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Bulls Go Bananas for Chiquita Call Options

Today’s tickers: CQB, BX, BAC, SWY, LLY, NFLX, MHS & UPS

CQB – Chiquita Brands International, Inc. – Shares of the marketer and distributer of bananas and other fresh produce surged 5.2% this afternoon to an intraday high of $12.68, giving bullish players a healthy appetite for call options on the stock just one week before the firm is slated to report second-quarter financial results. Chiquita Brands International popped up on our ‘hot by options volume’ market scanner after investors coveted approximately 2,900 calls at the now in-the-money November $12.5 strike for an average premium of $1.52 a-pop. Call buyers make money if, by expiration, Chiquita’s shares jump 10.6% over today’s high of $12.68 to trade above the average breakeven point to the upside at $14.02. CBQ shares last traded above $14.02 back on June 15, 2010, but traded as high as $16.84 on April 26, 2010. Investors long the calls are well positioned to accumulate significant profits should the price of the underlying shares rebound to the value recorded at the end of April.

BX – The Blackstone Group LP – Activity observed in LEAPS on the global asset manager and provider of financial advisory services suggests one strategist expects Blackstone’s shares to rise significantly by expiration in January 2012. BX’s shares are up 3.9% at $10.71 as of 3:15 pm (ET), but earlier increased as much as 5.00% to secure an intraday high of $10.83. It looks like the investor enacted a three-legged bullish transaction, selling put options to partially finance the purchase of a debit call spread. The trader sold 4,700 puts at the January 2012 $10 strike for premium of $2.30 each, purchased 4,700 calls at the January 2012 $10 strike at $2.60 in premium apiece, and finally sold 4,700 calls at the higher January 2012 $17.5 strike for a premium of $0.40 a-pop. The transaction yields a net credit of $0.10 per contract, which is safe in the investor’s wallet as long as Blackstone’s shares trade above $10.00 at expiration day. Additional profits accrue above a share price of $10.00, with maximum potential profits of $7.60 per contract available to the trader if the price of the underlying stock jumps 63.3% to trade above $17.50 by expiration day in January 2012. Bullish trading in options on the world’s biggest buyout firm arrived after the release of its second-quarter earnings report before today’s open. The company posted a 13% increase in second-quarter earnings.

BAC – Bank of America Corp. – One long-term bullish options investor appears to have purchased a large-volume ratio call spread in the January 2011 contract to position for Bank of America’s shares trade at a substantially higher price by expiration day. BAC’s shares rallied nearly 4.00% during the first half of the trading session to an intraday high of $13.89, but are currently up a lesser 2.75% in late afternoon trading to stand at $13.73 as of 2:50 pm (ET). It looks like the investor purchased 20,000 calls at the January 2011 $15 strike for an average premium of $1.10 each, and sold 40,000 calls at the higher January 2012 $17.5 strike for premium of $0.40 apiece. The net cost of the transaction amounts to $0.30 per contract, thus positioning the trader to make money if Bank of America’s shares rally 11.4% over the current price of $13.73 to surpass the effective breakeven point on the spread at $15.30 by January 2011 expiration. The investor stands ready to accumulate maximum potential profits of $2.20 per contract should BAC’s shares jump 27.45% in the next 6 months to settle at $17.50 at expiration next year. The overall reading of options implied volatility on the financial services firm fell 8.1% to 35.73% just before 3:00 pm (ET).

SWY – Safeway, Inc. – The national grocery store operator popped up on our ‘hot by options volume’ market scanner today after one bearish player purchased a large chunk of put options in the September contract. Safeway’s shares are down more than 2.6% to $19.69 this afternoon after the firm cut its full year earnings forecast and posted a 40% decline in second-quarter net income. The company reported profits of $0.37 a share for the quarter, meeting average analyst expectations, but lowered earnings guidance for 2010 to range from $1.50 to $1.70 a share down from earlier predictions of $1.65 to $1.85 a share. One pessimistic individual prepared for continued erosion in the price of the underlying shares by picking up 20,000 puts at the September $19 strike for an average premium of $0.55 per contract. The trader may be buying the put options to protect the value of a large position in Safeway shares, or could be initiating an outright bearish bet on the likelihood of shares of the grocery operator falling further ahead of expiration. Downside protection, if the puts were purchased as insurance, or otherwise profits start to accumulate if Safeway’s shares decline 6.3% from the current price of $19.69 to breach the effective breakeven point to the downside at $18.45 by expiration day.

