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UnitedHealth Bulls Have a Fever – the Only Prescription is More Call Options

Today’s tickers: UNH, BZH, WFC, GE, XLB, WMT, BAC, COF, HOG, ETFC & STJ

UNH – UnitedHealth Group, Inc. – Health and well-being company, UnitedHealth Group, commenced the trading session in the red after Goldman Sachs Group removed the firm from its ‘Conviction Buy List’. However, UNH is still rated as a ‘buy’ at Goldman, and the company’s shares recovered this afternoon to stand 0.60% higher at $32.73. A fire-storm of bullish activity descended on UnitedHealth during the middle of the trading day. Investors gobbled up April contract call options perhaps to position for continued bullish movement in the price of the underlying shares. Options players purchased 42,600 call options at the April $34 strike for an average premium of $0.87 per contract. More than 50,000 calls changed hands at that strike, which blows the 4,333 contracts of open interest at that strike right out of the water. Investors long the calls are positioned to amass profits should UNH’s shares rally another 6.5% to breach the breakeven price of $34.87 by April expiration. Wild-and-crazy options activity on the stock lifted the overall reading of options implied volatility 5% to 43.06% as of 2:05 pm (ET).

BZH – Beazer Homes USA, Inc. – Single- and multi-family homebuilding company, Beazer Homes USA, attracted bullish options players today amid a 4.65% rally in its share price to $4.95. Beazer was upgraded to a ‘buy’ rating and a target share price of $6.25 at Citigroup yesterday. Plain-vanilla call buying took place at the near-term March $5.0 strike where investor picked up 2,100 contracts for an average premium of $0.14 apiece. Investors long these contracts are hoping Beazer’s shares rally another 4.25% from the current price to surpass the effective breakeven point at $5.14 ahead of expiration on Friday. Optimism spread to the April $5.0 strike as traders coveted 2,200 calls for an average premium of $0.32 per contract. Call-buyers in the April contract profit if shares jump 8% and trade above the breakeven price of $5.32 by expiration day next month. The surge in investor demand for options on Beazer Homes lifted the overall reading of options implied volatility on the stock 15.8% to 61.92% this afternoon.

WFC – Wells Fargo & Co. – The bank holding company’s shares increased more than 0.65% during the session to $30.09, inspiring bullish options activity on the stock. Investors positioning for a continued rally in the price of the underlying shares purchased nearly 26,000 call options at the April $32 strike for an average premium of $0.27 per contract. Call-buyers profit if Wells Fargo’s shares surge 7.25% from the current value to exceed the breakeven price of $32.37 by April expiration. Shares must surpass the current 52-week high on the stock of $31.53, attained back on October 15, 2009, and continue to rally through $32.37 in order for call-coveters to accumulate profits by expiration day next month.

GE – General Electric Co. – Shares of jet engine manufacturer, General Electric Company, are trading 2.30% higher today to a new 52-week high of $17.69 after the company’s Chief Financial Officer, Keith Sherin, said the firm expects to raise its dividend in 2011. Bullish options investors celebrated GE’s rally by positioning for continued upward momentum in the price of the underlying shares. Optimistic individuals purchased more than 11,100 calls at the April $19 strike for an average premium of $0.17 per contract. Call-buyers stand ready to accrue profits should shares of the underlying stock rally another 8.35% over the current price to surpass the effective breakeven point on the calls at $19.17 by April expiration. Total options volume is fast approaching 250,000 contracts as of 12:15 pm on the east coast.

XLB – Materials Select Sector SPDR ETF – Options trading on the materials exchange-traded fund, which tracks the performance of the materials economic sector, indicates one option investor believes the recent climb may have overshot the mark. The investor appears to have sold short a strangle combination but has taken steps to iron-clad any losses in the event that the XLB magnifies gains or that the u-turn is harsher than expected. Shares of the underlying fund are up 1.20% today to $33.68. The investor essentially transacted two credit spreads on the materials fund. At-the-money calls and puts were sold but the trader bought protection at out-of-the-money strikes to protect the trade from adversity. On the call side, the trader sold 10,000 in-the-money contracts at the June $32 strike for a premium of $2.58 apiece, in order to buy the same number of calls at the higher June $35 strike for $0.96 each. As for the puts, the investor sold 10,000 lots at the June $32 strike for a premium of $1.16 each, and purchased 10,000 puts at the lower June $29 strike for $0.49 apiece. The investor pockets a net credit of $2.29 per contract, and keeps the full amount if shares of the XLB settle at $32.00 at expiration. The strategy is not without risk. The trader is vulnerable to maximum potential losses of $0.71 per contract should shares blow right through the upper strike price of $35.00, or if shares plummet beneath the lower strike price of $29.00, ahead of June expiration.

