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Strangle Strategist Targets MSG Ahead of LeBron James’ Decision

Today’s tickers: MSG, MOS, LUV, ILMN, GHDX, FCN, KBH, LCC & CSX

MSG – Madison Square Garden, Inc. – Speculation as to which team will acquire the larger-than-life LeBron James continues to mount ahead of the basketball superstar’s Thursday night announcement on ESPN. One options investor put uncertainty in the marketplace to good use by purchasing a strangle on Madison Square Garden, Inc., the fully-integrated sport, entertainment and media business, which, among other things, owns and operates sports franchises including the New York Knicks. MSG’s shares are currently up 1.5% to $20.58 as of 2:50 pm (ET), but earlier surged 5.4% to an intraday high of $21.36. MSG edged onto our ‘hot by options volume’ market scanner after the trader purchased a long strangle in the July contract. The investor appears to be positioning for a dramatic shift in the price of the underlying shares ahead of July expiration. The options strategist purchased a 2,000-lot strangle, buying 2,000 calls at the July $22.5 strike for a premium of $0.60 apiece, and buying 2,000 puts at the lower July $20 strike for a premium of $0.50 each. The net cost of the transaction amount to $1.10 per contract and prepares the strangle-player to benefit nicely as long as MSG’s shares take off running in either direction. Profits are available to the investor if shares rally straight through the current 52-week high on the stock of $22.95 to trade above the effective upper breakeven price of $23.60. If LeBron James were to join the NY Knicks it has been said the value of the MSG franchise will increase significantly. The strangler will certainly benefit if the Knickerbockers turn out to be James’ new teammates because MSG shares are likely to soar. Conversely, the options strategist is poised to profit to the downside should shares trade below the lower breakeven price of $18.90 ahead of expiration day. Perhaps the investor is expecting shares of the underlying stock to suffer if LeBron ends up with a different team. Either way, the investor responsible for the strangle strategy is positioned to benefit from a wayward shift in the price of the underlying stock. But, the trader will lose the full premium paid, $1.10 per contract in this case, if shares trade within the confines of the strike prices described at expiration. Finally, the investor may profit if implied volatility on MSG, which is currently up 6.1% to 54.46%, continues to appreciate. Higher implied volatility will increase premium on both call and put options and allow the investor to bank profits, should he choose to do so, by selling the contracts for more than the net cost of $1.10 paid to initiate the transaction.

MOS – The Mosaic Co. – Shares of the producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture are trading higher by more than 7.3% to stand at $42.00 by 1:45 pm (ET) inspiring one long-term bullish trader to purchase a plain-vanilla debit call spread in the December contract. The options strategist picked up 5,000 calls at the December $45 strike for an average premium of $3.01 apiece, and sold the same number of calls at the higher December $55 strike for an average premium of $0.88 each. Average net premium paid to establish the spread amounts to $2.13 per contract. Thus, the responsible party is poised to profit should Mosaic’s shares surge 12.2% to surpass the effective breakeven point on the spread at $47.13 by December expiration. The investor stands ready to amass maximum potential profits of $7.87 per contract should the price of the underlying shares jump 30.95% from the current price of $42.00 to exceed $55.00 by expiration day in six months time. The potash producer’s shares last traded above $55.00 back on April 21, 2010.

LUV – Southwest Airlines Co. – The passenger airline’s shares surged 4.6% to $11.12 this afternoon after the firm revealed passenger revenue per available seat mile jumped approximately 24% in June compared to the same month last year. One options player reacted by taking a bullish stance on the stock in the August contract. The investor sold short 10,000 put options at the August $10 strike to pocket premium of $0.25 per contract. The put seller walks away with the full premium received, that’s a total of $250,000, if Southwest’s shares exceed $10.00 through expiration day next month. The outright sale of the put options indicates the responsible party is happy to have shares of the underlying stock put to him at an effective price of $9.75 per contract should the puts land in-the-money at expiration. Options implied volatility on the stock fell 7.3% to 38.01% by 2:00 pm (ET).

ILMN – Illumina Inc. – Plain-vanilla call buying activity on the biotechnology firm today indicates options investors are positioning for continued appreciation in the price of the underlying stock through August expiration. Illumina’s shares rallied 2.50% during the session to $43.53 by 2:20 pm (ET). Bullish traders purchased approximately 2,700 calls at the August $45 strike for an average premium of $1.65 per contract. Investors long the calls make money if Illumina’s shares increase another 7.15% from the current price of $43.53, surpass the current 52-week high on the stock at $45.72, and trade above the average breakeven price of $46.65 by August expiration.

