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Trading in Electronic Arts’ Calls Accelerates Ahead of Earnings

Today’s tickers: ERTS, USO, ARMH, BK, JPM, GG, XRT, DF, CAH & PCLN

ERTS – Electronic Arts, Inc. – Call activity on the video game publisher is booming in late afternoon trading ahead of Electronic Arts’ fourth-quarter earnings announcement. Shares of the underlying stock are up 3.3% at $18.85 with 40 minutes remaining in the session. Analysts, on average, anticipate earnings of $0.05 per share on revenue of $835.4 million. Bullish options investors are scrambling to position for Electronic Arts’ share price to rally sharply should the firm’s earnings report beat average expectations. The majority of the call activity on the stock today is centered in the June contract where trading patterns look to be mimicking the parameters of a plain-vanilla debit call spread strategy. Approximately 15,000 calls were likely purchased for an average premium of $0.94 apiece at the June $20 strike. Meanwhile, traders sold about 15,000 calls at the higher June $22 strike for an average premium of $0.36 each. Investors employing this strategy reduce the net cost of buying the closer-to-the-money call options at the June $20 strike price to an average of $0.58 per contract. Maximum potential profits available to pseudo-call spreading traders amounts to $1.42 per contract should shares of the underlying stock surge 16.7% to surpass the $22.00-level by June expiration. Options implied volatility is up 6.9% to 57.12% ahead of the earnings announcement.

USO – United States Oil Fund LP – Shares of the U.S. Oil Fund are currently trading 1.25% lower on the day at $36.77. The USO’s share price of $36.77 is 12.2% below the May high of $41.90 attained back on May 3, 2010. One options investor is positioning for continued bearish movement in the price of the underlying fund through June expiration. The trader purchased a debit put spread, buying 3,000 lots at the June $36 strike for an average premium of $1.27 each, and selling the same number of contracts at the lower June $33 strike for $0.47 apiece. Net premium paid for the pessimistic play amounts to $0.80 per contract. The trader starts to make money if USO shares slip beneath the effective breakeven price of $35.20 by expiration day. Maximum potential profits of $2.20 per contract accumulate for the put-spreader if shares slump 10.25% beneath the current value to breach the $33.00-level by June expiration.

ARMH – ARM Holdings PLC – Optimistic options players initiated debit call spreads on the semiconductor company this afternoon with shares of the underlying stock trading 1.55% higher on the day at $11.21. Investors purchased approximately 8,500 now in-the-money calls at the July $10 strike for an average premium of $1.62 apiece, and sold about the same number of calls at the higher July $12.5 strike for an average premium of $0.21 each. The net cost of the transaction amounts to $1.41 per contract. Call-spreaders are prepared to amass maximum potential profits of $1.09 per contract if ARM Holdings’ shares surge 11.5% over the current value of $11.21 to surpass the $12.50-level by July expiration.

BK – Bank of New York Mellon Corp. – Put options on BK are in demand today on news Ivy Asset Management LLC, which is a New York-based investment adviser owned by Bank of New York Mellon, was sued – along with some if Ivy’s former executives – by New York Attorney General, Andrew Cuomo, on accusations of deceiving clients about investments linked to the infamous Bernard Madoff. Near-term put activity on Bank of New York Mellon jumped while shares of the underlying stock declined more than 0.80% to $31.31. Investors looking to take advantage of potential fallout stemming from the allegations purchased put contracts on the stock. Options players picked up 1,600 puts at the May $31 strike for an average premium of $0.76 apiece. The closest-to-the-money contracts yield profits should BK’s share price slip beneath the average breakeven point at $30.24 ahead of expiration day. Buying interest spread to the lower May $30 strike where 2,100 puts were purchased for an average premium of $0.51 each. Finally, another 1,800 put contracts were coveted at the May $29 strike for an average premium of $0.33 apiece. The increase in demand for put options on the stock coupled with the Ivy Asset Management news lifted options implied volatility on BK 4% to 35.60% as of 1:00 pm (ET).

JPM – JPMorgan Chase & Co. – The 0.50% increase in the price per share of JPMorgan Chase & Co. to $42.16 today and news the firm’s traders made money every day of the first quarter for the first time in the company’s history did not deter options investors from initiating bearish stances on the stock. Near-term pessimists anticipating share price erosion ahead of June expiration purchased put spreads on the financial services and investment banking firm. It looks like approximately 13,000 puts were purchased at the June $40 strike for an average premium of $1.53 apiece, and spread against the sale of roughly the same number of puts at the lower June $35 strike for an average premium of $0.56 each. The average net cost of the put strategy amounts to $0.97 per contract. Investors long the spread stand ready to accrue maximum potential profits of $4.03 per contract should shares of the underlying stock decline 17% from the current value of $42.16 to breach the $35.00-level by June expiration. Put-spreaders make money as long as JPM’s shares trade beneath the average breakeven price to the downside at $39.03 by expiration day next month. Options implied volatility on JPM is down 12.1% to 37.48% as of 1:20 pm (ET).