WMT – Wal-Mart Stores, Inc. – The world’s largest retailer attracted bullish options investors to the field today as shares climbed 0.75% to attain a new 52-week high of $55.84. Wal-Mart’s shares gained ground during the previous session on an upgrade to ‘buy’ from ‘hold’ at Citigroup where WMT’s target share price was upped to $65.00 from $54.00. Options traders established bullish stances on the stock in the April contract by buying up call options. Investors coveted nearly 5,000 contracts at the April $57.5 strike for an average premium of $0.43 apiece. The higher April $60 strike attracted optimistic traders who purchased 5,600 calls for an average premium of $0.06 per contract. Investors long the April $60 strike calls profit only if Wal-Mart’s shares rally 7.5% over the current price to breach the breakeven point on the calls at $60.06 by expiration day next month.

BAC – Bank of America Corp. – Options activity was once again bullish at BAC with the shares higher by 1% at $17.00 on the day. However, one curious position caught our eye and we’re still head-scratching to an extent. Open interest at the $12.00 strike in the May contract is 6,685 lots. Overall option volume at the strike today totals 9,200 contracts. It appears to us that an investor may have sold call options perhaps as a way to lock-in to a long stock position. In other words the seller might be creating a covered call having bought shares days, weeks or months ago and is using a deep in-the-money call to achieve an exit strategy. This is an unusual trade given the $5.00 intrinsic value the premium carries, yet could also represent an investor banking open gains on a well-established call position when shares were in the dog-house.

COF – Capital One Financial Corp. – A Capital One-bull banked profits on a previously established long call position today and extended optimistic sentiment on the stock by picking up fresh calls at a higher strike price in the June contract. Capital One’s shares edged slightly lower during the session, falling 0.80% to stand at $39.66. It appears the investor originally purchased 6,498 April $40 call options for an average premium of $1.16 apiece back on March 9, 2010, when shares were trading at $37.68. Today the trader sold the calls for an average premium of $1.39 each, thus pocketing average net profits of $0.23 per contract. Next, the investor extended bullish positioning on Capital One by purchasing 6,498 calls at the higher June $42 strike for a premium of $2.00 apiece. The new call stance readies the trader to accrue profits if shares of the underlying stock rally above the breakeven price of $44.00 by June expiration.

HOG – Harley-Davidson, Inc. – Options investors are going hog-wild for HOG-calls this morning on speculation that motorcycle-maker, Harley-Davidson, could be the purchase target in a leveraged buyout offer by a private equity firm. Shares are up 5.45% to $27.95 on the LBO rumors, and the overall reading of options implied volatility on the stock is also 15.1% higher to 43.58%. Bullish players purchased 2,700 now in-the-money calls at the March $27 strike for a premium of $0.57 apiece, while the higher March $28 strike attracted buying interest of 2,100 calls for $0.22 per contract. Optimistic positioning spread to the April $28 strike where 1,700 calls were picked up for an average premium of $0.87 each. Finally, uber-bullish individuals coveted 4,500 call options at the higher April $30 strike for an average premium of $0.47 each. HOG’s share price must increase another 9% from the current price before call buyers at the April $30 strike profit above the breakeven price of $30.47. Investors exchanged more than 59,000 option contracts on the stock by 10:30 am (ET).

ETFC – E*Trade Financial Corp. – A short strangle enacted on online brokerage and financial services firm, E*Trade Financial Corp., this morning represents nearly all of the 31,197 contracts of options trading volume on the stock thus far in the session. The transaction suggests one investor expects E*Trade’s shares to trade within a specified range through July expiration. Shares of the underlying stock are currently flat on the day to stand at $1.66 each. The investor sold 15,000 puts at the July $1.5 strike for a premium of $0.10 apiece in combination with the sale of 15,000 calls at the higher July $2.0 strike for $0.08 each. Gross premium pocketed on the trade amounts to $0.18 per contract. The strangle-players keeps the full amount of premium if ETFC’s shares trade within the boundaries of the strike prices described through expiration day in July. However, the trader is vulnerable to losses should shares rally above the upper breakeven price of $2.18, or if shares slip beneath the lower breakeven point at $1.32, ahead of expiration.

STJ – St. Jude Medical, Inc. – The manufacturer of cardiovascular medical devices was raised to ‘sell’ from ‘conviction sell’ at Goldman Sachs Group this morning following yesterday’s announcement that rival firm, Boston Scientific Corp., has suspended sales of its implantable defibrillators. St. Jude’s shares rallied during the previous session, but edged 0.70% lower today to stand at $40.28. One optimistic options trader initiated a bullish risk reversal on the stock to position for a sharp rally in shares of the underlying stock by October expiration. The investor sold 4,000 put options at the October $35 strike for a premium of $1.35 apiece, in order to partially finance the purchase of 4,000 calls at the higher October $45 strike for $1.50 each. The net cost of the bullish play amounts to $0.15 per contract, thus positioning the trader to amass profits above the effective breakeven price of $45.15. St. Jude’s shares must increase at least 12% from the current value of the stock before profits start to accumulate.


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