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Bullish Player Forecasts Sunnier Skies Over B of A by August Expiration

Today’s tickers: BAC, PBR, UAUA, BIIB, USO, MAC, NLY, NYX, CVS & KGC

BAC – Bank of America Corp. – Options trading in the August contract on Bank of America suggests a significant recovery in the value of the underlying shares within the next seven months to expiration. Shares spent the majority of the trading session in the red, but rallied in late-afternoon trading, improving 0.20% to $14.51. It looks like one trader sold 6,000 put options at the August $12 strike for a premium of $0.86 each in order to partially finance the purchase of 6,000 calls at the higher August $16 strike at a premium of $1.12 apiece. The net cost of the bullish risk reversal amounts to $0.26 per contract, positioning the investor to accumulate profits above a breakeven share price of $16.26. Shares of the underlying stock must rally at least 12% over the current price for the trader to break even on the transaction by August expiration. We note that B of A’s shares traded above $16.50 as recently as January 20, 2010.

PBR – Petroleo Brasileiro SA ADR – Shares of Brazil’s state-controlled oil company, Petroleo Brasileiro SA, rallied 3.70% to $39.60 today perhaps after the company stated natural gas output will increase to 93 million cubic meters in 2011, up from 85 million cubic meters in the current year. PetroBras-bulls stampeded the February contract this afternoon to sell roughly 15,000 puts at the February $39 strike for an average premium of $0.83 apiece. Investors selling short the puts retain the full premium received today as long as shares of the underlying stock trade above $39.00 through expiration day. Put-sellers are apparently happy to have shares put to them for an effective price of $38.17 each should the put contracts land in-the-money at expiration.

UAUA – UAL Corp. – Shares of the owner and operator of United Airlines surged 17% to a new 52-week high of $15.27 today amid better-than-expected unit revenue for the month of January. Optimistic option traders dabbled in both calls and puts to take bullish positions on UAL Corp. Investors sold 2,300 puts at the February $13 strike, taking in an average premium of $0.16 per contract. Put sellers retain the full premium as long as UAUA’s share price remains above $13.00 through expiration. One the call side, traders picked up roughly 2,000 contracts at the now in-the-money February $15 strike for an average premium of $0.65 apiece. Investors long the calls stand ready to amass profits should shares of the underlying stock rise above the effective breakeven price of $15.65 ahead of expiration day. Uber-bullish investors purchased roughly 1,000 calls at the March $16 strike for a premium of $0.85 each. Profits accrue for these traders if UAL’s shares rally 10.35% over the current day’s high of $15.27 to surpass the breakeven price of $16.85 by March expiration.

BIIB – Biogen IDEC, Inc. – The world’s largest producer of medication used in the treatment of multiple sclerosis posted a 48% increase in fourth-quarter profits today, sending its shares up 2.75% to $54.26. Profit growth, fueled by greater sales of its drug Tysabri, resulted in earnings of $1.06 per share in the fourth quarter, which beat average street estimates by $0.16 per share. One Biogen options trader established an iron condor in the March contract, indicating shares of the underlying may remain relatively neutral through expiration next month. The investor essentially enacted two credit spreads, which can also be thought of as two strangles, in order to pocket the resulting premium. On the put side, the trader sold 4,000 contracts at the March $50 strike for a premium of $0.70 each, marked against the purchase of 4,000 puts at the lower March $45 strike for $0.25 apiece. As for the calls, the investor sold 4,000 lots at the March $55 strike for a premium of $1.50 each, spread against the purchase of the same number of call options at the higher March $60 strike for a premium of $0.45 apiece. The net credit received on the iron condor play amounts to $1.50 per contract. Biogen’s shares must trade between $50.00 and $55.00 through expiration in order for the trader to keep the full $1.50 per contract, or total profits of $600,000. Risks involved in the transaction outweigh total benefits. The parameters of the transaction expose the trader to maximum potential losses of $3.50 per contract, which start to accumulate if shares trade above the upper breakeven point at $56.50, or if the stock trades below the lower breakeven price of $48.50, ahead of expiration.

