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Buy-Write Strategist Positions for Halliburton Rebound

Buy-write strategist positions for Halliburton rebound

Today’s tickers: HAL, RDC, CHK, AMAT, M, KR, HOLX, XLF, LVS & AVNR

HAL – Halliburton Co. – The provider of services, products, maintenance, engineering and construction to oil and natural gas companies around the globe was rated new ‘accumulate’ with a 12-month target share price of $28.00 at Madison Williams today. Perhaps the new rating inspired the bullish buy-write strategy initiated on the stock in the October contract this afternoon. Halliburton’s shares rallied 1.95% in morning trading to touch an intraday high of $24.14, but inched lower during the session to trade flat at $23.68 as of 2:55 pm (ET). The optimistic options investor enacted the buy-write strategy, or covered call play, by selling 2,500 calls at the October $28 strike price for a premium of $1.17 apiece. The investor likely purchased approximately 250,000 Halliburton shares around the same time for an average price of $23.35 apiece. The sale of the call options effectively reduces the price paid per share to $22.18 each. This strategy positions the investor to accrue maximum gains of 26.23% if HAL’s shares rally above $28.00 by October expiration. If the stock does surge through $28.00, the calls will likely be exercised and the investor will have the underlying shares called from him at $28.00 each, leaving the covered-call seller with significant profits in pocket.

RDC – Rowan Companies, Inc. – Shares of the manufacturer of equipment utilized in the drilling, mining and timber industries are lower by 3.90% to stand at $23.72 in late afternoon trading after the Obama administration extended a ban on offshore drilling. Rowan’s shares have recovered somewhat after plummeting 16.7% from an intraday high of $25.58 in morning trading down to an intraday low of $21.26 this afternoon. Bearish options traders scrambled to establish pessimistic positions in the June contract. Investors purchased 1,600 puts at the June $20 strike for an average premium of $0.41 apiece, suggesting some strategists are bracing for continued share price erosion ahead of June expiration. June $20 strike put buyers make money if Rowan’s shares slide 17.4% from the current price of $23.72 to breach the average breakeven point to the downside at $19.59. Investors also purchased 1,300 puts at the higher June $22.5 strike for a premium of $0.93 each, and picked up roughly 2,400 in-the-money puts at the June $25 strike for an average premium of $1.95 per contract. Other pessimistic players not expecting shares to recover ahead of June expiration sold 1,000 calls at the June $25 strike for a premium of $0.38 each. Call-sellers keep the premium pocketed on the transaction as long as Rowan’s shares fail to rally above $25.00 by June expiration.

CHK – Chesapeake Energy Corp. – Near-term put options on the natural gas and oil exploration and production company are in high demand this afternoon despite the slight 0.40% rebound in the price of the underlying shares to $23.41 as of 1:20 pm (ET). Investors wary Chesapeake’s shares may decline ahead of June expiration purchased at least 16,000 put options at the June $22 strike for an average premium of $0.42 apiece. Put-buyers could be initiating outright bearish bets in the expectation that Chesapeake’s share price will erode in the next couple of weeks. In this scenario, traders make money as long as CHK’s shares decline at least 7.8% to breach the average breakeven price at $21.58 by June expiration. Alternatively, investors may be CHK optimists long the stock and merely buying short-term insurance policies (put options) to protect the value of the underlying position in case Chesapeake’s shares shift lower ahead of expiration day. If this is the case, the puts yield downside protection through expiration day in June should shares of the energy company trade below the average breakeven point at $21.58. Chesapeake’s overall reading of options implied volatility is up 6.9% to 45.65% as of 1:30 pm (ET).

