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BP Shares Hemorrhage, Options Activity Explodes

Today’s tickers: BP, ALKS, MO, NFLX, APC, MDCO, LVS, TIVO, CAR, MDRX & XLK

BP – BP PLC – Options volume on beleaguered oil company, BP PLC, is fast approaching 750,000 contracts, fueling a more than 79.7% upward shift in the stock’s overall reading of options implied volatility to a 5-year high of 120.96%. Utter pandemonium erupted in BP options after the firm’s shares plunged 16.00%, crashing straight through the now defunct 52-week low of $34.15, to touch an intraday and new 5-year low of $29.13. Catalysts for the squall are not difficult to come by with analysts suggesting an increased probability BP will cut dividends to help pay for the disaster in the Gulf of Mexico. The first half of the trading day was relatively calm with shares increasing 1.62% over the opening price of $33.90 to an intraday high of $34.45. But, by noon time on the east coast, BP’s shares had already begun their descent. Options activity on the stock can easily be described as frenzied as volume continues to grow in both call and put options across multiple expiries. Investors are displaying a slight preference for put options, with roughly 1.35 put contracts exchanged to each single call option in play thus far in the trading day. Put buyers are out in full force, scooping up at least 1,600 of the bearish contracts at the June $17.5 strike for an average premium of $0.25 apiece. Buying interest in the front month is heaviest in now in-the-money puts at the June $30 strike where more than 43,000 contracts changed hands by 3:05 pm (ET). Investors buying these contracts now face an asking price of $2.85 apiece. Other pessimistic players cast doubts for a near-term recovery by selling call options. Less than 60 minutes remain in the current trading session. Option volume on BP has surpassed 710,000 contracts and continues to steadily rise.

ALKS – Alkermes, Inc. – A three-legged bullish options combination trade enacted on biotechnology company, Alkermes, Inc., this afternoon indicates long-term optimism by one savvy strategist today. Alkermes’ shares are up 1.10% to $11.00 as of 3:12 pm (ET), but earlier rallied more than 4.75% to touch an intraday high of $11.40. The bullish player essentially sold short a chunk of put options in order to finance the purchase of a debit call spread in the November contract. The trader picked up 5,000 calls at the November $12.5 strike for a premium of $1.60 apiece and sold the same number of calls at the higher November $15 strike for $0.65 each. Finally, the third leg of the transaction involved the sale of 5,000 puts at the November $10 strike for $1.35 a-pop. The investor responsible for the trade pockets a net credit of $0.40 per contract, and keeps the full credit received as long as Alkermes’ shares trade above $10.00 through November expiration day. Additional profits accumulate if shares of the biotech firm rally above $12.50, with maximum potential gains of $2.90 per contract – including the credit received today – available to the trader should shares of the underlying stock surge more than 31.5% to exceed $15.00 by expiration.

MO – Altria Group, Inc. – Rampant put buying ensued on Altria Group, Inc. late in the trading day with shares of the owner of Phillip Morris International, the cigarette manufacturer, down 0.65% to $20.07 just before 3:20 pm (ET). Yesterday the largest U.S. tobacco company sold $800 million of 5.25-year notes. Investors wary of continued erosion in the price of Altria’s shares through July expiration scooped up roughly 40,000 puts at the July $19 strike for an average premium of $0.34 per contract. Investors holding these contracts make money – or alternatively realize downside protection on a long underlying stock position – if shares trade beneath the average breakeven price of $18.66 by expiration day next month. Investors seeking more immediate protection purchased 10,000 puts at the higher July $20 strike for an average premium of $0.66 each. Higher-strike put players face an average breakeven share price of $19.34. The sudden surge in demand for put options on MO lifted the stock’s overall reading of options implied volatility 12.8% to 27.27% by 3:27 pm (ET).

