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Tuesday, February 27, 2024

Long-Term Bullish Spread Unfolds On IBM

Today’s tickers: IBM, XLF, TXN, XLF, CTXS, EBAY, HAL & FITB

IBM – International Business Machines Corp. – A long-term bullish transaction on IBM suggests one investor is positioning for a significant boost in share price at the computer services firm by expiration in January 2011. IBM’s shares are trading 0.75% higher this afternoon to $126.47. The optimistic trader purchased a ratio call spread on the stock, buying 5,000 calls at the January 2011 $135 strike for an average premium of $6.24 apiece, and selling 10,000 calls at the higher January 2011 $150 strike for a premium of $2.33 each. The net cost of the ratio spread amounts to just $1.58 per contract. Thus, the trader accrues profits if IBM’s shares rally 8% over the current price to surpass the breakeven point at $136.58 by expiration next year. Maximum available profits of $13.42 per contract amass only if shares surge 18.60% to $150.00. IBM’s shares must increase to a new 52-week high in order for the investor to break even on the transaction. The current 52-week high on the stock is $134.25, attained back on January 19, 2010.

XLF – Financial Select Sector SPDR – Option traders continue to initiate bearish strategies on the financial ETF today despite the 0.90% rebound in shares of the underlying to $14.31. Earlier we reported a June $14/$10 ratio put spread, which established downside protection beneath a breakeven share price of $13.30. This afternoon we observed a similar transaction take place. Another pessimistic investor purchased an even larger ratio put spread in the June contract. It looks like this individual bought 27,500 puts at the now in-the-money June $15 strike for an average premium of $1.52 apiece, spread against the sale of 55,000 puts at the lower June $12 strike for about $0.39 each. The net cost of the ratio transaction amounts to $0.74 per contract, and provides downside protection beneath a breakeven share price of $14.26.

TXN – Texas Instruments, Inc. – Chipmaker, Texas Instruments, is scheduled to report fourth-quarter results after the closing bell this afternoon, and although analysts expect the firm to post profits of $0.49 per share on a 19% increase in sales, option traders initiated near-term protective plays. Shares of the semiconductor company are up 1.80% to $23.52 ahead of earnings. One investor established a bearish risk reversal by selling 5,000 calls at the February $24 strike for a premium of $0.50 apiece, spread against the purchase of 5,000 puts at the lower February $23 strike for $0.82 each. The net cost of the reversal play amounts to $0.32 per contract. Perhaps the investor responsible for the spread is building up downside protection in case of an earnings disappointment tonight. The trader may have utilized the reversal in order to protect the value of a long position in the underlying stock. The long put position yields downside protection beneath the effective breakeven price of $22.68 through expiration. The sale of the call options, if the trader does not hold a long position in the underlying, leaves the investor vulnerable to potentially unlimited losses to the upside should TXN’s shares rally above $24.00.

XLF – Financial Select Sector SPDR ETF – Shares of the financials exchange-traded fund are up slightly by 0.35% to $14.23 today, recovering a bit after last week’s market mayhem. However, option trading on the XLF continues to be pessimistic. One investor purchased a ratio put spread to establish a bearish stance on the fund through expiration in June. The trader bought 22,000 puts at the June $14 strike for a premium of $1.04 apiece and sold 44,000 puts at the lower June $10 strike for about $0.17 each. The net cost of the bearish play amounts to $0.70 per contract and yields downside protection – should the investor hold a long underlying stock position – beneath the breakeven price of $13.30. The large size of the spread suggests the investor expects shares to trend lower over the next five months, but the larger proportion of sold put options at the June $10 strike likely means the trader does not see the price per XLF-share dipping much below $10.00 during that time period. Option traders are heavily favoring put options on the fund today. Roughly 6.75 puts have changed hands for each single call option traded thus far in the session.

CTXS – Citrix Systems Inc. – Networking software manufacturer, Citrix recently watched its share price struggle with resistance at the $44 mark – a price it hasn’t been able to breach since it visited that point in early October. Having tried once more as recently as Thursday of last week, the selling frenzy that undermined this effort saw shares recoil all the way to $40.94 today. We can’t tell from options activity today whether a bull is on the prowl or whether an investor is writing options in order to play out the bulls frustration. Around 10,200 call option contracts were traded at the February 45 strike this morning for a 55 cent premium. A buyer of the stock at today’s low point would require shares in the company to rally 11.2% before seeing the benefit from the trade. The trading could be the work of a stock buyer reducing the cost of the transaction through writing covered calls. Having shares called after 25 days at a break above the strike price would still leave the investor rewarded handsomely.

EBAY – eBay, Inc. – Option bears lumbered over to eBay today as the e-marketplace’s shares slipped 0.25% to $23.52 in the first half of the trading session. Plain-vanilla put buying in the March contract implies some investors are bracing for potential continued declines in the value of the underlying shares through expiration. It appears some 22,500 put options were picked up at the March $19 strike for an average premium of $0.14 per contract. Traders buying the puts are perhaps also long the stock, and merely purchasing relatively cheap downside protection to protect the value of underlying positions. However, put-buyers could also be placing outright bearish bets that EBAY’s shares are set to plummet 19.8% from the current price to the breakeven point on the puts at $18.86 by March’s expiration. If this is the case, investors holding the put options amass profits to the downside if shares of the online auction forum nose-dive down beneath $18.86 by expiration.

HAL – Halliburton Co. – Shares of the oil equipment and services firm are down 3.85% this morning to $29.95 after the firm revealed a 48% decline in fourth-quarter profits. Texas-based Halliburton posted earnings of $0.28 per share, which exceeded average analyst estimates by about $0.01 a share. Bearish options trading commenced in the wee-hours of the trading session in the near-term February contract. It looks like the majority of some 5,200 call options exchanged at the February $30 strike were sold. Option implied volatility is down approximately 12.7% to 34.90% as of 10:18 am (EDT).

FITB – Fifth Third Bancorp – A large chunk of call options purchased within the first 45 minutes of the trading session on Fifth Third Bancorp suggests one investor is positioning for continued bullish momentum in the price of the underlying through expiration next month. Shares of FITB are up 3.30% in early trading to stand at $12.50. It looks like one individual purchased 9,000 calls at the February $14 strike for a premium of $0.17 per contract. The purchase positions the trader to amass profits if FITB’s shares rally another 13.5% to surpass the breakeven price of $14.17 by expiration.

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