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Contrarian Player Sees Visa Recovery Story Unfolding by Jan. 2012

Today’s tickers: V, EMC, MON, SAY, MJN, ADM, BBY, EDMC, EBAY & CHS

V – Visa, Inc. – Shares of the global payments company plunged 4.7% this afternoon to an intraday and new 52-week low of $64.90 following reports that said federal caps and pending litigation may limit Visa’s ability to increase prices. The price of the underlying was also helped lower by a downgrade to ‘market perform’ from ‘outperform’ at Sanford Bernstein, where analysts have a 12-month target price of $77.00 a share on the stock. The sharp decline in the price of the credit card issuer’s shares inspired near-term bearish options trading. More interesting, however, were the contrarian players seen initiating bullish positions in the longer-dated January 2012 contract. One optimistic strategist enacted a three-legged bullish combination play to position for a rebound in Visa’s shares. The investor appears to have sold roughly 2,500 puts at the January 2012 $50 strike for premium of $4.39 each, purchased about the same number of January 2012 $70 strike calls at an average premium of $8.37 a-pop, and sold approximately 2,500 calls at the higher January 2012 $90 strike for a premium of $2.50 apiece. The average net cost of the transaction reduces to $1.48 per contract. Thus, the contrarian player stands ready to make money should Visa’s shares jump 10.1% over today’s low of $64.90 to exceed the average breakeven price of $71.48 by expiration day. Maximum potential profits of $18.52 per contract are available to the investor should shares surge 38.7% to trade above $90.00 by January 2012 expiration. Visa’s shares last traded above $90.00 back on May 4, 2010. Options implied volatility on Visa, Inc. is up 10.8% at 33.75% with just over 20 minutes remaining ahead of the closing bell.

EMC – EMC Corp. – A large chunk of call options were purchased on EMC Corp. in early afternoon trading, however, it looks like the investor responsible for the transaction is taking a bearish stance on the stock rather than a bullish one. EMC’s shares rallied as much as 2.25% in the first half of the trading day to reach an intraday high of $20.43. The current 52-week high on the stock is $20.97, attained back on August 4, 2010. At first glance, the purchase of 20,000 calls at the January 2011 $21 strike at a premium of $1.00 each looks like a bullish bet by an options strategist looking for shares to trade at new 52-week highs by expiration day in January. But, it looks like the call buyer also sold 920,000 shares of the underlying stock – which fits with the 0.46 delta on the calls – at a price of $20.34 a share within seconds of the purchase of the call options. The transaction may represent a stop loss for the investor who is now holding a sizeable short position in EMC shares. In this scenario, the trader benefits if shares decline in the next 4-5 months.

MON – Monsanto Co. – Near-term bulls dominated activity in Monsanto options today. Shares of the agricultural products provider increased as much as 3.8% during the session to reach an intraday high of $59.43. Investors expecting Monsanto to extend gains through September expiration picked up in- and out-of-the-money call options. Call buyers purchased approximately 1,100 now in-the-money contracts at the September $57.5 strike for an average premium of $1.56 each. Investors long the calls are poised to profit should Monsanto’s shares exceed the average breakeven price of $59.06 through September expiration day. Bullish sentiment spread to the higher September $60 strike where some 5,700 calls were coveted at an average premium of $0.37 a-pop. Traders holding these contracts make money if the seed producer’s shares inch up 1.6% in the next several days to trade above the average breakeven price of $60.37 by expiration on Friday.

SAY – Satyam Computer Services Ltd. – A short straddle on global IT solutions provider, Satyam Computer Services Ltd., indicates one options strategist expects little movement in the price of the underlying stock through April 2011 expiration. Satyam’s shares rallied 0.75% to $5.27 just before 2:40 pm ET. It looks like the straddle-player sold 5,000 calls at the April 2011 $5.0 strike for premium of $0.85 each, and shed 5,000 puts at the same strike to pocket premium of $0.60 apiece. Gross premium enjoyed on the transaction amounts to $1.45 per contract. The investor keeps the full premium received on the sale if SAY’s shares settle at $5.00 at expiration. However, shifts in the share price in either direction away from $5.00 could result in losses to the trader. Losses start to accumulate if shares rally above the upper breakeven price of $6.45, or if shares breach the lower breakeven point at $3.55, ahead of expiration day in April.

MJN – Mead Johnson Nutrition Co. – Shares of the pediatric nutrition company declined as much as 1.75% this afternoon to touch down at an intraday low of $55.70. Despite the decline in shares, one options investor hoping to see Mead Johnson’s shares rebound in the next couple of months initiated a cautiously optimistic transaction on the stock this morning. It looks like the trader enacted a delta neutral hedge, buying 130,000 shares of the underlying stock at an approximate price of $56.30 each, and purchasing a debit put spread. The investor paid a net $0.85 per contract to buy a 10,000-lot November $45/$50 put spread with a 0.13 delta. The parameters of the transaction, specifically the purchase of 130,000 Mead Johnson shares, suggest the investor expects the value of the underlying stock to appreciate. But, the put spread acts as a safety net in case MJN shares continue to slide lower ahead of November expiration.

