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Optimistic Trader Initiates Call Spread on ConocoPhillips

Today’s tickers: COP, EEM, DE, SIRI, JPM, FCX, T, PCS, MSFT & EK

COP – ConocoPhillips– Oil and gas company, ConocoPhillips, attracted an optimistic options player to the January 2011 contract today. Shares began the trading day on the up-and-up, but reversed direction in the latter portion of the session, falling slightly by 0.20% to $48.26. The long-term bullish strategist purchased a debit call spread to position for upside gains in the underlying share price by expiration next January. The spread involved the purchase of 5,000 calls at the January 2011 $50 strike for an average premium of $3.91 apiece, marked against the sale of the same number of calls at the higher January 2011 $65 strike for about $0.60 each. The net cost of the transaction amounts to $3.31 per contract. The investor responsible for the trade stands ready to accrue maximum potential profits of $11.69 per contract if COP’s shares gain 35% over the current price to reach $65.00 by expiration day. Shares must rise at least 10.5% from today’s price before the call-spreader breaks even on the transaction at $53.31.

EEM – iShares MSCI Emerging Markets Index ETF – Shares of the MSCI Emerging Markets exchange-traded fund fell less than 1% in afternoon trading to stand at $38.47. September contract options trading suggests one investor is positioning for continued downward movement in the price of the underlying stock by expiration. The pessimistic trader established a bearish risk reversal on the fund by selling 5,300 out-of-the-money call options at the September $45 strike for a premium of $1.35 apiece, spread against the purchase of the same number of put options at the September $33 strike for $1.77 each. The investor paid a net $0.42 per contract for the transaction. Profits to the downside accumulate only if shares of the EEM slump another 15.3% from the current price to breach the breakeven point at $32.58 by expiration in the next eight months. We note that the fund’s share price has remained above the $33.00-level since July 15, 2009.

DE – Deere & Co. – Shares of agricultural equipment maker, Deere & Co., are trading 1.80% higher to stand at $52.03 in the first half of the trading day. Notable options activity appeared in the January 2011 contract where one investor initiated a long-term protective play using put options. The trader established a put spread by purchasing 10,000 puts at the January 2011 $50 strike for a premium of $6.50 apiece, marked against the sale of the same number of puts at the lower January $40 strike for a $2.72 each. The net cost of the transaction amounts to $3.78 per contract. The responsible party is likely holding a long position in the underlying stock, thus buying the debit put spread to establish downside protection in case Deere’s share price declines beneath the effective breakeven point of $46.22 in the next year to expiration.

SIRI – Sirius XM Radio, Inc. – Subscription-based satellite radio company, Sirius XM Radio, attracted bullish call buyers to the February contract today. Plain-vanilla call buying is a continuation of similar activity observed during yesterday’s trading session. Sirius’s shares are trading 5.35% higher to $0.86 each as of 11:45 am (EDT). The stock is up nearly 41% since the first trading day of 2010 when shares stood at $0.61 apiece. Investors purchased at least 1,400 calls at the February $1.0 strike for an average premium of $0.05 per contract. Optimistic traders scooping up the call options profit if SIRI shares increase another 22% from the current price to exceed the value of the breakeven point at $1.05 by expiration next month. Option volume of 3,125 call contracts at the February $1.0 strike price exceeds existing open interest at that strike of 1,447 lots.

JPM – JPMorgan Chase & Co. – Long-term protective positioning on JPMorgan appeared in the January 2011 contract, although shares of the underlying stock are trading slightly higher by 0.30% to $39.60. The stock rebounded higher in earlier trading, reaching an intraday high of $39.68. A number of news sources reported the firm plans to unveil a global business, which will sell commercial banking services and loans to multinational companies. JPM will purportedly target rapidly growing economies such as China, India and Brazil with the unit. New endeavors aside, however, January 2011 contract options activity suggests one investor is building up downside protection on JPM to last throughout the year. The trader purchased 13,000 puts at the January 2011 $40 strike for a premium of $5.90 apiece, and sold the same number of puts at the lower January 2011 $30 strike for about $2.15 each. The put spread cost a net $3.75 per contract. The investor is most likely utilizing the puts to protect the value of an underlying stock position, and if this is the case, is insured against losses to the downside should JPMorgan’s shares decline beneath the effective breakeven price of $36.25 in the next year to expiration.

