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Rumor Mill Generates Options Feeding Frenzy on U.S. Steel Corp.

Today’s tickers: X, BBY, AEO & CREE

X – United States Steel Corp. – Unconfirmed rumors that ArcelorMittal may be interested in buying U.S. Steel at $80.00 per share inspired an all-out options feeding frenzy on the Pittsburgh, PA-based steel producer. U.S. Steel’s shares rallied as much as 6.7% in the first half of the trading session to reach an intraday high of $50.50 as of 11:50 am ET. The churning of the rumor mill, increased demand for the steel maker’s options and the significant move in the price of the underlying stock lifted the overall reading of options implied volatility on U.S. Steel 20.1% to 55.54% just before noon in New York trading. Call options on the stock are the clear favorite today and are changing hands 3.6 times for each single put option in play with investors exchanging nearly 200,000 contracts on U.S. Steel by 12:15 pm ET. Investors initiating bullish stances purchased in- and out-of-the-money call options and sold out-of-the-money puts. The August $50 strike, which currently has volume of 21,200 calls, is the most popular as of early afternoon. At least 9,800 of those call options were purchased for an average premium of $0.82 per contract. Traders positioning for U.S. Steel’s shares to continue higher ahead of Friday’s expiration picked up at least 4,300 calls at the August $55 strike for an average premium of $0.46 each. Another 3,500 calls were coveted at the August $60 strike, while some 3,000 call options were purchased at the August $65 strike price. Investors may or may not intend to hold these positions overnight. It will be interesting to see, by examining changes in open interest at these strikes tomorrow, whether traders are buying into the rumors rather than initiating intraday transactions to take advantage of the feeding frenzy while it lasts. Options traders holding the August $50 strike calls may profit if U.S. Steel’s shares rally above the average breakeven price of $50.82 ahead of expiration in a couple of days. Finally, September $55 strike calls were the hot-ticket item in that expiry. As of 12:30 pm ET, more than 11,700 calls changed hands at that strike, with at least 4,500 of those contracts purchased by investors at an average premium of $1.37 each. Traders long the calls make money if the price of the underlying stock jumps 11.6% over today’s high of $50.50 to surpass the average breakeven price of $56.37 by September expiration.

BBY – Best Buy Co., Inc. – The retailer of consumer electronics popped up on our ‘most active by options volume’ market scanner this morning after one options investor purchased a plain-vanilla debit put spread in the December contract. Best Buy’s shares gained 1.25% early in the session to touch an intraday high of $33.31, but have since cooled, and are currently trading flat on the day at $32.90 just before 11:25 am ET. The purchase of the put spread may be the work of an investor expecting Best Buy’s shares to decline in the second half of 2010. Alternatively, the transaction could represent protective positioning ahead of the firm’s second-quarter earnings report, which is scheduled to be released ahead of the opening bell on September 14, 2010. The options player purchased 3,000 puts at the December $30 strike for an average premium of $1.70 each, and sold the same number of put options at the lower December $25 strike for an average premium of $0.575 apiece. The average net cost of the transaction amounts to $1.125 per contract. Thus, the responsible party is prepared to make money, or realize downside protection, if Best Buy’s shares plunge 12.2% from the current price of $32.90 to breach the average breakeven point on the spread at $28.875 by December expiration day. Maximum available profits of $3.875 per contract are available should BBY’s shares tumble 24% to trade below $25.00 by expiration. The retailer’s shares reached a new 52-week low of $32.61 on Monday, but the spread detailed above is perhaps an indication the price of the underlying stock could suffer substantially greater losses through the end of the year. BBY’s shares have fallen 32.6% since April 26, 2010, when the stock touched a high of $48.83.

AEO – American Eagle Outfitters, Inc. – Investors are picking up call options on American Eagle Outfitters this afternoon ahead of the firm’s second-quarter earnings report, which is slated for release ahead of the open on August 25, 2010. AEO’s shares rallied as much as 4.2% in the first half of the trading day to touch an intraday high of $12.84. Near-term bulls purchased roughly 1,200 now in-the-money calls at the August $12.5 strike for an average premium of $0.25 each. Investors taking optimistic stances ahead of earnings targeted the September $12 strike where 1,000 in-the-money calls were picked up for an average premium of $0.85 apiece. Investors long the September $12 strike calls make money as long as AEO’s shares exceed $12.85 through expiration day. Buying interest spread to the higher September $13 strike where some 2,200 call options were scooped up at an average premium of $0.47 a-pop. Higher-strike call buyers profit if American Eagle’s shares surge 4.9% over today’s high of $12.84 to surpass the average breakeven point to the upside at $13.47 by expiration day next month. The stock’s overall reading of options implied volatility is up sharply ahead of earnings, rising 16.8% this afternoon to 52.82% by 12:40 pm ET.

CREE – Cree, Inc. – The manufacturer of semiconductor materials and devices appeared on our ‘hot by options volume’ market scanner in morning trading due to bullish trading in the August contract. Cree’s shares scurried up 2.3% to stand at $59.68 as of 12:42 pm ET. Investors hoping Cree’s shares will continue to rise ahead of expiration on Friday purchased roughly 1,600 call options at the August $60 strike for an average premium of $0.89 each. Call buyers at this strike stand ready to make money should Cree’s shares rally above the average breakeven price of $60.89 by expiration. Optimistic players picked up another 1,100 calls at the higher August $65 strike for an average premium of $0.11 each. These traders profit if the semiconductor maker’s shares surge 9.1% to exceed the effective breakeven point at $65.11 by Friday. Approximately 18,235 option contracts changed hands on Cree, Inc. by 12:45 pm ET.

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