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Mixed Trading in Career Education Corp. Options

Today’s tickers: CECO, ROST, LSI, ADBE, AVNR, PNC & ODP

CECO – Career Education Corp. – Shares of the for-profit provider of education geared toward career-oriented disciplines rallied as much as 10.9% during the session to secure an intraday high of $23.00 on analyst reports stating the industry is likely to rebound as bearish investors close out short positions. Options traders employed a mix of bullish and bearish strategies on the stock ahead of the release of the Education Department’s timeline for regulations on for-profit education industry firms tomorrow. One cautious investor prepared for CECO’s shares to falter ahead of October expiration by purchasing a ratio put spread. The options trader picked up 500 puts at the October $22 strike at a premium of $1.15 each, and sold 1,000 puts at the lower October $19 strike at a premium of $0.20 apiece. The net cost of the transaction amounts to $0.75 per contract. The investor is poised to profits should Career Education’s shares fall 7.6% from today’s high of $23.00 to breach the effective breakeven price of $21.25 by expiration day next month. Maximum potential profits of $2.25 are available to the trader if CECO shares plummet 17.4% to settle at $19.00 at expiration. In contrast, bullish players looking for a near-term rally picked up roughly 3,200 calls at the October $23 strike for an average premium of $1.02 each. Investors make money if shares gain 4.4% to surpass the average breakeven point at $24.02 by October expiration. The most optimistic traders purchased approximately 1,000 calls at the October $25 strike for an average premium of $0.43 a-pop. Call buyers at this strike stand ready to profit should shares surge 10.55% and exceed the average breakeven price of $25.43. Options implied volatility on stock is up sharply ahead of the Education Dept. announcement, and currently stands 11.6% higher on the day at 61.28%, as of 3:40 pm ET.

ROST – Ross Stores, Inc. – Shares of the operator of off-price retail apparel and home accessories stores increased as much as 2.3% during the trading session to secure an intraday high of $56.12. Ross Stores appeared on our scanners due to near-term activity in call options. It looks like the majority of trading in October contract calls is the work of one investor booking profits and rolling a previously purchased chunk of calls to a higher strike price. The investor likely purchased approximately 4,000 in-the-money calls at the October $52.5 strike for an average premium of $2.48 each back on September 14 when shares were trading around $53.56. Ross Stores’ shares have since rallied 4.8% to today’s high of $56.12 and lifted premium on the now deep in-the-money October $52.5 strike call options. The trader sold roughly 4,000 calls at that strike today for a richer premium of $3.47 apiece. Average net profits on the sale amount to $0.99 per contract. Next, the trader extended bullish sentiment on the retailer by scooping up a fresh batch of 4,000 in-the-money calls at the higher October $55 strike for which he paid an average premium of $1.82 each. Profits on the new position start to accumulate if ROST’s shares exceed the average breakeven point to the upside at $56.82 by expiration day next month.

LSI – LSI Corp. – Investors sold in- and out-of-the-money call options on LSI Corp. throughout the trading session today with shares of the semiconductor company trading 1.8% lower on the day to arrive at $4.30 by 3:15 pm ET. Trading traffic was heaviest in the April 2011 contract where more than 30,000 calls changed hands. Traders sold at least 11,000 in-the-money calls at the April 2011 $4.0 strike at an average premium of $0.65 per contract. Another 14,400 calls were sold at the higher April $5.0 strike for an average premium of $0.20 apiece. Perhaps call sellers are expecting LSI’s shares to continue fall. Investors keep the full premium received on the sale if the calls land out-of-the-money at expiration.

ADBE – Adobe Systems, Inc. – A put credit spread on the maker of graphic design software suggests one option strategist expects the firm’s shares are unlikely to decline much further ahead of October expiration. Adobe’s shares fell as much as 22.2% to touch down at a new 52-week low of $25.81 on Wednesday morning after the firm forecast lower than expected fourth-quarter sales. Today, shares slipped 0.15% lower to trade at $26.63 as of 11:30 am ET. The bullish player sold 2,500 puts at the November $25 strike for a premium of $0.85 each, and purchased the same number of puts at the lower November $22.5 strike at a premium of $0.30 apiece. The investor pockets a net credit of $0.55 per contract on the transaction and keeps the full amount as long as Adobe’s shares exceed $25.00 through expiration day in November. But, if shares do slide lower, the trader will accumulate losses beneath the effective breakeven price of $24.45. Maximum potential losses of $1.95 per contract amass for the credit-spreader if Adobe’s shares fall 15.5% from the current price of $26.63 to trade below $22.50 by expiration.

AVNR – AVANIR Pharmaceuticals, Inc. – Options on the pharmaceuticals firm are active today as the company’s scheduled FDA decision date for potential approval of its drug candidate, AVP-923, on October 30, 2010, draws closer. The firm is also slated to present at the UBS 2010 Global Life Sciences Conference this afternoon. Shares are currently up 3.8% at $3.01 as of 12:50 pm ET. It looks like some investors are positioning for shares to move sharply going forward. One such strategist appears to have purchased a long "straddle", buying 2,500 calls at the November $5.0 strike at a premium of $0.50 each, and picking up 2,000 in-the-money puts at the March 2011 $5.0 strike for a premium of $3.10 apiece. The transaction positions traders to benefit from increasing options implied volatility on the stock as well as from sharp moves in the price of AVNR shares in either direction. If the drug receives approval, premium on the calls will appreciate significantly along with the price of the underlying stock. But, if shares collapse investors may profit as premium on the puts grows and the value of shares shrinks. Other investors populating AVNR today picked up large numbers of put options. Perhaps these traders are hedging erosion in the price of the underlying stock should the drug candidate fail to receive approval from the FDA in October. Options implied volatility on the stock is up 13% at 175.75% as of 1:00 pm ET.

PNC – PNC Financial Services Group, Inc. – Shares of the financial services firm rallied 2.05% to $52.33 in the first half of the trading session and inspired one options investor to take profits off the table by unraveling a debit put spread in the October contract. It looks like the formerly pessimistic player originally purchased a 4,500-lot October $55/$49 put spread at a net cost of $1.43 per contract on September 14, 2010, when PNC’s shares were trading at a volume-weighted average price of $55.68. In hindsight, the investor purchased the spread at the right time because the price of the underlying stock declined as much as 8.85% in the 9 days that followed, reaching today’s intraday low of $50.75. The trader unraveled the bearish position this morning as shares started to rebound. The investor sold the spread to receive premium of $3.03 per contract, thus booking net profits of $1.60 per contract by closing out the position.

ODP – Office Depot, Inc. – Investors populating the provider of office supplies and services have had a change of heart since yesterday when we reported that bearish players were selling call options in the November contract. Bulls are dominating trading activity in Office Depot options today with shares trading higher by 8.6% as of 12:35 pm ET to stand at $4.66. More than 12,600 contracts, nearly all of them call options, changed hands on ODP thus far in the session. Investors hoping to see shares continue to climb picked up approximately 3,200 calls at the October $5.0 strike for an average premium of $0.13 apiece. Optimism spread to the November $5.0 strike where another 3,600 calls were scooped up at an average premium of $0.26 each. November contract call buyers are poised to profit should Office Depot’s shares rally another 12.9% to surpass the average breakeven price of $5.26 by expiration day. The sharp rally in shares coupled with rising demand for options on the stock lifted ODP’s overall reading of options implied volatility 13.2% to 63.96% by 12:40 pm ET.


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