NFLX – Netflix, Inc. – Analysts at JPMorgan raised their target share price on Netflix to $133 from $110 today sending the provider of DVD-rental-by-mail service soaring 5.05% higher to $115.91 as of 1:08 pm (ET). Earlier shares surged 6.83% to touch an intraday high of $117.87, which is just $1.63 below the stock’s current 52-week high of $119.50 attained back on May 13, 2010. Options traders littered Netflix with various bullish strategies to position for continued appreciation in the price of the underlying shares. Near-term optimists purchased 1,200 calls at the June $120 strike for an average premium of $2.48 apiece. Call buyers at this strike price profit only if NFLX shares rally above the average breakeven point to the upside at $122.48 by June expiration. Other bullish individuals sold 2,100 puts at the June $110 strike for a premium of $3.20 per contract. Put sellers keep the premium received on the trade if shares trade above $110.00 through expiration day. Investors short the puts are apparently happy to have shares of the underlying stock put to them at an effective price of $106.80 in the event that Netflix shares slip and the puts land in-the-money at expiration. Finally, medium-term bullishness took the form of a debit call spread in the September contract. One trader picked up 2,100 in-the-money calls at the September $115 strike at an average premium of $16.19 each, and sold the same number of calls at the higher September $125 strike for an average premium of $11.47 a-pop. The net cost of the debit call spread amounts to $4.72 per contract. Therefore, the investor responsible for the transaction stands ready to accrue maximum potential profits of $5.28 per contract as long as Netflix shares jump 7.85% over the current price of $115.91 to exceed $125.00 ahead of expiration day in September.

APC – Anadarko Petroleum Corp. – Bullish options strategists dominated activity on the independent oil and gas exploration and development company today as shares of Anadarko Petroleum Corp. rebounded 1.87% to stand at $43.60 by 12:17 pm (ET). Investors expecting shares of the underlying stock to continue to gain ground over the next several months purchased call spreads in the November contract. It looks like optimistic options players picked up approximately 15,000 calls at the November $47.5 strike for an average premium of $4.79 apiece and sold about the same number of calls at the higher November $57.5 strike for an average premium of $1.62 each. The average net cost incurred by call spreaders at these strike prices amounts to $3.17 per contract. Thus, investors long the spread are prepared to accrue maximum potential profits of $6.83 per contract as long as Anadarko’s shares surge 31.9% over the current price of $43.60 to exceed $57.50 ahead of November expiration. APC-bulls start to make money only if shares rally 16.2% to trade above the average breakeven price of $50.67 ahead of expiration day in six months time.

MDCO – Medicines Co. – Global pharmaceutical company, Medicines Co., popped onto our ‘hot by options volume’ market scanner in the first half of the trading session after one investor utilized both call and put options to establish a bullish stance on the stock. Medicines’ shares increased 0.40% today to arrive at $7.47 by 12:38 pm (ET). It looks like the optimistic options player sold 5,000 puts at the October $5.0 strike for a premium of $0.35 apiece in order to halve the cost of buying 5,000 calls at the nearer-term July $10 strike for a premium of $0.70 each. The net cost of getting long the out-of-the-money calls is reduced to $0.35 per contract, thus positioning the investor to make money if shares of the underlying stock surge 38.55% over the current price to exceed the effective breakeven point on the calls at $10.35 by July expiration. The short sale of the puts implies the investor does not expect MDCO shares to plummet through $5.00 by October expiration. But, if the stock were to plunge 33% from the current price to push the puts in-the-money, the trader is obliged to have Medicines’ shares put to him at an effective price of $4.65 each. We note that shares of the pharmaceutical company have not traded under $5.00 in the last five years, but shares did rally above $10.35 as recently as March 17, 2010.

LVS – Las Vegas Sands Corp. – Casino resort operator, Las Vegas Sands Corp., attracted near-term bullish options traders once again with shares of the underlying stock up 3.85% at $24.88 just after 12:25 pm (ET). Earlier in the session LVS shares rallied more than 4.20% to touch an intraday high of $24.97. Investors itching for continued upward momentum in Las Vegas Sands’ share price picked up 5,600 calls at the June $25 strike for an average premium of $0.77 apiece. Call buyers at this strike price make money as long as shares surpass the average breakeven price of $25.77 by June expiration. Buying interest spread to the higher June $26 strike where more than 3,000 calls were coveted at an average premium of $0.39 per contract. Higher-strike call buyers stand ready to accrue profits should shares of the casino operator increase 5.7% from today’s high of $24.97 to exceed the average breakeven point to the upside at $26.39 by expiration day.

