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Options on Halliburton Get Messy

Today’s tickers: HAL, IPG, AMGN, BP, COF, FXI, OMX, NEM & FSLR

HAL – Halliburton Co. – Making sense of options activity on oil company, Halliburton Co., this afternoon is difficult due to the chaotic and seemingly pattern-less trading taking place on the stock. Investors exchanged more than 200,000 contracts on HAL by 3:00 pm (ET), which represents approximately 37% of total existing open interest on the stock of 541,062 contracts. Frenzied options trading was catalyzed by news the firm is assisting in ongoing investigations regarding the oil spill in the Gulf of Mexico as HAL reportedly provided a variety of oilfield services to Deepwater Horizon rig, which is the rig that caught fire and sank last week. Options volume and options implied volatility on Halliburton jumped while its shares slipped 6.3% to $31.26. The surge in demand for option contracts on the stock, coupled with uncertainty regarding possible repercussions stemming from HAL’s connection to the situation in the Gulf of Mexico, lifted the overall reading of options implied volatility 25.4% to 44.13% as of 3:25 pm (ET). Trading activity is heaviest in the May contract with decent volume building in both call and put options. Some bearish investors bracing for continued share price erosion purchased about 2,200 puts at the lowest available strike – the May $25 strike price – for an average premium of $0.16 apiece. Buying interest in put options was also apparent at the May $26 strike where 1,800 puts were picked up for an average premium of $0.20 each. May $29 strike puts were the most heavily trafficked as more than 16,700 contracts changed hands by 3:22 pm (ET), versus previously existing open interest of just 2,743 contracts at that strike. But, the put action was certainly not one-sided as investors took to buying and selling the contracts, with buyers gaining the right to sell the stock at $29.00, and sellers receiving an average premium of $0.81 per contract in exchange for bearing the risk of having shares of the underlying stock put to them at $29.00. Similar two-way trading traffic in calls took place at out-of-the-money strike prices as some traders threw in the towel on bullish stances expiring in May. Meanwhile, contrarian players purchased out-of-the-money calls, perhaps to prepare for a potential rebound in the price per share ahead of expiration next month.

IPG – Interpublic Group of Cos., Inc. – Advertising and marketing services firm, Interpublic Group of Companies, enticed bullish options investors during afternoon trading after revealing a narrower first-quarter loss of $0.15 per share as compared to a loss of $0.16 per share in the same period last year. IPG’s shares rallied 4.6% earlier in the session to an intraday high of $9.70, which is just $0.23 off the stock’s current 52-week high of $9.93 attained back on April 20, 2010. Options-optimists expecting continued bullish movement in the price of the underlying stock through May expiration purchased 4,800 calls at the May $10 strike for an average premium of $0.30 each. Interpublic’s shares must break through the current 52-week high and surpass the average breakeven point on the calls at $10.30 in order for call-buyers to accrue profits by expiration day in May.

AMGN – Amgen, Inc. – An iron condor transacted on the global biotechnology company today implies one options player expects shares of the underlying stock to trade within a specified range through June expiration. Amgen’s shares are up 1.25% to $59.91 as of 12:05 pm (ET). The investor responsible for the trade essentially enacted two credit spreads, one utilizing call options and the other puts, in order to take in option premium. The options player sold 3,000 calls at the June $62.5 strike for a premium of $0.64 apiece, and purchased the same number of calls at the higher June $67.5 strike for $0.11 each. On the put side of the field, the trader shed 3,000 lots at the June $57.5 strike for $1.53 each, and picked up 3,000 puts at the lower June $52.5 strike for $0.41 a-pop. The iron condor strategy in this case yields a net credit of $1.65 per contract, which the investor keeps in full as long as Amgen’s shares trade within the range of $57.50 to $62.50 through expiration day in June. The net credit of $1.65 per contract represents maximum potential profits available to the iron condor strategist. However, the parameters of the transaction expose the trader to heftier maximum potential losses of $3.35 per contract should the price of the underlying stock rally above $67.50, or plummet beneath $52.50, ahead of expiration.

BP – BP PLC – Reports stating BP must foot the bill for cleanup efforts stemming from a massive oil spill off the Gulf of Mexico sent the oil and gas company’s shares down more than 8.05% during the trading session to $52.73, bringing total share price erosion for the week to 11.93% since Monday when shares reached an intraday high of $59.87. Investors wary of continued bearish movement in the price of the underlying stock scooped up near-term put options. Put buyers may be shelling out premium to secure downside protection on long stock positions, or could be looking to profit from BP’s pain should its shares continue to decline ahead of expiration next month. Investors purchased roughly 2,700 now in-the-money puts at the May $55 strike for an average premium of $2.15 each. Buying interest spread to the May $52.5 strike where 2,200 puts were picked up for an average premium of $1.07 apiece. Finally, uber-bearish individuals paid an average premium of $0.58 per contract to acquire 2,100 puts at the May $50 strike. Investors long the May $50 strike puts make money if BP’s shares fall another 6.5% to breach the breakeven point to the downside at $49.42 by May expiration. Investor uncertainty – as measured by the stock’s overall reading of options implied volatility – is soaring 41.3% higher to 32.44% as of 12:50 pm (ET), the highest reading of implied volatility on BP since July 2009.

