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Saturday, February 24, 2024

Near-Term Bears Pummel DGIT, While Bullish Player Foresees Long-Term Recovery

Today’s tickers: DGIT, LTD, EWJ, ETN, AKS, ACLI & AMR

DGIT – DG FastChannel, Inc. – The provider of digital technology services that facilitate electronic delivery of advertisements, syndicated programs and video news releases to various media outlets suffered a 38.5% decline in the value of its shares to an intraday- and new 52-week low of $15.10 today. DGIT’s shares hemorrhaged after the firm revealed that third-quarter revenue will not exceed $53 million, which is substantially less than the average analyst forecast of $61.5 million in sales for the quarter. Investors expecting DG FastChannel’s shares to remain bruised and battered through September expiration sold 1,300 calls at the September $17.5 strike to pocket an average premium of $0.96 apiece. Call sellers keep the premium received on the transaction as long as DGIT’s shares fail to rally above $17.50 by expiration next month. The company is scheduled to report third-quarter earnings ahead of the opening bell of November 4, 2010. In contrast to the near-term bearish trading on the stock today was a covered call enacted in the March 2011 contract by an investor who appears to be positioning for a lengthy recovery period. It looks like the investor sold 2,000 calls at the March 2011 $17.5 strike for premium of $3.30 per contract and purchased 200,000 shares of the underlying stock at $16.60 apiece. The sale of the call options effective reduces the price paid per share to $13.30 each. Thus, the investor is prepared to walk away with maximum gains of 31.6% on the underlying position as long as the calls land in-the-money and the shares are called from him at $17.50 at that time.

LTD – Limited Brands, Inc. – Investors picked up put options on the specialty retailer of women’s apparel, beauty and personal care products, and accessories right out of the gate this morning with the price of the underlying stock slipping as much as 3.00% to an intraday low of $24.20. Limited Brands’ put options are in demand ahead of the firm’s August sales report on Thursday morning, and after July reports showed that personal income rose less than anticipated. Bears expecting LTD’s shares to continue to decline ahead of September expiration purchased approximately 1,900 in-the-money puts at the September $25 strike for an average premium of $1.11 apiece. Put buyers are poised to profit – or realize downside protection should they hold long positions in the underlying stock – if LTD shares drop 1.3% from today’s low of $24.20 to breach the average breakeven price to the downside at $23.89 by expiration day. The jump in demand for near-term puts on the stock helped lift Limited Brands’ overall reading of options implied volatility 9.8% to 40.26% in late afternoon trading.

EWJ – iShares MSCI Japan Index Fund – One options strategist is expecting shares of the EWJ, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the MSCI Japan Index – an index created to measure the performance of the Japanese equity market, to trade within a narrow range through expiration day in January 2011. The investor established a short strangle, selling 10,000 puts at the January 2011 $9.0 strike at a premium of $0.33 each, and selling 10,000 calls at the January 2011 $10 strike for a premium of $0.23 apiece. The trader pockets gross premium of $0.56 per contract and keeps the full amount as long as shares of the fund trade within the $9.00 to $10.00 range through expiration day. The short stance taken in both call and put options expose the trader to potentially devastating losses should the fund’s shares rally above the upper breakeven price of $10.56, or if shares trade below the breakeven point on the downside at $8.44, by expiration in January. The EWJ’s shares have not traded below $9.00 since May of 2009, and have not exceeded $10.00 since May 14, 2010.

ETN – Eaton Corp. – The power management company popped up on our ‘hot by options volume’ market scanner in morning trading after one pessimistic player purchased a debit put spread in the October contract. Eaton’s shares lost 1.2% to trade at $71.01 as of 12:35 pm ET. The investor responsible for the plain-vanilla put spread is perhaps bracing for continued erosion in the price of the underlying shares ahead of the firm’s scheduled presentation at the Morgan Stanley Global Industrials Conference on Wednesday. The investor picked up 1,800 puts at the October $70 strike at a premium of $2.80 each, and sold the same number of puts at the lower October $60 strike for premium of $0.60 apiece. The net cost of the purchasing the spread amounts to $2.20 per contract. The trader stands ready to amass profits should Eaton’s shares fall another 4.5% to breach the effective breakeven price of $67.80 by expiration day in October. The put player could walk away with maximum potential profits of $7.80 per contract if Eaton Corp. shares plunge 15.5% lower to trade under $60.00 by expiration. Options implied volatility on the stock inched up 5.7% to 31.48% by 12:40 pm ET.

