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Bullish Strategists at Work Ahead of Arena Pharmaceuticals’ Earnings Report

Today’s tickers: ARNA, GENZ, HL, CY, JCP, FR & XLB

ARNA – Arena Pharmaceuticals, Inc. – Options on the biotechnology company are active ahead of the firm’s second-quarter earnings report slated for release after the closing bell this afternoon. Shares rallied as much as 5.15% earlier in the session to an intraday high of $7.54, but are currently trading a lesser 1.95% higher on the day at $7.31 as of 3:35 pm ET. One optimistic investor hoping to see Arena’s shares appreciate ahead of October expiration enacted a bullish risk reversal. The trader appears to have sold roughly 9,000 puts at the October $7.0 strike for an average premium of $2.40 each in order to buy the same number of calls at the October $12.5 strike for an average premium of $0.60 apiece. The investor reels in a net credit of $1.80 per contract on the risk reversal, and keeps the full amount received on the transaction as long as Arena’s shares exceed $7.00 through October expiration. Additional, and potentially unlimited profits, start to accumulate for the trader if Arena’s shares surge 71% to exceed $12.50 by expiration day in October. The credit $1.80 credit pocketed by the investor provides limited protection against losses should Arena’s shares nosedive ahead of expiration. The trader starts to lose money if the price of the underlying stock falls 28.9% to trade beneath the effective breakeven price of $5.20 by expiration day. Options implied volatility on Arena Pharmaceuticals is up 5.5% to 197.15% ahead of earnings.

GENZ – Genzyme Corp. – The biopharmaceutical company, which is currently knee-deep in merger negotiations with Sanofi-Aventis, attracted bullish options investors during the trading session. It looks like one trader initiated a plain-vanilla debit call spread in the January 2011 contract to prepare for the sharp increase in the price of Genzyme’s shares that’s likely to occur if Sanofi-Aventis winds up purchasing – or at least confirming plans to purchase – the drug maker before January 2011 expiration. Genzyme’s shares inched up 0.25% this afternoon to $70.52 as of 3:15 pm ET. The options player picked up approximately 6,000 calls at the January 2011 $70 strike for an average premium of $4.42 each, and sold the same number of calls at the higher January 2011 $75 strike for an average premium of $1.72 apiece. The net cost of putting on the bullish transaction amounts to $2.70 per contract. Genzyme’s shares must rally 3.1% over the current price of $70.52 in order for the trader to start to make money above the average breakeven point at $72.70. The call spreader is poised to accumulate maximum potential profits of $2.30 per contract should Genzyme’s shares surge 6.35% to trade above $75.00 by January 2011 expiration. The investor responsible for the spread will likely lose the full premium paid to purchase the transaction if GENZ is not acquired because the firm’s shares have a more than 24% premium priced in since takeover speculation began.

HL – Hecla Mining Co. – Activity in Hecla Mining Co. LEAPs suggests some investors are taking long-term bullish stances on the stock. Shares of the firm engaged in the discovery, acquisition, development and production of silver, gold, lead and zinc increased as much as 2.60% during the session to secure an intraday high of $5.12. Optimistic options players sold approximately 2,300 puts at the January 2012 $4.0 strike for an average premium of $0.71 per contract. Put sellers keep the full premium received on the transaction as long as Hecla’s shares exceed $4.00 through expiration day in January 2012. Options implied volatility on Hecla Mining Co. declined 3% to 46.33% just before 1:40 pm ET.

CY – Cypress Semiconductor Corp. – Cypress Semiconductor popped up on our ‘most active by options volume’ market scanner today after one big investor initiated a large covered put transaction involving 45,000 puts options and 1,360,000 shares of stock. CY’s shares were down slightly earlier in the trading session, but have since rallied 0.30% to stand at $10.63 as of 1:12 pm ET. It looks like the strategist responsible for this trade sold 45,000 September $10 strike put options with a .31 delta for an average premium of $0.325 each in combination with the sale of 1,360,000 shares for $10.50 apiece. The trader keeps the premium received on the sale of the puts and hopes to have shares put back to him in the event that shares in the semiconductor company are trading below the $10.00 strike price at expiration. However, the short stock position exposes the investor to potentially unlimited losses if shares rally sharply. While the premium received on the sale of the puts acts as a limited buffer against a rising share price, losses do start to build if shares rally above the average breakeven share price of $10.825. Alternatively, the investor could have the shares returned to him at $10.00 each if the put options land in-the-money at expiration. This scenario could yield approximate gains of 8.25% because of the beneficial change in share price from the $10.50 value at which he shorted the stock to $10.00, plus the premium received for selling the put options.

JCP – J.C. Penney Co., Inc. – Shares of the department store operator fell as much as 8.05% this morning to secure an intraday low of $23.43. The sharp pullback in the price of the underlying stock inspired bearish investors to take action in the August contract. One investor purchased a plain-vanilla debit put spread on JCP, while others appear to be selling in- and out-of-the-money calls. JCP’s shares are currently down 6.40% to stand at $23.85 as of 11:55 am ET. The put-spreader purchased 750 now in-the-money puts at the August $24 strike at a premium of $1.16 each, and sold the same number of puts at the lower August $21 strike at a premium of $0.26 apiece. The net cost of the bearish transaction amounts to $0.90 per contract. The investor responsible for the trade makes money as long as JCP’s shares decline another 3.1% from the current price of $23.85 to breach the effective breakeven point to the downside at $23.10 by August expiration. Maximum potential profits of $2.10 per contract are available to the trader should J.C. Penney’s shares plunge 11.95% lower to slip beneath $21.00 by expiration day. As for activity in near-term call options, investors appear to be throwing in the towel on JCP, selling some 1,100 in-the-money calls at the August $23 strike for an average premium of $1.65 each. Call sellers may be ditching previously established bullish positions in order to take available premium off the table, or they could be initiating outright bearish bets that JCP’s shares will continue lower to trade below $23.00 through August expiration. Options implied volatility on the stock is higher by 7.7% to arrive at 46.48% as of 12:00 pm ET.

FR – First Industrial Realty Trust, Inc. – Call options on First Industrial Realty Trust are in demand today with the REIT’s shares rallying as much as 13.05% to an intraday high of $4.94. Investors hoping to see FR’s shares continue to appreciate during the second half of 2010 picked up approximately 2,000 calls at the December $5.0 strike for an average premium of $0.75 per contract. Call buyers at this strike are prepared to profit should shares of the underlying stock rally another 16.4% over today’s high of $4.94 to surpass the effective breakeven point to the upside at $5.75 by expiration day in December. Options implied volatility plunged 16.5% lower to 66.94% today following the firm’s second-quarter earnings report released after the closing bell on Monday.

XLB – Materials Select Sector SPDR ETF – The purchase of a plain-vanilla debit put spread on the XLB, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Materials Select Sector of the S&P 500 Index, indicates one options strategist is bracing for bearish movement in the price of the underlying shares through January 2011 expiration. Shares of the XLB declined 1.70% to $32.31 by 12:35 pm ET. The pessimistic player picked up 10,000 puts at the January 2011 $32 strike for an average premium of $2.35 each, spread against the sale of the same number of puts at the lower January 2011 $28 strike for an average premium of $1.11 apiece. The net cost of establishing the spread amounts to $1.24 per contract. The investor responsible for the transaction may be employing the spread to protect the value of a long position in shares of the fund. If this is the case, downside protection kicks in should the XLB’s shares decline another 4.80% from the current price of $32.21 to breach the effective breakeven point at $30.76 by expiration day next year.


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