COF – Capital One Financial Corp. – Shares of the financial services company are up 1.75% to $44.64 as of 12:15 pm (ET), but earlier rallied up to an intraday high of $44.92, prompting one options player to take profits on a previously established long call position. It looks like the investor originally purchased 6,500 calls at the June $42 strike for an average premium of $2.00 each back on March 16, 2010, when shares of the underlying stock were trading at a volume-weighted average price of $39.79. The subsequent appreciation in the value of COF shares lifted premium on the now in-the-money calls, allowing the investor to sell the 6,500 contracts for $3.80 apiece this morning. Net profits enjoyed by the bullish trader amount to $1.80 per contract. Next, the investor initiated a fresh optimistic stance on the stock by purchasing 6,500 fresh call options at the higher June $45 strike for a premium of $2.15 each. Profits on the new position accumulate should Capital One’s shares rally another 5% to surpass the effective breakeven price of $47.15 by June expiration day. We note that shares of the ‘what’s in your wallet’ financial services firm traded up at to its current 52-week high $47.73 as recently as April 23, 2010.

FXI – iShares FTSE/Xinhua China 25 Index Fund – Medium-term bullish sentiment on the FXI stuck out like a sore thumb in the first half of the trading session. Shares of the FXI, an exchange-traded fund that tracks the price and yield performance of the FTSE/Xinhua China 25 Index – an index designed to represent the performance 25 of the largest and most liquid Chinese companies – are up 0.30% to $41.03 just ahead of 12:30 pm (ET). It looks like one optimistic options player invested in a ratio call spread to position for continued appreciation in the price of the underlying fund through June expiration. The trader purchased roughly 10,000 calls at the June $42 strike for an average premium of $1.08 apiece, and sold 20,000 calls at the higher June $46 strike for $0.16 each. The average net cost of the transaction amounts to $0.76 per contract. Thus, the bullish individual stands ready to accrue maximum potential profits of $3.24 per contract should FXI shares rally more than 12.1% to $46.00 by expiration day in June. The investor makes money on the spread only if shares of the fund surpass the effective breakeven price of $42.76 ahead of expiration.

OMX – OfficeMax Corp. – Shares of the office supplies retailer are up more than 12.35% this morning at a new 52-week high of $18.32 after the firm revealed first-quarter net income that exceeded average analyst expectations. OfficeMax posted first-quarter earnings of $0.29 per share, easily beating average estimates of $0.21 per share. A short straddle options combination play on OMX indicates one options player expects – rather hopes – shares of the underlying stock settle at $17.50 at expiration in June. The straddle-seller shed roughly 3,250 now in-the-money calls at the June $17.5 strike for a premium of $1.25 apiece, and sold about 3,250 puts at the same strike for $1.15 each. Gross premium pocketed by the trade amounts to $2.40 per contract. The investor keeps the full premium if OfficeMax shares trade at $17.50 at expiration day in June. The short positions in both call and put options expose the investor to losses in the event that shares rally above the upper breakeven price of $19.90, or should shares slip beneath the lower breakeven point at $15.10, by expiration. Options implied volatility on OMX is down 24% to 49.13% as of 11:15 am (ET).

NEM – Newmont Mining Corp. – Plain-vanilla call buying on the largest U.S. gold producer indicates long-term bullish sentiment on the stock is alive and well. Newmont’s shares earlier rallied up 2.7% to $56.32, which is just 13 cents off the gold mining firm’s current 52-week high of $56.45 attained back on December 1, 2009. NEM’s shares leapt higher after the firm posted net income of $0.83 per share (excluding some items), and beat average analyst estimates of $0.82 a share. Optimistic options investors purchased roughly 10,000 calls at the January 2011 $85 strike for an average premium of $0.69 per contract. Newmont’s shares must explode 52.1% over the current value of the stock before call-buyers breakeven at a price of $85.69 per share.

FSLR – First Solar, Inc. – Shares of the world’s largest manufacturer of thin film power modules surged 17.36% in morning trading to an intraday high of $150.38 after the firm posted first-quarter earnings of $2.00 per share, which exceeded average analyst forecasts of $1.67 per share. First Solar also raised its full-year earnings forecast to a range of $6.80 to $7.30 a share, revising up from its earlier guidance of $6.05 to $6.80 a share. The positive earnings report inspired a swarm of analyst upgrades for the firm, such as the increased rating to ‘buy’ from ‘hold’ at Deutsche Bank, where analyst Steve O’Rourke has a 12-month target share price of $155.00 on the stock. Bullish options investors positioning for continued share price appreciation for First Solar purchased approximately 1,500 calls at the May $175 strike for an average premium of $0.44 apiece. The overall reading of options implied volatility on FSLR fell 21.1% to 42.61% following earnings.


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