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Tuesday, February 20, 2024

Vanda-Pharm Receives a Dose of Covered Call Selling

Today’s tickers: VNDA, PFE, S, ZION, GDX, PBR, BSX, AIG & PEP

VNDA – Vanda Pharmaceuticals, Inc. – The biopharmaceutical company, which specializes in the development of drug candidates for central nervous system disorders, attracted covered call selling in afternoon trading. It looks like one bullish individual purchased shares of the underlying stock in combination with the sale of 10,000 calls at the September $12.5 strike for an average premium of $1.13 per contract. Vanda’s shares – at the time of the transaction – were trading at $10.80 apiece. Thus, the investor effectively paid a net $9.67 per share because of the financing provided by the sale of the call options. The covered call strategy positions the investor to accumulate maximum potential profits of 29.25% if Vanda’s shares rally above $12.50 by expiration in September. This is because the short call stance provides an exit strategy for the trader which dictates gains of 29.25% on the appreciation in value of the underlying shares from the purchase price of $9.67 up to the $12.50 price at which the shares will be called from him – should the calls land in-the-money – at expiration in seven months. Vanda is scheduled to reveal its fourth-quarter earnings report before the opening bell on Tuesday February 16, 2010.

PFE – Pfizer, Inc. – Shares of the global pharmaceutical company commenced the current session in the red, but rallied in afternoon trading, rising 0.85% to $17.89 with forty-five minutes remaining in the trading day. Long-term optimistic trading patterns emerged in the January 2012 contract where one investor initiated a bullish risk reversal on the stock. It looks like the trader sold 5,000 puts at the January 2012 $17.5 strike for a premium of $3.20 each in order to purchase 5,000 calls at the same strike for $2.60 apiece. The investor pockets a net credit of $0.60 per contract on the reversal play, which he keeps in his piggy bank if Pfizer’s shares trade above $17.50 through January 2012 expiration. Additional profits amass to the upside as shares increase above the stated strike price of $17.50.

S – Sprint Nextel Corp. – Massive strangles plays on the communications company today indicate investors expect shares of the underlying stock to remain range-bound through expiration in May. Sprint’s shares fell significantly yesterday afternoon and continued lower by 2% to $3.28 today following disappointing fourth-quarter sales, which fell 6.7% to $7.87 billion. The third-largest U.S. wireless carrier is struggling as it continues to lose customers to rivals AT&T and Verizon in addition to generating less revenue from existing contract customers versus the prior year. Large-volume strangle plays littered the May contract by investors pocketing option premium on expectations of lower volatility in the price of the underlying shares in the next few months. The larger of the two transactions involved the sale of 45,000 puts at the February $2.5 strike for a premium of $0.10 each, and the sale of the same number of calls at the higher February $4.0 strike for 0.16 apiece. Gross premium on the short strangle play amounts to $0.26 per contract for a total of $1.17 million. The investor responsible for the trade keeps the full amount if Sprint’s shares trade within a range of $2.50 to $4.00 through expiration day. The trader is vulnerable to losses should shares swing outside of the effective breakeven points at $2.24 to the downside and at $4.26 to the upside. The narrower of the two strangle plays involved the sale of roughly 25,000 puts at the May $3.0 strike for a premium of $0.28 each and the sale of the same number of calls at the May $3.5 strike for $0.29 apiece. The trader pockets a gross premium of $0.57 per contract or a total of $1.425 million on the transaction. As with the other strangle, this individual keeps the premium only if Sprint’s shares trade within the $3.00 to $3.50 range through expiration day. Again, the investor is exposed to potentially devastating losses if shares trade outside of the breakeven prices at $4.07 to the upside and at $2.43 to the downside.