USO – United States Oil Fund LP – U.S. Oil Fund bulls are positioning for a rally in the price of the underlying stock by the time our nation’s roadways are bumper-to-bumper with summer traffic. Shares of the oil fund are currently up 3.25% to $36.23. Plain-vanilla call buying took place at the July $37 strike where investors paid an average premium of $2.67 per contract for 5,000 call options. Traders holding the calls stand ready to amass profits if the price per USO share rallies 9.50% over the current value to surpass the breakeven point at $39.67 ahead of July expiration.

MAC – The Macerich Company – The real estate investment trust, which owns and leases regional and community shopping centers in the United States, edged onto our ‘hot by options volume’ market scanner today due to put activity in the September contract. Shares were trading lower in the first half of the session, but have recovered to rally 1% higher to $30.91 as of 12:20 pm (EDT). The earlier dip in share price inspired plain-vanilla put buying. It looks like nervous investors purchased approximately 4,000 puts at the September $25 strike for an average premium of $2.50 apiece to secure downside protection. Put-buyers are protected in case MAC’s share price plummets 27.20% from the current day’s value to breach the lower breakeven point at $22.50 by September expiration.

NLY – Annaly Capital Management, Inc. – Bearish investors pawed at put options on mortgage-backed securities investment firm, Annaly Capital Management, today as shares of the underlying stock slipped 2.40% to $17.45. Pessimistic traders bracing for continued share price erosion over the next six months purchased 1,300 puts at the July $12.5 strike for an average premium of $0.21 per contract. These put contracts yield profits to the downside should NLY shares fall another 29.50% from the current price to breach the effective breakeven point at $12.29 by July expiration. Investors who are perhaps expecting an all out collapse in the value of the stock looked to the January 2012 $7.5 strike where 3,000 put options were picked up for an average premium of $0.59 apiece. Long-term bearish put-buyers accrue profits if shares of the underlying stock pare 60% of the current day’s value to fall beneath the breakeven point of $6.91 by January 2012 expiration. We note that shares of Annaly Capital Management have not traded under $10.95 in the past five years.

NYX – NYSE Euronext, Inc. – Shares of the operator of the largest U.S. stock exchange are up 5.50% to $23.73 this morning after the firm reported fourth-quarter earnings of $0.58 per share, which exceeded average analyst expectations by $0.10 a share. Bullish options traders are positioning for continued upward momentum in the price of the underlying stock by purchasing near-term call options. In the first hour of the trading session investor bought more than 2,000 calls at the February $25 strike for an average premium of $0.23 apiece. Individuals long the calls stand ready to amass profits if NYX’s shares rally above the breakeven price of $25.23 ahead of expiration day. The reading of overall options implied volatility on NYSE Euronext contracted 15.19% to 34.43% following earnings.

CVS – CVS Caremark Corp. – The largest distributor of prescription drugs in the United States reported an 11% increase in fourth-quarter profit yesterday, citing an increase in the number of consumers buying 90-day medicine supplies. Shares rallied during Monday’s session on the positive report, but slipped slightly during the current session, falling 0.85% to $32.45 as of 10:30 am (EDT). Options activity in the January 2011 contract this morning suggests one investor expects little movement in the value of the underlying shares through next January. The trader sold a strangle by shedding 5,000 puts at the January 2011 $30 strike for a premium of $2.51 each in combination with the sale of 5,000 calls at the higher January 2011 $35 strike for a premium of $2.57 apiece. The investor pockets a gross premium of $5.08 per contract, which he keeps if shares trade within the range of the strike prices described through expiration next year. The short position in both calls and puts leaves the trader vulnerable to potentially devastating losses should CVS’s shares swing beyond the upper breakeven price of $40.08, or trade below the lower breakeven price of $24.92, by expiration day.

KGC – Kinross Gold Corp. – Canadian gold mining company, Kinross Gold Corp., attracted bullish option traders this morning as its share price jumped up 4.25% to $17.36. Plain-vanilla call buying activity is apparent at the March $17 strike where more than 5,000 in-the-money call options were picked up for an average premium of $1.25 apiece. Bullish players long the calls are positioned to accrue profits if Kinross shares increase approximately 5.10% over the current price to surpass the breakeven point at $18.25 by March expiration.


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