GG – Goldcorp, Inc. – Shares of Canada’s second-largest gold producer are up 6.75% at a new 52-week high of $46.43 on the rally in the price of gold and rising demand for the precious metal. Options investors populated the stock with optimism, buying approximately 1,000 now in-the-money calls at the May $46 strike for an average premium of $1.09 apiece. Call-buyers at this strike price make money if Goldcorp’s shares rally through the average breakeven price of $47.09 ahead of May expiration. Bullish sentiment spread to the higher June $55 strike where 1,000 calls were picked up for an average premium of $0.22 each. Buying interest continued at the higher June $60 strike as 2,000 calls were coveted for an average premium of $0.08 apiece. These relatively cheap bullish plays pay off if Goldcorp’s shares explode to the upside on additional concerns from the Eurozone and further gold bullion price appreciation stemming from increased demand for the metal ahead of June expiration. Investors populating the October contract established bearish stances should shares of the underlying stock fail to retain gains enjoyed during the current rally. Options traders picked up 1,200 puts at the October $46 strike for an average premium of $4.89 each, and scooped up another 1,600 lots at the lower October $45 strike for $4.30 a-pop. Put-buyers are positioned to profit by October expiration if Goldcorp’s shares slip beneath the effective breakeven prices of $41.11 and $40.70, respectively.

XRT – SPDR S&P Retail ETF – Shares of the XRT, an exchange-traded fund that tracks the performance of the S&P Retail Select Industry Index, are trading 0.95% higher at $42.51 as of 1:05 pm (ET). Bearish options trading patterns persisted on the XRT despite the rebound in the price of the underlying fund today. One pessimistic player perhaps anticipating bearish movement in the XRT’s share price purchased a plain-vanilla debit put spread in the June contract. The investor picked up 10,000 puts at the June $41 strike for a premium of $1.52 apiece, and sold the same number of puts at the lower June $37 strike for $0.49 each. Net premium paid for the transaction amounts to $1.03 per contract, thus positioning the responsible party to amass maximum potential profits of $2.97 per contract should shares of the retail fund plummet 13% from the current price of $42.51 to breach $37.00 by June expiration.

DF – Dean Foods Co. – Shares of the food and beverage company, which operates Dean Food’s Dairy Group – the largest processor and distributor of milk and other dairy products in the United States, are down 7.45% to $9.69 just before 11:00 am (ET). Dean Foods’ share price plummeted 36.13% since May 7, 2010, when the stock touched an intraday high of $14.75, down to today’s intraday low of $9.42. The rapid decline in DF’s share price inspired a swarm of analyst downgrades. Analysts at Sanford Bernstein cut the stock to ‘market perform’ from ‘outperform’ while an analyst at UBS downgraded DF to ‘neutral from ‘buy’. Pessimism on Dean Foods stems from the firm’s reported 43% decline in first-quarter net income and suspension of its full-year earnings forecast. Despite the turmoil, options activity on the stock this morning indicates some investors expect shares are unlikely to sink much lower. Traders positioned for a rebound in the price of the underlying stock by purchasing approximately 1,800 calls at the June $10 strike for an average premium of $0.66 apiece. Call-buyers make money if Dean’s shares rally 10% over the current price of $9.69 to surpass the average breakeven point at $10.66 ahead of June expiration.

CAH – Cardinal Health, Inc. – Put activity on the provider of various products and services to the healthcare industry suggests investors are bracing for share price erosion ahead of June expiration. Cardinal’s shares spent the better part of the morning session vacillating about Monday’s closing value of $34.96. Investors piled into put options at the June $35 strike where approximately 5,000 contracts appear to have been purchased for an average premium of $1.41 per contract. Put buyers may be securing downside protection on long positions in the underlying shares, or could be establishing outright bearish bets on the stock. Plain-vanilla but buyers expecting shares to decline make money if Cardinal’s share price slips beneath the average breakeven price of $33.59 by June expiration. The surge in demand for put contracts on the stock lifted the overall reading of options implied volatility on CAH by roughly 21.8% to 32.32% as of 11:15 am (ET).

PCLN – Priceline.com, Inc. – Bearish investors are shedding out-of-the-money call options on the second-largest online travel agency today with shares of the underlying stock lower by more than 15% to $212.06. Priceline’s shares slipped after the firm said second-quarter profit is likely to disappoint due to weakness in the Euro and other factors foiling consumers’ travel plans. Pessimists expressed doubts for a near-term rebound in PCLN’s share price by selling calls in the May contract. It looks like approximately 1,300 calls were shed at the May $250 strike for an average premium of $0.41 apiece. The lower May $240 strike had roughly 1,000 calls sell for an average premium of $1.12 per contract. Call sellers keep the premium received as long as shares of the underlying stock fail to rally above the strike prices described through May expiration day. Options implied volatility on the stock is down 17.7% to 52.82% as of 11:25 am (ET).


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