GHDX – Genomic Health, Inc. – The biotechnology company, which focuses on developing genomic-based clinical diagnostic tests for cancer that allow physicians and patients to make individualized treatment decisions, popped up on our ‘hot by options volume’ market scanner due to bullish activity in the August contract. Genomic Health’s shares fell 2.05% in the first half of the session to touch down at an intraday and new 52-week low of $12.26, but the stock bounced up off the day’s low point and is currently 2.40% higher to stand at $12.82 by 2:05 pm (ET). It looks like one bullish individual populating GHDX today feels Genomic Health’s shares have bottomed out and are unlikely to head much lower ahead of August expiration day. The optimistic investor sold short 2,000 puts at the August $12.5 strike to take in premium of $0.80 per contract. The put seller keeps the full premium received on the trade as long as Genomic’s shares exceed $12.50 through expiration next month. The trader is obliged to have shares of the underlying stock put to him at an effective price of $11.70 each if the puts land in-the-money at expiration.

FCN – FTI Consulting, Inc. – Shares of business advisory firm, FTI Consulting, Inc., plunged 27.1% to touch an intraday and new 52-week low of $31.53 after the company cut its outlook for the year and revealed second-quarter results are likely to disappoint. The stock is currently trading 26.45% lower on the day to stand at $31.83 as of 11:10 am (ET). The consulting company, and provider of forensic accounting in the Madoff Ponzi scheme, said Tuesday it expects to earn $0.50 to $0.55 a share in the second quarter, which is drastically lower than the average earnings of $0.75 a share anticipated by analysts. FTI Consulting also slashed its full year earnings outlook estimated in February from $3.00 to $3.25 a share to its new forecast of $2.50 to $2.80 per share. The firm’s significantly reduced outlook for the year inspired analysts at both Oppenheimer & Co. and William Blair & Co. to cut their ratings on FCN to ‘market perform’ from ‘outperform’ today. Options investors were quick to initiate near-term bearish transactions on the stock. Traders bracing for continued erosion in the price of the underlying stock purchased at least 1,100 puts at the July $30 strike for an average premium of $0.33 per contract. Put buyers at this strike are positioned to profit should shares decline 5.9% from the intraday low of $31.53 to breach the average breakeven point to the downside at $29.67 by July expiration. Other pessimistic players sold 1,000 calls at the July $35 strike to pocket an average premium of $0.68 per contract. Call sellers keep the full premium received on the transaction as long as FCN’s shares fail to trade above $35.00 by expiration day. The overall reading of options implied volatility on the stock shot up 41.6% to 51.47% by 11:25 am (ET).

KBH – KB Home – Investors are piling into call options on the homebuilding firm this morning with shares of the underlying stock rallying more than 3.65% to $10.77 by 10:55 am (ET). Bullish options traders expecting continued appreciation in the price of KBH’s shares coveted approximately 9,500 calls at the August $12 strike for an average premium of $0.32 per contract. Call buyers make money if, by August expiration day, the homebuilders’ shares jump 14.4% over the current price of $10.77 to surpass the average breakeven point to the upside at $12.32. Frenzied activity in August $12 strike call options sticks out like sore thumb as previously existing call open interest at that strike stands at a meager 729 contracts. As of 11:00 am (ET), it looks like more than 16,800 call options have changed hands at the August $12 strike price.

LCC – US Airways Group, Inc. – Options investors are building up bullish positions on US Airways Group today with shares of the underlying stock soaring 9.15% higher to $8.82 by 11:30 am (ET). LCC’s shares jumped after the airline reported its passenger revenue per available seat mile surged 22% in June. Traders anticipating US Airways’ shares will continue to rally flocked to the August contract to purchase call options on the stock. Bulls bought approximately 8,600 calls at the August $10 strike for an average premium of $0.44 apiece. Investors profit if LCC’s shares climb 18.4% from the current price of $8.82 to trade above the average breakeven point at $10.44 by August expiration day. It looks some options traders expecting to see LCC’s shares rally sharply during the current session got ahead of the game and started purchasing August $10 strike calls during Tuesday’s session. First-mover advantages of buying the calls yesterday are clear as investors paid an average premium of $0.33 apiece for the same contracts.

CSX – CSX Corp. – Shares of the provider of rail-based transportation services are up 2.00% to $48.41 as of 11:40 am (ET) inspiring what appears to be a change of heart for one previously bearish options strategist. It looks like the investor booked profits today by unraveling a well-timed debit put spread originally purchased on June 28, 2010, when CSX shares were trading at a volume-weighted average price of $52.83.CSX Corp.’s shares plunged 11.00% from an intraday high of $52.95 on June 28, 2010, to an intraday low of $47.08 during yesterday’s trading session. The investor appears to have established the put spread at exactly the right time, buying the roughly 3,000-lot July $49/$46 debit spread for an average net premium of $0.44 per contract back on June 28. Today the trader unraveled the bearish position, selling-to-close the spread for an average net premium of $1.295 per contract, signaling perhaps the expectation that CSX shares will continue to rebound. Net profits on the closing sale amount to $0.855 per contract.


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