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Apollo Calls Remain Active on Mixed Views

Today’s tickers: APOL, ERTS, MMR, BAC & RIG

APOL – Apollo Group – A second day of gains for the online education company has shares touching $50 this morning. The start of July saw the company reach its 52-week low at $42.41. Option trading has centered on call options at the August $50 and $55 strikes but the picture is mixed. At the higher of the two strikes where only about 1,000 open positions exist, a chunk of 5,700 call options traded to the bid of 55 cents leading us to believe that this investor is raising his hand over the likelihood of exponential gains for the stock. This investor has either recently bought the stock in which case is writing a covered call, or is simply skeptical of a further 10% gain in Apollo’s share price from here. Buyers also showed up at the $50 strike expiring next month where buying rights to buy shares jumped from 13 cents to 56 cents. Call volume at the strike of almost 2,000 lots easily tops the prevailing open interest of 1,400 contracts.

ERTS – Electronic Arts – Despite a reduction in one the earnings projection from on analyst today, shares in the video gamer are higher at $14.91 possibly on account a groundswell of bullish call option activity. Investors awaiting an August 4 earnings report have spent premiums of around 40 cents to lock into bullish expectations in the event the company pulls off a decent report or perhaps a new title release in a dull climate for consumer demand. Option traders flocked to the August $16 strike, which currently shows odds of successfully landing in-the-money by expiration of one-in-three. Shares opened lower before today’s rally as call activity hit the screens. Options implied volatility has been on the rise of late and is again higher today by around 10% at 47%. That would indicate rising uncertainty surrounding prospects for the share price and is typical ahead of earnings.

MMR – McMoRan Exploration Co. – Investors didn’t stick around to ask many questions following the seventh consecutive quarterly loss at this oil and gas explorer. McMoRan specializes in ultra-deepwater exploration in search of oil and gas, which of course is not the most popular of investments targets following the Gulf of Mexico spill in April. McMoRan emphasized that it doesn’t operate in this segment but does operate in a high-risk operation some 10 miles off the Louisiana coast in the Davy Jones shelf exploration. A 23-cent per share loss compares to $1.40 a year ago with the company citing a 12% boost to revenues coupled with higher prices. Still, investors were unimpressed and sent shares almost 6% down to $10.16. Notable put options activity occurred at the $9.00 strike in the November contract, with volume of 4,300 lots comparing to existing open interest of one-tenth of today’s trading activity. Investors paid a premium of $1.13 to preserve rights to sell the shares at the fixed price of $9.00 by expiration after the next earnings cycle. Already the same selling rights have jumped to a 10% premium as pressure piles on the company in an unfavorable climate. Options implied volatility remained at 70% post earnings.

BAC – Bank of America Corp. – The drama doesn’t seem to stop at Bank of America after last week’s earnings report helped pole-axe the stock below the early July lows. Today has seen another 4.2% off the value of the company and at the day’s worst level of $13.30 saw put buyers come in adding to the bearish tone. Using the November contract investors honed in on the $10.00 strike paying around 40 cents to lock into selling rights, while in-the-money puts commanded a $1.20 premium. However, at least one option strategist doesn’t think the bearishness will remain in place forever and used what appears to be a reversal combination to play out his view. Using January 2012 expiration options around 10,000 calls appear to have been bought at the $15.00 strike in exchange for the same amount of sold puts. The in-the-money nature of the put side leaves the investor taking a $1.50 per contract credit in this case and is clearly positioning for better times ahead. Option implied volatility has hardly budged since earnings last week and today remains lofty at 44%. The 52-week low stands at $11.89.

RIG – Transocean Ltd. – Shares in the Geneva-based owner of drilling rigs slid again today, this time after Kenneth Feinberg said that just because someone claims against BP’s compensation fund, it wouldn’t preclude them from suing other parties. Transocean’s share price is 7% lower at $48.45 with investors seemingly hell-bent on diving to test the 52-week low of $41.88. Bullish call options are the center of attention in the November series at the $55.00 strike where 5,900 lots have traded at declining premiums of between $4.80 and $3.60 as the calls continue to move further away from the money. The majority appear to have been bought and adding to open interest that doubled last week to around 10,000. It could well be the case that shares will recover but today’s price decline favors call selling for a fast buck.


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