TIVO – TiVo, Inc. – Shares of the subscription-based provider of digital-video recording services fell as much as 7.8% today to reach a new 52-week low of $7.10. TiVo’s shares recovered slightly, trading lower by 5.85% to $7.25, as of 12:51 pm (ET). Long-term options activity on the stock suggests some traders expect shares to rebound by expiration in January 2012. It looks like one trader initiated a bullish risk reversal by selling 4,000 puts at the January 2012 $5.0 strike for a premium of $1.51 each, spread against the purchase of the same number of calls at the higher January 2012 $12.5 strike for a premium of $1.83 apiece. The net cost of the spread amounts to $0.32 per contract. The investor responsible for the transaction profits only if TiVo’s share price jumps 77% from the current price of $7.25 to surpass the average breakeven point to the upside at $12.82 by expiration day in January 2012.

CAR – Avis Budget Group, Inc. – Bullish trading in Avis Budget Group, Inc. options is apparent this morning with shares of the car and truck rental services provider rallying 4.30% to $10.44 as of 10:50 am (ET). One early-bird optimist purchased a plain-vanilla debit call spread on the stock in order to position for continued appreciation in the price of the underlying shares through August expiration. The investor picked up 2,000 now in-the-money calls at the August $10 strike at an average premium of $1.76 apiece and sold the same number of calls at the higher August $12.5 strike for roughly $0.76 each. The average net cost of initiating the spread amounts to $1.00 per contract. Thus, the trader responsible for the bullish play is prepared to profit if CAR’s shares rally above the average breakeven price of $11.00 ahead of expiration day. Maximum potential profits of $1.50 per contract accumulate for the investor should shares of the underlying stock surge 19.7% over the current price of $10.44 to exceed $12.50 by August expiration.

MDRX – Allscripts-Misys Healthcare Solutions, Inc. – Shares of the provider of clinical software, services, information and connectivity solutions to physicians and other healthcare providers fell as much as 10.48% to an intraday low of $16.49 this morning on news the firm agreed to purchase Atlanta-based health-care information technology company, Eclipsys Corp., for $1.3 billion in stock. Medium-term options trading on the stock indicates optimism that Allscipts’ shares will rebound by September expiration. Investors anticipating a recovery in share price purchased 1,500 calls at the September $17.5 strike for an average premium of $1.22 apiece. Call buyers make money as long as shares of the underlying stock jump 13.5% from an intraday low of $16.49 to rally above the average breakeven point to the upside at $18.72 by September expiration day. News of the Eclipsys Corp. acquisition lifted MDRX’s overall reading of options implied volatility 10.58% to 45.17% this morning.

XLK – Technology Select Sector SPDR – Shares of the XLK, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Technology Select Sector of the S&P 500 Index, rallied more than 1.05% to $21.38 in the first couple of hours of the trading day. Long-term options activity initiated by one investor this morning suggests greater volatility in the price of the underlying fund through January 2011 expiration. It looks like the trader purchased a straddle to prepare for a significant shift in the XLK’s share price by the start of next year. We note the straddle traded to the middle of the market but was closer to the offer, which means the transaction is more probably a long straddle, but does not rule out the possibility the investor enacted a short straddle. If the trader did sell the straddle he likely expects shares of the ETF to settle at $21.00 by expiration. But, in the long straddle scenario, the investor purchased 4,700 in-the-money calls at the January 2011 strike for a premium of $1.87 each, and picked up 4,700 puts at the same strike price for a premium of $1.87 apiece. Gross premium paid for the straddle amounts to $3.74 per contract. The parameters of this strategy position the investor to make money as long as the price of the underlying fund shifts dramatically by expiration day. Profits start to accumulate if shares rally above the upper breakeven price of $24.74, or if shares decline through the lower breakeven point at $17.26, by January 2011 expiration. However, if the straddle was sold rather than purchased, the investor keeps the gross premium of $3.74 per contract if shares of the XLK settle at $21.00 at expiration next year.


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