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Covered-Call Sellers Make Note of Exits on American Airlines Parent Corp.

Today’s tickers: AMR, AIG, C, GME, HD, XLP, ALL, CMC, QLGC & YUM

AMR – AMR Corp. – Bullish investors engaged in covered-call selling on AMR Corporation this afternoon after its subsidiary, American Airlines, revealed February passenger unit revenue increased between 6.5% to 7.5% as compared to roughly the same time a year ago. The so-called buy-write strategy took off amid an 11% rally in the price of the underlying stock to $9.93. Options traders sold approximately 16,300 calls at the March $11 strike for an average premium of $0.09 apiece, and simultaneously purchased an equivalent number of AMR-shares when the stock was trading at approximately $9.84 each. The net price paid per AMR-share amounts to $9.75 apiece because of the $0.09 per contract financing provided by the sale of the call options. Investors utilizing the buy-write strategy are positioned to accumulate maximum potential gains of 12.82% if shares rally through $11.00 by expiration day. The covered-calls provide an effective exit strategy for investors, who walk away with 12.82% profits if AMR shares rally to $11.00, and if the underlying shares are called from them at expiration.

AIG – American International Group, Inc. – Insurance firm, American International Group, already reported plans to sell two units for $51 billion, but speculation that it may sell additional assets sparked rampant options trading activity on the stock this afternoon. Shares surged more than 18% to $34.34 at times during afternoon trading. Options investors exchanged more than 224,000 contacts on AIG as of 2:30 pm (ET), and traded more than two call options on the stock for each single put option in play. Two-way trading traffic in out-of-the-money call options is evident, but it looks like – in most cases – more calls are being purchased than sold. The nearest-to-the-money March $35 strike had more than 37,000 calls trade today versus that strike’s previous existing open interest of just 12,297 contracts. More than 12,300 calls were purchased for an average premium of $0.89 apiece. The higher March $40 strike had 12,900 calls picked up by bullish individuals who paid an average $0.25 premium per contract. Finally, the March $45 strike attracted buying interest in the amount of 3,200 calls for an average premium of $0.18 each. More than 7,000 contracts changed hands at the March $45 strike, which trumps existing open interest of just 2,489 lots. It is likely that a large portion of today’s trading activity is the work of intraday movers who do not plan on maintaining positions overnight. Options traders may be taking advantage of the 35.3% increase in overall options implied volatility on the stock to 80.49% this afternoon. It will be interesting to observe how overall open interest on the insurer changes tomorrow to reflect the ratio of intraday contracts traded as compared to new positioning on the stock.

C – Citigroup, Inc. – Options traders are concentrating on Citigroup call options this afternoon with total volume traded in the session edging up over 1.374 million contracts. Shares of the underlying stock are up 7.58% to $3.83, the highest traded price since December 2009. The bullish shift in the price per Citi-share inspired investors to trade more than 5 call options for each single put option in play thus far in the trading day. The most heavily trafficked areas are in call contracts at the March $4.0 and April $4.0 strike prices. Notable buying activity took place at the April $4.0 strike where at least 168,000 contracts were purchased for an average premium of $0.10 apiece out of the total volume at that strike of 257,822 contracts. The higher April $5 strike, which houses existing open interest of just 2,541 contracts, attracted volume of more than 35,000 calls during the session. It looks like more than 27,300 of those calls were purchased by traders for an average premium of $0.02 apiece. Finally, as of 3:00 pm (ET), investors exchanged more than 284,000 calls at the near-term March $4 strike where a minimum of 176,700 of those contracts were purchased for an average premium of $0.04 each. The surge in demand for options on Citigroup bumped up the reading of overall options implied volatility by approximately 16.2% to 48.59%. A large portion of today’s trading volume on Citigroup could be the work of traders making intraday moves to turn a quick profit. We will need to wait to see how overall open interest changes overnight in order to assess how much of today’s volume represents new positioning.

GME – GameStop Corp. – Less than twenty-four hours ago we reported bullish options trading activity on the retailer of video games, but today pessimists dominated the field and initiated bearish bets on the stock. GameStop’s shares are trading 0.80% lower on the day to stand at $18.32. One investor appears to be responsible for the bulk of the bearish trading on GME today. But, at the near-term March $19 strike smaller players flexed their paws to purchase 1,800 puts for an average premium of $1.17 apiece. The March contract action suggests the big options player on the stock today is not the only bear bracing for potential share price erosion. It looks like one investor established a large-volume bearish risk reversal in the April contract and initiated outright call selling in the July contract. The trader sold approximately 10,910 calls at the April $19 strike for an average premium of $0.80 apiece in order to finance the purchase of the about the same number of puts at the April $17 strike for $0.50 each. The investor pockets a net credit of $0.30 per contract on the reversal play. Next, the trader added to the credit by selling 21,820 call options at the July $21 strike for $0.75 each. It is unclear whether the investor is currently holding an equivalent number of underlying shares of GME stock. However, let’s first assume there is no underlying stock position. In this scenario, the trader is positioned to add to profits ahead of April expiration if GME’s shares trade below $17.00 apiece, and will retain the full $0.75 premium on the sale of the call options as long as shares trade below $21.00 through July expiration. On the other hand, the trader could be long the stock. In this case, the risk reversal yields a net credit and downside protection through expiration day next month, whereas the short calls provide $0.75 in premium per contract as well as an effective exit strategy – by mimicking a covered call – should GME’s shares breakthrough $21.00 by expiration day in July. Options implied volatility on the stock is up 12% to 48.39%.