ADM – Archer-Daniels Midland Co. – At least one options investor satisfied an appetite for Archer-Daniels Midland Co. call options right out of the gate this morning. Shares of the processor of oilseeds, corn, wheat, cocoa and other feedstuffs increased as much as 1.3% to secure an intraday high of $33.15. The stock is currently up a lesser 0.30% to stand at $32.82 as of 12:30 pm ET. More than 10,000 calls changed hands at the December $35 strike within the first 10 minutes of the trading session. One trader involved in the frenzied call activity purchased 6,799 December $35 calls at a premium of $1.00 per contract. The bullish player stands ready to make money should shares of the manufacturer of vegetable oil, flour and ethanol surge 8.6% over today’s high of $33.15 to surpass the effective breakeven price of $36.00 by expiration day in final month of 2010. The sharp rise in demand for call options on the stock lifted Archer-Daniels Midland’s overall reading of options implied volatility 6.2% to 26.68% by 12:35 pm ET.

BBY – Best Buy Co., Inc. – Shares of the consumer electronics retailer are up 1.25% to stand at $34.31 as of 11:15 am ET, but earlier rallied as much as 2.9% to touch an intraday and one-month high of $34.86. It looks like a number of options investors are initiating bullish positions on Best Buy today ahead of the firm’s second-quarter earnings report scheduled to be released ahead of the opening bell on Tuesday. One optimistic individual enacted a ratio call spread, buying 3,500 calls at the October $35 strike at a premium of $1.35 each, and selling 7,000 calls at the higher October $37 strike for premium of $0.64 apiece. Net premium paid to establish the spread is reduced to $0.07 per contract. Thus, the investor responsible for the transaction starts to make money if BBY’s shares increase another 2.2% over the current price of $34.31 to trade above the effective breakeven point at $35.07 by October expiration. Maximum potential profits of $1.93 per contract pad the investor’s wallet if the retailer’s shares surge 7.8% to settle at $37.00 at expiration day next month. The overall reading of options implied volatility on BBY is up 4.9% at 42.32% ahead of earnings.

EDMC – Education Management Corp. – The for-profit provider of post-secondary education in North America popped up on our ‘hot by options volume’ market scanner this morning after one contrarian investor initiated a bullish transaction in the December contract. EDMC’s shares slipped 0.75% to $9.09 just before 11:30 am ET. It looks like the trader is positioning for the education company’s shares to rebound by the end of this year. The stock has suffered sharp declines, along with other for-profit education stocks, in recent months. Shares in Education Management Corp. are currently down 66% since April 13, 2010, when the stock touched a 6-month high of $26.79. The contrarian player populating the December contract is hoping for a recovery story. It appears the investor purchased 1,500 calls at the December $10 strike for premium of $1.30 each, and sold the same number of calls at the higher December $15 strike at a premium of $0.10 apiece. The net cost of the transaction amounts to $1.20 per contract. Profits start to accumulate for the call spreader if EDMC’s shares surge 23.2% to surpass the effective breakeven price of $11.20 by expiration day. Maximum potential profits of $3.80 per contract are available to the investor if shares of the underlying stock jump 65% in the next several months to exceed $15.00 by December expiration.

EBAY – eBay, Inc. – A short strangle implemented on online marketplace operator, eBay, Inc., this morning suggests one options player expects the price of the underlying stock to trade within a specified range through January 2011 expiration day. EBAY’s shares earlier gained as much as 1.535% to touch an intraday high of $24.47, but are currently up 0.45% to stand at $24.21 as of 12:10 pm ET. The strangle strategists sold 6,000 puts at the January 2011 $24 strike for premium of $1.83 apiece, and shed 6,000 calls at the January 2011 $26 strike to take in premium of $0.19 each. Gross premium pocketed on the transaction amounts to $3.02 per contract. The investor keeps the full premium received as long as eBay’s shares trade above $24.00 and below $26.00 through expiration. Short stances assumed in both call and put options expose the strangle player to losses in the event that EBAY’s shares rally above the upper breakeven price of $29.02, or should shares slip beneath the lower breakeven point at $20.98, ahead of January 2011 expiration.

CHS – Chico’s FAS, Inc. – Bullish options traders are picking up in-and-out of the money calls on the specialty retailer of clothing and accessories today with shares of the underlying stock trading higher by as much as 2.1% this morning to secure an intraday high of $9.16. Investors hoping the retailer’s shares continue to rally purchased roughly 3,700 now in-the-money calls at the October $9.0 strike for an average premium of $0.67 apiece. Call buyers are poised to profit should shares increase another 5.6% over today’s high of $9.16 to exceed the average breakeven point to the upside at $9.67 by October expiration. Optimism spread to the higher October $10 strike where another 1,300 calls were scooped up at an average premium of $0.24 a-pop. Investors holding these contracts make money if CHS shares jump 11.8% to trade above $10.24 by expiration day next month. The overall reading of options implied volatility on the clothing company increased 17.9% to 57.83% as of 12:05 pm ET.


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