AMAT – Applied Materials, Inc. – Straddle selling strategists dominated options activity on the provider of Nanomanufacturing Technology solutions this afternoon indicating investors expect volatility in the price of Applied Materials’ shares to come dissipate. AMAT’s shares are currently up slightly by less than 0.10% to stand at $12.86 as of 1:00 pm (ET). Investors signaled they see shares of the underlying stock settling at $13.00 by July expiration by shedding nearly 20,000 calls at the July $14 strike for an average premium of $0.54 apiece in combination with the sale of roughly 20,000 puts at the same strike price for an average premium of $0.71 each. The short straddle strategy in this case yields gross premium of $1.25 per contract, which investors keep in full as long as Applied Materials’ shares trade at $13.00 at expiration. The premium received today offers limited protection to investors against potentially devastating losses inherent in any short straddle combination. Straddle-sellers lose the full premium pocketed on the trade and start to incur losses on the transaction if shares of the underlying stock rally above the upper breakeven price of $14.25, or if shares slip beneath the lower breakeven point at $11.75, by expiration day next month.

M – Macy’s, Inc. – Options strategists employed diverse tactics on the department store operator today after the firm posted a 2.6% increase in sales for the month of May in 2010 as compared to sales realized in the same month last year. Macy’s also revealed a 1.4% increase in same-store sales in the four weeks ended May 29, 2010. Shares of the underlying stock rallied 2.95% this morning to touch an intraday high of $23.06, but surrendered earlier gains this afternoon to stand 0.15% lower on the day to $22.37 as of 12:17 pm (ET). Bullish options players enacted bullish risk reversals on the department store operator while investors expecting Macy’s shares to stagnate sold straddles in the July contract. Investors keeping an eye on upside potential sold 1,324 in-the-money puts at the July $23 strike for an average premium of $1.55 apiece in order to buy 1,324 calls at the same strike for a premium of $1.30 each. Risk-reversal plays pocket a net credit of $0.25 per contract, and keep the full amount received if Macy’s shares settle at or above $23.00 at expiration. Additional profits accumulate should shares rally above and beyond $23.00. In contrast, straddle-sellers are betting shares are likely to settle at $23.00 at expiration. Investors sold approximately 1,600 calls and 1,600 puts at the July $23 strike to take in a gross premium of $2.85 per contract. Straddlers keep the entire premium if Macy’s shares settle at $23.00 at expiration next month. The premium received erodes down to $0.00 and turns into increasing losses if shares shift away from strike price selected. Losses start to accumulate for straddle-sellers if shares of the underlying stock rally above the upper breakeven price of $25.85, or if shares slump beneath the lower breakeven point at $20.15, ahead of expiration day in July.

KR – The Kroger Co. – Options investors are snatching up both call and put options on the nation’s largest traditional grocery retailer today two weeks ahead of the firm’s scheduled June 17 first-quarter earnings announcement. June contract options expire the day after the firm reports earnings. Kroger’s shares edged 0.70% lower just before 12:00 pm (ET) to stand at $19.92. Investor demand for calls and puts in the June contract lifted the stock’s overall reading of options implied volatility 7.3% to 33.40% in the first half of the trading day. Investors taking a bearish stance on the grocer purchased 3,200 puts at the June $19 strike for an average premium of $0.18 each. Another 2,700 now in-the-money puts were picked up at the June $20 strike for an average premium of $0.45 apiece. In-the-money put buyers make money if, by expiration, Kroger’s shares fall another 1.85% to breach the average breakeven price of $19.55. The lower-strike put purchasers are prepared to profit if shares of the underlying stock drop 5.5% to trade below the breakeven point to the downside at $18.82 by expiration. In contrast to bearish put buying, investors with a rosier outlook purchased call options. Optimistic individuals picked up 3,500 calls at the June $20 strike for an average premium of $0.61 each, thus positioning for KR’s shares to exceed $20.61 by June expiration. Uber-bulls hoping for a sharp rally in Kroger’s share price purchased 1,000 calls at the higher June $22 strike for just $0.05 per contract. Shares must rise at least 10.7% to surpass the breakeven point on the June $22 strike calls at $22.05.