ZION – Zions Bancorp. – Banking services company, Zions Bancorporation, suffered significant share price erosion since the start of February. Shares plummeted 13.65% from $20.06 on February 2 to $17.32 on February 5, 2010. The clouds partially lifted during the current trading week, and shares rebounded back up to $18.72 on Monday. Today’s 1.35% decline in the value per share to $18.27 indicates ZION is not in clear yet, but one options trader is prepared to weather the storm. The investor purchased a debit put spread in the April contract to hedge against further declines in ZION’s share price. The trader bought 12,500 puts at the April $17 strike for a premium of $1.35 each, spread against the sale of 12,500 puts at the lower April $13 strike for $0.35 apiece. The net cost of the trade is reduced to just $1.00 per contract, yielding downside protection beneath a breakeven share price of $16.00 through April expiration.

GDX – Market Vectors Gold Miners ETF – Shares of the exchange-traded fund, which typically mirrors the price and yield performance of the AMEX Gold Miners index, jumped 3.30% to $43.74 today. The rebound in the price of the underlying shares inspired bullish options activity in the June contract. A bullish risk reversal play employed on the GDX suggests traders are positioning for further upward movement in the price of the stock. Investors sold 2,500 in-the-money puts at the June $44 strike for a premium of $5.05 apiece in order to offset the cost of buying 2,500 calls at the same strike for $4.10 each. Reversal players pocket a net credit of $0.95 per contract, which they keep in full and add to if GDX shares rally above $44.00 by expiration. Plain-vanilla call buying in the amount of 2,000 contracts at the June $44 strike for a premium of $4.10 each adds to optimistic sentiment observed on the fund today. Call buyers stand ready to accumulate profits only if shares of the ETF rally 10% to surpass the breakeven price of $48.10 by expiration in a couple of months.

PBR – Petroleo Brasileiro SA ADR – Brazilian state-controlled oil and natural gas company, PetroBras, enticed bullish players today as shares improved 1.90% to $40.51. One trader purchased a ratio call spread to position for a potentially significant increase in shares of the underlying by March expiration. The investor picked up 2,000 calls at the March $41 strike for a premium of $1.50 each, marked against the sale of 4,000 calls at the higher March $45 strike for an average premium of $0.38 apiece. The net cost of the ratio spread amounts to $0.74 per contract. Maximum potential profits of $3.26 per contract accumulate for the trader if PBR’s shares surge 11% from the current day’s value to $45.00 by expiration day. The investor breaks even on the transaction if PetroBras-shares rise to $41.74 ahead of expiration.

BSX – Boston Scientific Corp. – Shares of medical device manufacturer, Boston Scientific, are down 8.70% to $7.57 this morning after the Massachusetts-based firm forecast adjusted earnings of $0.62 to $0.72 cents per share for 2010, which disappointed analysts expecting an average of $0.84 cents a share for the year. The world’s second-largest maker of heart devices attracted contrarian options trading in the first hour of the session despite gloomy guidance and its hemorrhaging share price. Investors sold 1,000 puts at the March $7.0 strike for a premium of $0.15 apiece. Put sellers retain the full $0.15 per contract received on the sale if BSX shares trade above $7.00 through expiration next month. The short selling suggests traders are happy to have shares of the underlying stock put to them at an effective price of $6.85 each in the event that the puts land in-the-money. Optimism spread to the March $8.0 strike where 1,200 call options were purchased for an average premium of $0.24 per contract. Perhaps call buyers anticipate a rebound in shares above the breakeven price of $8.24 by expiration day in March.

AIG – American International Group, Inc. – The insurance company’s shares came roaring back this week from $21.99 on Monday morning up to today’s high of $28.30. The more than 28.50% rebound in the price of the underlying stock stoked demand for option contracts in the past few days. Today, investors are concentrating on calls, exchanging more than 2.4 contracts to each single put option in play thus far. Shares are up 2.86% to $27.69 as of 10:38 am (EDT). Approximately 54,000 option contracts changed hands on AIG within the first hour of the session.

PEP – PepsiCo, Inc. – Shares of the global beverage and snack food company rallied 2% in morning trading to $61.59 after the firm’s fourth-quarter profit nearly doubled on strengthening overseas beverage operations and higher snack sales. PepsiCo earned $0.90 per share in the fourth quarter. Options traders sunk their teeth into call options on PEP, trading 2.6 call contracts to each single put option on the stock. Investors exchanged more than 27,800 contracts on Pepsi by 10:45 am (EDT).

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