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Motorola Business Split Creates Appetite for Options

Today’s tickers: MOT, ALL, BWLD, BONT & X

MOT – Motorola Inc. – The Shares are almost 8% higher at $7.20 on the news that the company will split into two with networks on one side and mobile devices on the other. Shares are on the move because this probably reflects management’s confidence in the turnaround for mobile devices. It appears that one option investor is looking for further upside and placed a 20,000 lot call option spread when shares were trading at about $6.95 this morning. The spread involved the purchase of now in-the-money April call options at the $6.00 strike, which cost $1.12. The buyer sold the same amount of $9.00 strike calls expiring at the same time for 7 cents to reduce the breakeven to $7.05 in two months. It is likely that this investor wants to take a stake in the company now that it’s announced this corporate split and as long as Motorola’s shares stay north of $6.00 in April, he will be able to exercise that option.

ALL – Allstate Corp. – Looks like a substantial amount of call option buying in the home and auto insurer today as its share price holds up relatively well in the face of a 1% loss for the major market averages. At $29.36 shares are off by just a nickel, possibly still sheltered by a 22.7% surge in revenue and earnings that exceeded investor hopes earlier in the week. Call option buying at the April expiration $31 strike has so far totaled more than 22,000 contracts. Buyers paying around 65 cents per contract for rights to get long of shares in the insurer should they rally by more than 5.6% in the next nine weeks are clearly banking on a rebound to the January peak above $31.50. Implied volatility has slumped in the aftermath of earnings further eroding the premiums today.

BWLD – Buffalo Wild Wings Inc. – An earnings miss earlier in the day from the Minneapolis-based restaurant operator attracted option investor attention today. The activity is curious simply because it’s contrarian. The share price slumped more than 12% earlier to $41.28 before steadying to $43.00. The decline in options implied volatility to 37% is twice the decline in the share price and is perhaps behind investors willingness to write almost 2,000 put options at the soon to expire February $40 strike. Premium sellers, who would have to buy shares at a fixed $40 each by expiration next weekend, were keen to bear that risk by taking in the available 70 cents per contract pushing premiums lower all morning. These are currently offered at just 25 cents as volatility declines and shares rebound. It seems that companies missing earnings estimates are being punished perhaps excessively and in the case of Buffalo Wings, the expectation heading into the number already discounted too much spicy sauce. The put writers today can see from a chart of the company that during the last six months the share price has had a hard time staying below $40 for too long.

BONT – Bon-Ton Stores Inc. – Retailer Bon-Ton, which also operates stores in the name of Bergner’s saw an interesting calendar roll on Friday. One investor extended the duration of a bullish play on the stock whose shares have languished since peaking at $14.57 at Thanksgiving. The subsequent slide to today’s $8.70 leaves investors bargain hunting. And while the traffic has been one-way today’s activity suggests this investor is willing to spend an additional 55 cents to buy a further three months time value as he rolls around 6,500 calls from April to July expiration. In order for this play to come good, Bon-Ton needs to display a positive earnings report between now and then. Some of the recent pressure on its share price is likely as a result of the permanent loss of earnings due to the fact that three-quarters of its stores are in the path of the recent winter storms, which leaves this investor hoping for a better summer-time performance.

X – U.S. Steel Corp. – The dramatic slump in the fortunes at United States Steel Corp. saw its shares slip from above $65 in January to a recent low at $42.50. On a day like Friday, when the rising dollar is battering commodity prices further and after China takes another step towards cooling demand, you’d be forgiven for expecting that U.S. Steel might be one of the hot contenders for taking a further slamming. However, the selling pressure seems to have run its course at $42.50 and indeed its shares are 2% higher on Friday at $47.86. Investors using call options expiring next week appear to be looking at further imminent increases in the fortunes of the stock with noteworthy activity at ach dollar strike between $47 to $50. Elsewhere the April $50-$60 call spread looks to have been bought 2,500 times at a net cost of $2.45 leaving bulls positioned for a rally of 9.6% in the spring.


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