AKS – AK Steel Holding Corp. – Shares in steel producer, AK Steel Holding Corp., rallied as much as 3.65% during the first half of the trading session to secure an intraday high of $13.07. AK Steel’s shares are currently up a lesser 1.50% to stand at $12.80, which is still 52% below the stock’s 52-week high of $26.75, attained back on January 11, 2010. AKS shares currently stand 12.9% above the 52-week low of $11.34 reached on July 1, 2010, and options traders populating the stock today appear to be positioning for shares to continue to rebound in the next couple of months. Investors purchased roughly 4,500 calls at the September $14 strike for an average premium of $0.29 a-pop. Call buyers at this strike are poised to profit should AKS shares surge 11.6% over the current price of $12.80 to exceed the average breakeven point to the upside at $14.29 by September expiration. Optimism spread to the higher September $15 strike where bulls picked up approximately 2,200 calls at an average premium of $0.16 each. Investors make money if the price of the underlying stock jumps 18.4% to trade above $15.16 ahead of expiration day next month. Finally, bullish players purchased about 1,000 calls at the October $14 strike for an average premium of $0.63 apiece. Profits start to accumulate for traders long the October $14 strike calls as long as AK Steel’s shares surge 14.3% to surpass the average breakeven price of $14.63 by October expiration. The surge in demand for options on AKS helped lift the overall reading of options implied volatility on the stock 21.1% to 63.93% by 12:30 pm ET.

ACLI – American Commercial Lines Inc. – A bullish risk reversal initiated on the provider of dry and liquid cargo barge transportation in U.S. inland waterways this morning suggests one option strategist is expecting the price of the underlying stock to appreciate ahead of December expiration. ACLI’s shares increased 1.3% to stand at $27.71 by 12:15 pm ET. The bullish player appears to have sold 1,000 puts at the December $25 strike at a premium of $2.15 each in order to purchase the same number of calls at the higher December $30 strike at a premium of $2.50 apiece. The net cost of the transaction amounts to $0.35 per contract. Thus, the investor responsible for the risk reversal is positioned to make money should American Commercial Lines’ shares surge 9.5% in the next four months to trade above the average breakeven price of $30.35 by expiration day. ACLI shares last traded above $30.35 back on September 23, 2009. The share price is currently up more than 58% since June 9, 2010, when the stock touched a 6-month low of $17.53.

AMR – AMR Corp. – Shares of the owner of the second-largest U.S. airline rallied as much as 6.8% this morning on speculation that Emirates, which is the biggest airline by international traffic, could be interested in purchasing a stake in AMR Corp. The rumors have since been dispelled by the Dubai-based company after Emirates’ President, Tim Clark, stated the firm “certainly wouldn’t be doing that” in reference to the takeover chatter. AMR’s shares have since retained a 3.65% rally on the day to trade at $6.26 as of 12:50 pm ET. Earlier in the session it seems the unconfirmed takeover speculation and the shift higher in the price of the underlying stock inspired frenzied call buying on the operator of American Airlines in the September and October contracts. Traders bought approximately 9,100 calls at the September $7.0 strike for an average premium of $0.12 apiece. More than 15,400 calls changed hands at the September $7.0 strike by 1:00 pm ET. Call buyers are positioned to make money as long as AMR’s shares rally above the average breakeven price of $7.12 by expiration day next month. Bulls also looked to the higher October $8.0 strike to purchase roughly 1,100 calls for an average premium of $0.10 a-pop. AMR’s shares would need to jump 29.4% over the current price of $6.26 in order for October $8.0 strike call buyers to start to make money above the average breakeven price of $8.10 by expiration day. Although the takeover rumors were denied by Emirates earlier today, options implied volatility on AMR Corp. is still up 14.4% at 61.89% as of 12:55 pm ET.


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