LLY – Eli Lilly & Co. – Options investors are celebrating the pharmaceutical maker’s better-than-expected second-quarter earnings report, released ahead of today’s opening bell, by initiating bullish transactions on the stock. LLY earned $1.24 per share in the second-quarter, easily surpassing average analyst expectations of $1.10 per share. The firm’s shares increased as much as 2.6% at the starting the session to secure an intraday high of $35.85, although the rally has cooled slightly by 11:05 am (ET), with the price of the underlying stock up 0.70% on the day to stand at $35.20. Significant increases in sales of a number of the company’s drugs, such as Zyprexa and Cymbalta, and the firm’s decision to raise its 2010 earnings forecast pushed Eli Lilly’s shares higher today. Optimistic options players populating LLY this morning employed diverse trading strategies. One investor appears to have initiated a credit put spread, selling 1,700 puts at the August $35 strike for an average premium of $0.72 each, and buying the same number of puts at the lower August $33 strike for an average premium of $0.22 apiece. The spread yields a net credit, or maximum profit, of $0.50 per contract. The trader keeps the full credit received as long as shares exceed $35.00 through expiration day next month. However, the responsible party is exposed to losses should shares slip beneath the effective breakeven price of $34.50, with maximum potential losses of $1.50 per contract if the price of the underlying stock settles below $33.00 at expiration day. It is possible the transaction represents an investor closing out a long debit put spread, rather than putting on a riskier credit spread, but both scenarios are bullish plays. Further along, in the September contract, it looks like one optimistic individual initiated a bullish risk reversal, selling approximately 1,500 puts at the September $33 strike for an average premium of $0.43 each in order to purchase the same number of calls at the higher September $36 strike for an average premium of $0.53 apiece. The average net cost of the transaction amounts to $0.10 per contract and positions the trader to make money if Eli Lilly’s shares surpass the effective breakeven price of $36.10 by expiration day in September.

NFLX – Netflix, Inc. – Shares of the provider of DVD-rental-by-mail service fell as much as 11.5% in the first half of the trading day to an intraday low of $105.90 after the firm’s second-quarter sales of $519.8 million failed to meet the average analyst sales forecast of $525.4 million for the quarter. Netflix Inc. shares were cut to ‘hold’ from ‘buy’ with a 12-month target price of $107.00 at Canaccord Genuity Corp. today. Shares are currently down 10.95% to arrive at $106.51 as of 11:35 am (ET). The nosedive in the price of the underlying shares attracted the attention of contrarian options investors. Traders hoping to see NFLX shares rebound ahead of August expiration initiated bullish positions on the stock. It looks like some optimists purchased plain-vanilla debit call spreads, buying approximately 1,000 calls at the August $110 strike for an average premium of $5.29 a-pop, and selling about the same number of calls at the higher August $115 strike for an average premium of $3.66 each. Call-spreaders paid an average net premium of $1.63 per contract, and stand ready to make money should the movie rental provider’s shares rebound 4.80% off the current price of $106.51 to surpass the average breakeven point to the upside at $111.63 by August expiration. Contrarians long the spread may walk away with maximum potential profits of $3.37 per contract if Netflix shares rally 8.00% to trade above $115.00 by expiration day next month.

MHS – Medco Health Solutions Inc. – Contrarians are dominating options trading on Medco Health Solutions today, initiating bullish positions on the stock even though the healthcare company’s shares declined as much as 10.4% this morning to touch down at an intraday and new 52-week low of $47.76. Medco’s shares are currently down a lesser 6.8% to stand at $49.70 as of 12:00 pm (ET). Medco posted second-quarter earnings of $0.83 a share, beating the average analyst forecast of $0.79 a share, before today’s opening bell. Investors expecting Medco’s shares to rebound ahead of August expiration picked up 1,100 calls at the August $50 strike for an average premium of $1.40 apiece. Call buyers at this strike make money if, by expiration, the price of the underlying stock rallies 3.4% over the current price of $49.70 to surpass the effective breakeven point at $51.40. Bullish behavior spread to the higher August $55 strike where traders purchased roughly 1,900 calls for an average premium of $0.32 a-pop. Traders are prepared to profit should the healthcare firm’s shares surge 11.3% to exceed the average breakeven price of $55.32 by August expiration day. Medco’s shares last traded above $55.32 on July 21, 2010.

UPS – United Parcel Service, Inc. – Shares of the provider of services in the package and freight delivery industry jumped 7.15% to an intraday high of $64.31 following the release of better-than-expected second-quarter earnings. The world’s largest package-delivery company earned $0.84 a share in the second quarter, which is greater than the consensus forecast of $0.75 a share, and also raised its full-year earnings estimate to a maximum of $3.45 a share from a previously reported maximum of $3.30 per share. Bulls anticipating continued upward movement in the price of the underlying shares through expiration day next month purchased roughly 2,100 calls at the August $65 strike for an average premium of $0.99 per contract. Investors long the calls make money if shares exceed the average breakeven price of $65.99 by August expiration. Medium-term optimists scooped up 1,700 calls at the October $67.5 strike for an average premium of $1.07 apiece. Shares of the package-deliverer must rally at least another 6.6% in order for call buyers at this strike to start to accrue profits above the average breakeven point of $68.57 by October expiration. Put action at the October $52.5 strike, where more than 6,000 contracts changed hands, appears to be the work of an investor taking profits off the table by buying-to-close a previously established short put stance. It looks like the trader originally sold 6,000 puts at the October $52.5 strike to receive premium of $1.28 per contract back on July 12, 2010, when UPS shares traded at an intraday high of $60.50. The subsequent surge in the value of the shares pushed premium on the puts significantly lower. Thus, it seems the put-seller bought back the contracts today at an average premium of $0.59 each. In this scenario, the trader walks away with net profits of $0.69 per contract. The overall reading of options implied volatility on the stock declined 16.7% to 23.40% following earnings.


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