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CVS’s Sympathy Rally Inspires Bullish Options Activity

 Today’s tickers: CVS, DRIV, AVP, WAG, ADBE, PHM & COP

CVS - CVS Caremark Corp. – The better-than-expected fourth-quarter earnings report from Walgreen Co. this morning helped CVS’s shares higher during the trading session. Shares rallied as much as 3.365% to rein in an intraday high of $31.64. The increase in the price of the underlying stock inspired one options player to extend bullish sentiment on the stock by initiating a calendar roll. It looks like the investor purchased 10,000 calls at the November $30 strike at a premium of $1.11 each back on September 17, 2010, when shares were trading around $29.72 each. The surge in shares since the purchase bumped up premium on those now in-the-money calls, which the investor sold today for a premium of $2.09 apiece. Net profits on the sale amount to $0.98 per contract. Next the investor renewed optimism on CVS by purchasing a fresh batch of 10,000 calls at the higher January 2011 $32 strike at a premium of $1.64 a-pop. Profits on the new position are available to the trader if CVS’s shares jump 6.3% to surpass the effective breakeven price of $33.64 by expiration day in January.

DRIV - Digital River, Inc. – It looks like an investor expecting Digital River’s shares to remain range-bound through November expiration sold a strangle in the second half of the trading session. Shares of the provider of a variety of marketing solutions and services increased more than 5.50% this afternoon to touch an intraday high of $33.34. The strangle-strategist appears to have sold 2,500 calls at the November $35 strike for a premium of $1.35 each, and sold the same number of puts at the lower November $28 strike at a premium of $0.525 apiece. Gross premium pocketed on the transaction amounts to $1.875 per contract. The trader keeps the full amount of premium received on the strangle play if DRIV’s shares trade within the boundaries of the strike prices described through expiration day. The short positions in both call and put options expose the investor to potentially devastating losses in the event that shares rally above the upper breakeven price of $36.875, or should shares slip beneath the lower breakeven point at $26.125, by November expiration. Digital River is scheduled to report third-quarter earnings after the closing bell on November 3, 2010. An earnings miss or surprise could adversely impact the strangle player if the price of the underlying stock shoots up or tumbles lower. But, the erosion of time value come November, and the drop in options implied volatility that often appears post-earnings, could allow the trader to buy back the strangle at an advantageous price.

AVP - Avon Products, Inc. – Bulls are busying themselves with call options on the global manufacturer and marketer of beauty products this afternoon with the price of the underlying shares rising 3.00% to $32.44 by 1:00 pm ET. Near-term calls are popular with investors itching for Avon Products to extend gains through October expiration. Traders purchased approximately 1,800 calls at the October $33 strike for an average premium of $0.38 apiece. Call buyers make money if, by October expiration, AVP’s shares rally another 2.90% to exceed the average breakeven price of $33.38. Bullish sentiment spread to the higher October $34 strike where another 1,100 call options were purchased at an average premium of $0.18 each. Investors long the calls stand ready to profit should shares surge 5.35% to trade above the effective breakeven price of $34.18 by expiration day next month. The increase in demand for calls on Avon Products helped lift the stock’s overall reading of options implied volatility 4.7% to 28.53% in afternoon trading.

WAG - Walgreen Co. – Shares of the largest U.S. drugstore chain rallied as much as 11.3% today to touch an intraday high of $33.78 following the release of better-than-expected fourth-quarter earnings. Walgreen’s said it earned $0.49 a share in the quarter on revenue of $16.87 billion, which beat average analyst forecasts of $0.44 a share in net income on revenue of $16.84 billion. One options strategist was properly positioned to benefit from bullish movement in Walgreen’s shares today. It looks like the investor sold approximately 35,000 puts at the October $27 strike for an average premium of $0.17 apiece back on September 20, 2010, when WAG’s shares were trading around $29.25. Premium on those put options collapsed with the jump in shares, allowing the investor to buy back the short position at just $0.04 in premium per contract. Net profits on the transaction amount to approximately $0.13 per contract or $455,000. Next, the investor extended bullish sentiment on the stock by rolling the short stance in some 35,000 puts up to the higher October $31 strike for which he received premium of $0.14 each. The trader keeps the full premium pocketed on the fresh sale of put options at the October $31 strike as long as WAG’s shares exceed $31.00 through expiration day next month. The overall reading of options implied volatility on Walgreen Co. fell 13.5% to 24.74% following earnings. Options traders exchange more than 124,400 contracts on the stock by 12:20 pm ET.

ADBE - Adobe Systems, Inc. – One optimistic options investor purchased a call spread on the software company this morning in order to position for a rebound in the price of the underlying shares by January 2011 expiration. The bullish transaction is somewhat contrarian on a day when Adobe’s shares are down 1.30% to stand at $26.53 as of 11:40 am ET. The trader appears to have purchased some 2,000 calls at the January 2011 $28 strike for an average premium of $1.39 each, and sold roughly the same number of calls at the higher January 2011 $32 strike at an average premium of $0.39 apiece. Net premium paid to establish the spread amounts to an average of $1.00 per contract. Thus, the investor is prepared to make money should Adobe’s shares surge 9.30% over the current price of $26.53 to exceed the effective breakeven point at $29.00 by expiration day. Maximum potential profits of $3.00 per contract are available to the call-spreader if ADBE’s shares jump 20.60% to trade above $32.00 by expiration next January.

PHM - PulteGroup, Inc. – Options investors populating the homebuilding company utilized November contract calls in such a way as to suggest the current rally in the price of the underlying stock is running on empty. PulteGroup’s shares increased 1.25% to $8.83 by 11:55 am ET after analysts at Goldman Sachs upped their target price on PHM to $9.00 from $8.00 and upgraded the stock to ‘neutral’ from ‘sell’. Pessimistic players sold approximately 9,500 calls outright at the November $9.0 strike to take in an average premium of $0.48 apiece. The sale of the call options indicates that investors, particularly if they hold no position in the underlying shares, expect PHM shares to trade below $9.00 through expiration day in November. Call sellers keep the full $0.48 premium received as long as the calls are trading out-of-the-money at expiration. Uncovered call selling is an unlimited risk strategy and in this scenario investors start to lose money over-and-above the premium pocketed on the transaction if PHM’s shares rally 7.4% to trade above the effective breakeven price of $9.48 ahead of expiration day. PulteGroup is scheduled to report third-quarter earnings on November 3, 2010, before the market opens. The homebuilder’s shares last traded above $9.00 back on August 2, 2010, but have not topped $9.48 since June 21, 2010.

COP - ConocoPhillips – Near-term put options are popular with ConocoPhillips players today even with shares rallying up 1.2% to $56.94 by 12:30 pm ET. More than 12,000 puts changed hands at the October $55 strike for an average premium of $0.66 apiece in morning trading. It looks like at least 7,600 of those contracts were purchased. Perhaps put buyers are long COP shares and simply building up downside protection to lock in gains realized during the month of September. Alternatively, traders could be initiating outright bearish bets on ConocoPhillips, hinting that stormier seas are ahead. Investors buying the puts outright are poised to profit should COP’s shares fall 4.6% from the current price of $56.94 to breach the average breakeven point on the downside at $54.34 by October expiration. COP is scheduled to report third-quarter earnings on October 28, 2010, which is well past the point at which the October contract options expire.


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