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Pessimism on Alcoa Apparent as Bears Bulk Up on Put Options

 Today’s tickers: AA, SWKS, WDC & CSC

AA - Alcoa, Inc. – Bearish options traders decided to pay Alcoa a visit this morning in order to pick up large numbers of put options in the November contract. Shares of the aluminum giant fell as much as 2.7% in the first half of the session to touch an intraday low of $12.77, but have recovered somewhat as of 11:50 a.m. to stand 0.60% lower on the day at $13.05. Pessimistic players piled into put options at the November $13 strike where more than 32,600 contracts changed hands by midday. It looks like the majority of the activity was initiated by one bearish individual who purchased approximately 23,000 puts at that strike at a premium of $0.55 per contract. The investor may be utilizing the puts to protect an existing position in the underlying shares. Alternatively, this transaction may represent an outright bearish bet on the aluminum maker. The put buyer starts to make money if Alcoa’s shares fall 4.6% from the current price of $13.05 to breach the effective breakeven point to the downside at $12.45 by expiration day next month. Alcoa’s overall reading of options implied volatility is up 6.6% at 36.02% as of 11:55 a.m. in New York trading.

SWKS - Skyworks Solutions, Inc. – Shares of the chip making company that supplies semiconductors for cellular devices such as Apple’s iPhone rallied as much as 3.1% this morning to secure a new 52-week high of $21.98. Options traders populating the stock focused their attention almost exclusively in November contract put options despite the rise in the price of the underlying shares. The majority of options volume generated on SWKS today appears to be involved in a sizeable debit put spread. It looks like one investor picked up 7,500 puts at the November $21 strike for a premium of $1.02 each, and sold the same number of puts at the lower November $20 strike at a premium of $0.62 apiece. Net premium paid for the spread amounts to $0.40 per contract. The investor responsible for the trade may accumulate up to $0.60 per contract in profits if Skyworks’ shares reverse course to below $20.00 ahead of November expiration. The semiconductor company is scheduled to report earnings for the fourth quarter before the opening bell on November 4, 2010. This suggests the spread may be the work of an investor building up downside protection ahead of the earnings report next month. We note that options investors populating Skyworks Solutions during Thursday’s trading session also displayed a preference for put options.

WDC - Western Digital Corp. – Bullish options traders flocked to the manufacturer of hard drives right out of the gate this morning as its shares surged in sympathy with those of rival Seagate Technology, which announced it may be taken private in a leveraged buyout offer worth an estimated $16.00 a share. Western Digital’s shares also rose after at least one analyst speculated it could also go private. WDC’s shares increased as much as 10.24% this morning to a 3-month high of $32.51. Investors expecting WDC’s shares to head higher by expiration day next month picked up 1,000 calls at the November $33 strike for an average premium of $1.18 apiece. These trades make money if the price of the underlying stock increases another 5.1% to exceed the average breakeven price of $34.18 by expiration. Optimism spread to the higher November $34 strike where another 1,000 calls were coveted at an average premium of $0.84 a-pop. Call buyers at this strike profit if WDC shares rally above $34.84 ahead of expiration day. Other bullish strategists initiated debit call spreads in the January 2011 contract. It looks like these traders picked up roughly 1,300 calls at the January 2011 $35 strike at an average premium of $1.58 apiece, and sold about the same number of calls at the higher January 2011 $41 strike for an average premium of $0.38 each. Net premium paid to establish the spread amounts to $1.20 per contract and prepares investors to profit should shares surge 11.35% over today’s high of $32.51 to surpass the average breakeven price of $36.20 by expiration day next year. Maximum potential profits of $4.80 per contract are available to call spreaders should shares jump 26.1% in the next several months to trade above $41.00 by expiration in January.

CSC - Computer Sciences Corp. – Investors are initiating bullish transactions on the provider of technology solutions and services on news the company is one of three that have been awarded the U.S. Missile Defense Agency operations support IDIQ contract worth up to $270 million for all firms involved. CSC’s shares are up 5.5% to stand at $49.56 as of 12:25 p.m. in New York Trading after earlier rising as much as 5.95% to an intraday high of $49.78. Options traders scooped up call options on the stock and exchanged more than 3,800 calls at the November $50 strike versus previously existing open interest of 179 contracts at that strike. It looks like the majority of the call options were purchased for an average premium of $0.76 per contract this morning. Premium on those calls has since sky-rocketed and investors looking to buy them now face an asking price of $2.10 apiece. Call buyers having paid an average premium of $0.76 each for the contracts could easily book intraday profits. But, looking at the trade through expiration, investors long the calls make money if CSC’s shares increase another 2.00% over today’s high of $49.78 to surpass the average breakeven point to the upside at $50.76 by expiration day in November. Options implied volatility is up 43.40% at 37.80% just after 12:30 p.m. in New York, and earlier rose to 39.81%, the highest reading on the stock in more than a year.

 


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