimistic strategies in morning trading as shares rallied 2.75% to $15.32. Investors purchased roughly 1,100 calls at the now in-the-money February $15 strike for an average premium of $0.74 apiece. The premium paid for the contracts dictates a breakeven price of $15.74, above which investors accrue potentially unlimited profits to the upside by expiration next month. More optimistic individuals bought 5,600 calls at the higher March $17.5 strike for a volume-weighted average premium of $0.20 per contract. Rubbermaid’s shares must jump 15.5% over the current price before investors holding March $17.5 strike call options breakeven at a share price of $17.70. Finally, plain-vanilla call buying continued at the June $17.5 strike where 1,100 calls were picked up for an average premium of $0.47 each. Newell Rubbermaid is scheduled to report fourth-quarter earnings ahead of the opening bell on January 29, 2010. Perhaps call buying option traders are positioning for higher shares post-earnings next Friday.

CSE – CapitalSource Inc. – Commercial lender CapitalSource has a sizeable options play on its stock today almost equal to almost half the prevailing number of open option positions held by investors. The 9,700 call options traded this morning appear to be written for 70 cents per contract following a jump in its share price from $3.75 to $5.00. just last week one analyst upgraded the stock to “overweight” helping its cause. We have to think that the investor is probably already an entrenched holder of the shares from several months or weeks ago and rather than realizing gains at $5.00, has chosen to reserve another investor the right, but not the obligation to take his place as a CapitalSource shareholder at the fixed $5.00 price before the rights lapse by July 16. By underwriting such a deal, the investor takes in the additional premium and if called essentially guarantees an additional 70 cent per share gain. Implied options volatility has dropped by more than one-third since January 5, today reaching 47% as fears for economic recovery recede.

VZ – Verizon Communications, Inc. – The provider of communications services to the fixed-line and wireless markets realized a 1.65% rally in shares during the trading session to arrive at $31.09. Verizon-bulls scurried around the February contract, initiating optimistic plays on the stock using both calls and puts. Call buying at the February $31 strike suggests some investors expect VZ’s shares to rally further ahead of expiration next month. Roughly 3,100 calls were picked up at the now in-the-money February $31 strike for an average premium of $0.79 per contract. Call-buyers stand ready to bank profits on the contracts if shares appreciate above the breakeven price of $33.79 by expiration day. Further evidence of bullish sentiment appeared on the put side of the field. Option traders shed 2,000 puts at the February $29 strike to pocket an average premium of $0.15 per contract. The higher February $30 strike had 6,100 puts sold for about $0.35 apiece. Put-sellers retain the full premium received on the transactions if Verizon’s share price trades above the respective strike prices described above through expiration in February. Option implied volatility is down 8.36% on the day to an intraday low of 20.15%.

XLV – Health Care Select Sector SPDR – Shares of the XLV, which generally mirrors the total return of the Consumer Services Select Sector of the S&P 500 Index, are up 2.25% to $32.95. Large health care and benefits firms such as Aetna and UnitedHealth Group are also up sharply today. The rise in the value of the underlying stock prompted plain-vanilla call buying as well as put buying during the session. Traders picked up 11,100 calls at the February $33 strike for an average premium of $0.53 per contract. Call buyers at this strike are positioned to amass profits above the effective breakeven price of $33.53. Other investors purchased 5,100 in-the-money put options at the same February $33 strike for $0.70 premium apiece. Perhaps put buyers are long the underlying shares of the fund and seeking downside protection on stock positions in case shares of the XLV slip ahead of February’s expiration day. Finally, health care sector optimists coveted 14,000 call options at the higher March $34 strike for an average premium of $0.35 per contract. Shares of the exchange-traded fund must rally another 4.25% from the current price for March $34 strike call buyers to breakeven at a share price of $34.35.

CBY – Cadbury PLC – Option implied volatility on the British chocolate maker came crashing down this morning on news Cadbury board members have recommended shareholders accept Kraft’s sweetened offer to buy the company. Cadbury’s shares are trading nearly 5.5% higher to $54.69 in the first 25 minutes of the trading day. Option implied volatility plummeted 63.95% down to 11.09%. Investors exchanged more than 3,000 contracts on the candy manufacturer, and favored call options on the stock over puts.

HSY – The Hershey Co. – Shares of the U.S. manufacturer of chocolate and confectionary products jumped 4.5% to $37.90 this morning as the Kraft-Cadbury deal appears to be solidifying. Some investors banked profits on today’s rally by selling previously established call positions in the February contract. Roughly 3,500 calls sold for an average premium of $0.51 apiece at the February $40 strike. It looks like traders originally paid a volume-weighted average premium of $0.35 per contract back on January 5, 2010. Average net profits on the sale amounts to $0.16 each. Bullish investors sold 1,200 puts at the February $35 strike to receive an average premium of $0.42 per contract. Option implied volatility is down 12.74% on the day to an intraday low of 28.90%.

SYMC – Symantec Corp. – Software company, Symantec Corp., attracted bullish traders in early trading today. Shares are up more than 1% to $19.07, which is a scant $0.07 off the current 52-week high of $19.14. Investors anticipating continued upward momentum in the price of the underlying purchased 5,200 calls at the now in-the-money April $19 strike for an average premium of $1.00 per contract. Traders long the calls profit if SYMC’s shares rally another 5% from the current price to surpass the effective breakeven point at $20.00 by expiration in April.


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