HOLX – Hologic, Inc. – The manufacturer and supplier of medical imaging systems and diagnostic and surgical products was upgraded to ‘buy’ from ‘hold’ and tagged with a 12-month target share price of $20.00 at Needham & Co. today, sending its share price up 1.70% to $14.97 just ahead of 11:45 am (ET). One bullish investor opted to roll a long call stance forward to a higher strike price in order to position for continued share price appreciation through July expiration. The trader sold roughly 8,985 calls at the June $15 strike for a premium of $0.40 apiece in order to get long approximately the same number of calls at the higher July $17.5 strike for a premium of $0.60 each. The net cost of the calendar roll – in isolation – amounts to $0.20 apiece and positions the investor to make money should Hologic’s shares surge more than 18.2% over the current price of $14.97 to surpass the breakeven point at $17.70 by July expiration. It is unclear how much the investor originally paid to establish the long call stance at the June $15 strike. However, looking at call open interest at that strike, it appears the trader might have initially paid premium of $1.10 to $1.15 per contract to purchase the calls back on December 18, 2009, when shares of the underlying stock were trading at a volume-weighted average price of $13.46. If these circumstances are accurate, shares must rally much more significantly for the investor to recoup losses on the original call purchase.

XLF – Financial Select Sector SPDR – Bearish sentiment on the XLF, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index, appeared in the first 30 minutes of the trading session as one pessimistic options player purchased a put butterfly spread in the July contract. Shares of the fund commenced the session slightly higher than Wednesday’s close, but surrendered the morning’s gains ahead of 11:00 am (ET) to trade flat at $14.82. The bearish investor purchased 20,000 puts at the July $15 strike for a premium of $0.78 apiece [wing 1] and picked up another 20,000 puts at the lower July $13 strike for a premium of $0.24 each [wing 2]. Finally, the body of the butterfly involved the sale of 40,000 puts at the July $14 strike for a premium of $0.43 a-pop. The net cost of enacting the butterfly spread amounts to just $0.16 per contract and represents the maximum loss potential faced by the investor. The spread trader stands ready to accrue maximum potential profits of $0.84 per contract should shares of the underlying fund decline 5.5% from the current price of $14.82 to settle at $14.00 at expiration next month. Shares of the XLF must slip beneath the upper breakeven price of $14.84 before the investor starts to make money. The transaction is a very efficient way for the trader to establish a pessimistic viewpoint on the ETF because the maximum potential loss of $0.16 per contract pales in comparison to maximum potential profits of $0.84 apiece. The reward-to-risk ratio in this case is greater than 5-to-1.

LVS – Las Vegas Sands Corp. – The owner and operator of gambling resorts around the world enticed early-bird bullish investors to the options field today after analysts at Morgan Stanley upgraded LVS to ‘overweight’ and upped their target share price on the stock to $29.00. Las Vegas Sands’ shares rallied during Wednesday’s session on news its Singapore resort is set to surpass analysts’ cash-flow projections this year. Shares of the underlying stock continued higher this morning, rallying more than 3.50% to $25.10 as of 11:05 am (ET), to stand $1.47 below LVS’s current 52-week high of $26.57 attained back on April 26, 2010. Investors hoping to see shares blow through the current 52-week high by June expiration purchased out-of-the-money call options. Traders picked up roughly 2,700 calls at the June $26 strike for an average premium of $0.59 apiece. Call-buyers at this strike price make money if, by expiration, shares of the casino company exceed $26.59. Optimism spread to the higher June $27 strike where investors coveted some 6,500 call options at an average premium of $0.34 per contract. Las Vegas Sands’ shares must rally at least 8.9% from the current price of $25.10 in order for June $27 strike call buyers to start to accrue profits above the average breakeven price of $27.34.

AVNR – Avanir Pharmaceuticals, Inc. – Shares of the biopharmaceutical company engaged in acquiring, developing and commercializing therapeutic products for the treatment of central nervous system disorders are up more than 5.15% this morning to stand at $2.65 as of 10:55 am (ET). The AVNR ticker symbol popped onto our ‘hot by options volume’ market scanner after one options investor initiated a bullish stance on the stock. It appears the optimistic individual sold 2,500 puts outright at the July $2.5 strike to take in an average premium of $0.26 per contract. The investor keeps the full premium received as long as shares of the underlying stock trade above $2.50 through July expiration. The short sale of puts implies the trader is happy to have shares of the Abreva maker put to him at an effective price of $2.24 each should the puts land in-the-money at expiration next month.


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