HD – Home Depot, Inc. – Shares of the home improvement products retailer reached a new 52-week high of $32.04 during yesterday’s session, and are trading roughly 0.25% higher for the current day at $31.80. Put activity in the April contract on the stock today appears to be the work of an investor securing downside protection in case HD’s share price erodes ahead of expiration next month. The trader purchased a debit put spread by picking up 5,000 puts at the April $30 strike for a premium of $0.29 apiece, marked against the sale of the same number of puts at the lower April $29 strike for $0.14 each. The net cost of the spread amounts to $0.15 per contract. Downside protection kicks in if Home Depot’s shares decline 5.95% from the current price to breach the breakeven point on the puts at $29.85.

XLP – Consumer Staples Select Sector SPDR – Shares of the consumer staples exchange-traded fund, which invests in companies from industries such as food and drug retailing, beverage, food products and tobacco, are up 0.15% to $27.53 today. Put activity on the fund indicates investors are expecting shares to trade above $26.00 through June expiration. Bullish individuals sold 19,500 puts at the June $26 strike to pocket an average premium of $0.35 per contract. Put-sellers keep the full premium received on the transaction as long as shares of the underlying stock trade above $26.00 through expiration day in June. Investors short the puts are apparently happy to have shares of the underlying fund put to them for $25.65 each should the put contracts land in-the-money at expiration.

ALL – Allstate Corp. – In mid-February an investor amassed a 39,000 lot options stake in insurer, Allstate as the shares were trading at around $29.00 per share. The premium paid to get long of March expiration calls at the $31.00 strike was between 40-60 cents. Activity today gets a little murky, but we reckon that the investor sold this position out for a handsome gain at 92.5 cents and simultaneously attempted to call a top to further gains for the share price. Time and sales data indicates that 13,000 April expiration calls were sold at the $32 strike for 65 cents and while 26,000 July calls at the higher $33.00 strike were sold at $1.05. It is possible that since the three legs were transacted close together that the time and sales data is miscuing our interpretation. Logically the investor could be simply rolling up the strikes over time and maintaining a long position.

CMC – Commercial Metals Co. – A little over two weeks ago, on February 22, 2010, shares of the manufacturer and recycler of metals jumped 14% due to takeover rumors. Perhaps the rumor mill is in motion once again because today Commercial Metals’ shares are trading higher by 6.50% to $17.30. Investor uncertainty surrounding CMC, as measured by its overall reading of options implied volatility, is at its highest point since the final days of June 2009. Implied volatility is up 18.91% to 70.36% as of 10:40 am (ET). Investors flocked to the metals producer to establish bullish positions on the stock. Traders picked up at least 10,000 calls at the March $17.5 strike for an average premium of $0.66 apiece. The higher March $20 strike attracted buying interest in the amount of 2,200 call options for a volume-weighted average premium of $0.27 each. Optimism spread to the April $20 strike where 2,300 calls were purchased for an average premium of $0.49 per contract. Investors holding the April $20 strike call options stand ready to accrue profits should CMC’s shares rally another 18.45% from the current price to breach the effective breakeven point at $20.49 by April expiration. Investors exchanged more than 34,900 contracts on Commercial Metals Company in the first seventy minutes of the trading session.

QLGC – QLogic Corp. – Options investors are feasting on QLogic call options this morning amid a 1.85% rally in the value of the firm’s shares to $19.37. Near-term bullish positions are amassing at the March $20 strike where traders purchased roughly 4,400 calls for an average premium of $0.18 per contract. Traders also scooped up 4,100 calls at the April $20 strike for a premium of $0.44 apiece. April contract call buyers are positioned to profit if QLogic’s shares increase 5.50% from the current price to surpass the breakeven price of $20.44 by expiration day. The spike in investor demand for options on QLGC lifted the overall reading of options implied volatility on the stock by 25.50% to 33.70% in morning trading.

YUM – Yum! Brands, Inc. – Shares of Yum! Brands, Inc., which operates restaurants such as KFC, Pizza Hut, Taco Bell and Long John Silver’s, surged 4.30% to a new 52-week high of $36.92 this morning after the firm was upgraded to ‘buy’ from ‘neutral’ at UBS. Bullish investors positioned for continued upward movement in the price of the underlying shares by picking up approximately 1,600 calls at the April $37 strike for an average premium of $0.70 per contract. Investors long the calls profit if YUM’s share price rallies 2.10% over the current value of the stock to exceed the breakeven point on the calls at $37.70 by expiration day in April. Options implied volatility on Yum! Brands is up roughly 8.6% to 22.36% as of 11:00 am (ET).


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