FCX – Freeport-McMoRan Copper & Gold, Inc. – Shares of the metals and mining company rallied earlier in the session up to $71.06, but are currently trading flat at around $68.80 each by 12:08 pm (EDT). In line with the earlier rebound in share price, a bullish options trader employed the use of a call spread to position for resurgence in the value of the underlying stock by expiration in March. The investor purchased 9,000 calls at the March $75 strike for a premium of $3.20 apiece, and sold the same number of calls at the higher March $85 strike for approximately $0.83 each. The spread cost the investor a net $2.37 per contract. With the bullish strategy in place, the trader stands ready to accumulate maximum potential profits of $7.63 per contract if FCX shares surge to $85.00 by expiration day. Shares must trade 23.5% higher than the current price in order to reach the $85.00-level or point at which the trader enjoys maximum available benefits. A more modest, but still significant, rally of 12.45% is required for the investor to breakeven on the transaction at a share price of $77.37.

T – AT&T, Inc. – Shares of the telecommunication services company are down 0.20% to $25.49 today, perhaps inspiring the long-term protective transaction employed in the January 2011 contract on the stock. One wary options trader, who is likely long shares of the underlying, purchased a put spread on AT&T. The investor bought 7,500 puts at the January 2011 $25 strike for a premium of $2.90 each, and sold 7,500 puts at the lower January 2011 $20 strike for an average premium of $1.05 apiece. The net cost of the transaction amounts to $1.85 per contract. Assuming the investor is in fact long shares of the stock, the spread serves to protect the value of the underlying position in case shares decline beneath the breakeven price of $23.15 ahead of expiration next January. We note that while the spread described appears to be a new trade, open interest levels at both strikes exceed put volume employed in the spread. Thus, it is possible the investor is closing out a previously established trade.

PCS – MetroPCS Communications, Inc. – Early morning options activity on wireless communications provider, MetroPCS, indicates bullish sentiment on the stock. Shares are up 3.25% to $5.71 as of 10:05 am (EDT). It looks like one investor purchased 10,000 in-the-money call options at the May $5.0 strike for a premium of $1.25 per contract. The trader is positioned to accrue profits should PCS shares rally another 9.5% from the current price to surpass the effective breakeven point at $6.25 by expiration in May. MetroPCS’s shares last traded around $6.39 as recently as January 19, 2010.

MSFT – Microsoft Corp. – Shares of the software maker commenced the trading session higher, but have slipped 1.50% to $28.75 as of 10:10 am (EDT). Microsoft reported slightly better-than-expected profits of $0.60 per share for the fiscal second quarter, which came in just one penny above average analyst estimates. The firm’s new Windows 7 software lifted revenues 14% to $19 billion in the quarter. Investors exchanged more than 137,000 contracts on the stock in the first forty-five minutes of the trading session. Option implied volatility is down 24.19% to 26.61%.

EK – Eastman Kodak Co. – Bullish options trading patterns continue on camera-maker Eastman Kodak this morning amidst gains of 5.25% in its share price to $6.23. Investors bought 1,200 call options at the March $8.0 strike for a premium of $0.20 apiece. The buying interest at that strike suggests some traders are positioning for a significant rally in the price of the underlying stock within the next couple of months. Investors holding the call options stand ready to amass profits if Kodak’s shares surge 31.5% over the current price to breach the breakeven point at $8.20 by expiration. More than one year has elapsed since EK’s shares traded at $8.32 back on November 10, 2008. Thus, investors are perhaps anticipating a new 52-week high for Kodak’s shares by March expiration.


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