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Strangle Strategist Tightens Grip on JPMorgan

Today’s tickers: JPM, TIVO, RHT, UTX, CSCO, CI, BA, XRX, DIS, AKS & M

JPM – JPMorgan Chase & Co. – A long strangle enacted on JPMorgan today indicates one investor is expecting the firm to experience a significant shift in the price of its shares by June expiration. The investment banking and financial services giant realized a 1% rally in share price during the current session to $41.94. The investor initiated the strangle strategy by purchasing 9,000 calls at the June $46 strike for a premium of $1.06 apiece and by picking up 9,000 puts at the June $36 strike for $0.96 each. The net cost of the transaction amounts to $2.02 per contract. Strangle-players benefit from drastic moves in share price, but lose out if the value of the stock stagnates. In this specific trade, the investor profits if JPM’s shares rally above the upper breakeven price of $48.02 by expiration, or if shares trade below the lower breakeven point at $33.98, by June expiration. The trader is looking for increased volatility in the price of the underlying shares, but also may benefit from higher options implied volatility. Moves higher in options implied volatility corresponds with greater option premium on both calls and puts. Thus, the investor could potentially sell the strangle at a profit ahead of expiration day if combined premium on the trade exceeds the $2.02 per contract paid today. We note that JPM’s shares have not exceeded $47.47 in the past year, but did trade as low as $14.96 back on March 6, 2009.

TIVO – TiVo, Inc. – Shares of the innovator of digital-video recording services surged as much as 61.30% to an intraday high of $16.42, the highest price recorded for TiVo’s shares in at least five years. TiVo was named the victor today after a U.S. appeals court ruled that Dish Network Corp. and EchoStar Corp. are “still infringing its patent and should stop providing digital-video recording services.” Options traders had a field day with the news and exchanged upwards of 275,300 contracts on the stock by 3:10 pm (ET). Today’s options trading volume on TiVo represents just under 80% of the total existing open interest on the stock of 348,203 contracts. Investors populated the stock with a plethora of trading strategies. Some traders banked profits on the rally, while others employed the use of strangles. Plain-vanilla call buying and put selling by bullish individuals was also observed. The most heavily trafficked area is the March $17.5 strike where more than 49,000 calls changed hands. Analysts at Lazard Capital reiterated a ‘buy’ rating on the stock and upped their twelve-month target share price for TiVo to $27 from $13 today, as well.

RHT – Red Hat, Inc. – Plain-vanilla bullish call buying activity dominated options trading on software company, Red Hat, Inc., today as shares of the underlying stock up 1.65% to $29.83. Near-term optimists picked up 3,000 calls at the March $30 strike and paid an average of $0.69 in premium per contract. Investors long the calls are positioned to profit should Red Hat’s shares trade above the effective breakeven price of $30.69 by expiration in approximately two weeks. Bullish sentiment spread to the April contract where roughly 1,900 call options were purchased at the April $30 strike for an average premium of $1.48 apiece. Finally, 1,100 calls were coveted by option traders at the higher April $32.5 strike for a volume-weighted average premium of $0.54 each. The software company’s shares must jump 10.75% over today’s price in order for investors to break even on the calls at $33.04 by April expiration.

UTX – United Technologies Corp. – The producer of high technology products and services to the building systems and aerospace industries attracted the attention of a bullish options player today. Shares of the Hartford, CT-based company increased 0.90% during the session to stand at $70.21. The investor initiated a long-term optimistic stance on UTX by employing a bullish risk reversal in the August contract. The trader sold 10,000 put options at the August $60 strike for a premium of $1.41 apiece in order to buy the same number of calls at the higher August $80 strike for $0.80 each. The reversal play results in a net credit of $0.61 per contract to the investor, which he may keep if shares of the underlying stock trade above $60.00 through expiration in August. Additional profits are available if shares rally approximately 14% to surpass the breakeven point at $80.00 ahead of expiration in six months.

CSCO – Cisco Systems, Inc. – A bearish put butterfly spread unfurled its wings in Cisco’s April contract today suggesting one investor is anticipating share price erosion ahead of expiration. Shares of the manufacturer of switches and routers are currently trading 0.40% lower on the day to stand at $24.74. The pessimistic trader purchased 7,100 puts at the April $24 strike for a premium of $0.38 apiece [wing 1] and picked up another 7,100 put options at the lower April $22 strike at a premium of $0.10 each [wing 2]. The body of the butterfly, which involved the sale of 14,200 puts for a premium of $0.17 per contract, was sandwiched between the two wings of the spread at the central April $23 strike. The investor paid a net premium of $0.14 per contract for the butterfly. Maximum available profits of $0.86 per contract accumulate if Cisco’s shares decline 7% from the current price to $23.00 by expiration. The trader faces a risk-reward ratio of approximately 1-to-6 because he only ever risks losing a maximum of $0.14 per contract, but stands to gain as much as $0.86 should shares settle at $23.00 apiece.

CI – CIGNA Corp. – A massive bearish transaction was initiated in the April contract on the health care provider today with shares of the underlying stock down 2.05% to $33.98. The pessimistic player established a plain-vanilla put spread on the stock to position for continued share price erosion for CIGNA through expiration next month. The trader purchased 24,000 puts at the April $33 strike for a premium of $1.10 apiece and sold the same number of put contracts at the lower April $30 strike for $0.30 each. The net cost of the spread amounts to $0.80 per contract, and therefore yields maximum potential profits of $2.20 apiece should CIGNA’s shares slip to $30.00. Shares must decline at least another 5.25% to $32.20 by expiration day in order for the bearish trader to break even on the transaction.

BA – The Boeing Company – The producer of commercial jetliners was raised to ‘neutral’ from ‘sell’ today and received an upgrade to its target share price to $68 from $50 at UBS. Boeing was also initiated as a new ‘buy’ with a twelve-month target share price of $76.00 at C.K. Cooper this morning. Shares of the jet maker reacted positively, rallying 1.65% to a new 52-week high of $65.50. Despite the bullish analyst upgrades and rally in the price of the underlying stock, one options investor established a bearish risk reversal play in the August contract. It looks like the trader sold 10,000 calls at the August $75 strike for a premium of $1.36 apiece in order to partially finance the purchase of 10,000 puts at the August $55 strike for $1.82 each. The net premium paid for the reversal amounts to $0.46 per contract. Boeing’s shares would need to plummet 16.75% to reach the effective breakeven point on the trade at $54.54 by August expiration.

XRX – Xerox Corp. – A large-volume short straddle involving a total of 50,000 option contracts was enacted on the electronic office equipment innovator during the session. Xerox’s shares edged 0.10% higher to $9.53 as of 12:25 pm (ET). The investor responsible for the straddle strategy apparently expects shares of the underlying stock to settle at $10.00 by expiration in July. The trader sold 25,000 calls at the July $10 strike for an average premium of $0.47 apiece, and shed 25,000 in-the-money put options at the same strike to take in a premium of $1.03 each. Gross premium pocketed by the investor amounts to $1.50 per contract for a total of $3.750 million. The investor keeps the full amount of premium received if Xerox’s shares trade at $10.00 at expiration. Additionally, the $1.50 premium provides limited protection for the trader from losses should shares shift in either direction away from the central $10.00 mark. Losses will accumulate, however, if Xerox’s shares exceed the upper breakeven price of $11.50, or if shares fall below the lower breakeven point at $8.50 ahead of expiration.

DIS – The Walt Disney Co. – Global entertainment giant, Walt Disney Co., was raised to ‘buy’ from ‘neutral’ at Bank of America Merrill Lynch Global Research this morning on optimism surrounding the release of Alice in Wonderland and Toy Store 3. Disney’s share price rallied sharply at the start of the session to attain a new 52-week high of $32.86, though shares are up a lesser 3% to $32.60 as of 11:00 am (ET). Bullish investors picked up roughly 3,200 calls at the March $33 strike for an average premium of $0.34 apiece, while the higher March $34 strike had 1,200 calls purchased at an average premium of $0.08 each. Optimism spread far-and-wide to the October $36 strike where 1,100 calls were coveted for $1.01 per contract. Long-term uber-bullish call buyers are perhaps expecting to profit should Disney’s shares surge at least 13.50% from the current price to surpass the breakeven point on the calls at $37.01 by expiration in October.

AKS – AK Steel Holding Corp. – The rekindling of takeover speculation surrounding AK Steel this morning sent shares of the iron and steel manufacturer up 6% to a six-week high of $24.18. Unconfirmed takeover rumors inspired a rapid influx of bullish options traders to the near-term March contract in early trading and lifted options implied volatility on the stock 11.86% to 55.26%. Investors exchanged more than 9 call options on AK Steel for each single put option in play thus far in the trading day. The March $24 strike attracted the most volume as more than 11,900 contracts changed hands in the first eighty minutes of the session. At least 6,600 in-the-money calls at that strike were purchased for an average premium of $0.92 apiece. Other investor picked up 3,200 calls at the higher March $25 strike for a volume-weighted average premium of $0.55 each. Finally, investors paid an average premium of $0.43 apiece to take ownership of 2,800 calls at the March $26 strike. Call-buyers are prepared to accrue profits should AKS shares continue to rally.

M – Macy’s, Inc. – Shares of the department store operator are trading 0.60% higher to $20.15 after the firm said same-store sales – retail locations open for at least one year – rose 3.7% last month, which exceeded average analyst forecasts of 1.4% improvement. The positive news motivated one options investor to establish a long-term bullish trade in the August contract. It looks like the trader initiated a short straddle by selling 1,400 calls at the August $22 strike for a premium of $1.23 apiece in combination with the sale of 1,400 in-the-money puts at the same strike for $2.87 each. The investor pockets a gross premium of $4.10 per contract, and keeps the full amount if Macy’s shares rally 9.20% to a new 52-week high of $22.00 by expiration day in about six months. As with all short straddles, the trader is hoping to see shares settle at the strike price, or the point at which both calls and puts expire worthless. The investor is exposed to losses if shares of the underlying stock trade above the upper breakeven point at $26.10, or if shares trade below the lower breakeven price of $17.90, at expiration.


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