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Bulls Take the Wheel, Initiate Recovery Plays Using Ford Options

Today’s tickers: F, TOL, BRCD, LOW, NUAN, WAG & IFF

F - Ford Motor Co. – The automaker’s shares edged 2.45% lower this afternoon to $15.80, but investors expecting to see Ford rebound and rally in the next few months initiated bullish plays using put and call options expiring in February 2011. It looks like one trader purchased a bull call spread, while another investor put on a bullish risk reversal. The call spreader picked up 5,000 contracts at the February 2011 $16 strike for a premium of $1.24 each, and sold the same number of calls at the higher February 2011 $20 strike for a premium of $0.20 apiece. Net premium paid to establish the spread amounts to $1.04 per contract. Thus, the responsible party is prepared to make money should shares in Ford Motor Co. surge 7.85% over the current price of $15.80 to surpass the effective breakeven point at $17.04 by February expiration. The call-spreader could end up walking away with maximum potential profits of $2.96 per contract if Ford’s shares jump 26.6% to trade above $20.00 by expiration day next year. The other bullish play in the February 2011 contract appears to be the work of an investor selling 1,990 February 2011 $15 strike puts at a premium of $0.69 each in order to purchase the same number of February 2011 $18 strike calls for a premium of $0.50 a-pop. The transaction results in a net credit of $0.19 per contract, which the investor keeps as long as shares in Ford exceed $15.00 through expiration. Additional profits start to accrue for the trader should shares rally 13.9% to trade above $18.00 before the contracts expire. The net credit received by the investor provides limited downside protection should shares continue to head south. The investor will face losses, however, if Ford’s shares trade below the effective breakeven price of $14.81 in the next few months to expiration.

TOL - Toll Brothers, Inc. – The homebuilding firm’s shares fell 2.4% to an intraday low of $17.35 this morning, but regained composure this afternoon to rally as much as 1.35% to an intraday high of $18.02 by 3:15 pm in New York trading. Toll Brothers joined the ranks of our ‘hot by options volume’ market scanner today on heavier than usual action in near-term call options. Investors may be building up bullish positions on the stock ahead of TOL’s fourth-quarter earnings report, scheduled for release ahead of the opening bell on December 2, 2010. December $18 strike calls were far-and-away the most popular contracts, with more than 15,800 lots changing hands at that strike versus previously existing open interest of 11,722 contracts. The majority of the December $18 strike calls, at least 9,300 of them, were purchased for an average premium of $0.48 per contract. Call buyers are prepared to make money should TOL’s shares exceed the average breakeven price of $18.48 ahead of December expiration. Bullish sentiment on the homebuilder spread to the higher December $19 strike where another 1,500 call options were purchased at an average premium of $0.21 a-pop. The jump in demand for call options on Toll Brothers and the firm’s impending earnings announcement helped lift the overall reading of options implied volatility on the stock 17.3% to 36.94% as of 3:20 pm.

BRCD - Brocade Communications Systems, Inc. – Shares of the biggest maker of switches for data-storage networks took a beating today, falling as much as 10.0% to touch an intraday low of $5.13 after the firm released lower-than-expected forecasts for sales and earnings in the first quarter. Brocade Communications Systems reported fourth-quarter earnings after the final bell on Monday, posting net income of $0.05 a share, which is down from earnings of $0.07 a share in the same period last year. The San Jose, CA-based firm projected first-quarter profits of $0.09 to $0.10 a share on revenue of $550 million, disappointing analysts expecting Brocade to earn $0.14 a share on sales of $556.9 million, on average. The earnings forecast and sharp pullback in the price of the underlying spurred demand for options on the stock today. Yet, it does not appear that activity in BRCD options is solely the work of pessimistic players. Investors betting that shares are unlikely to slide much lower in the next five months looked to the April 2011 $5.0 strike to sell approximately 11,300 puts at an average premium of $0.41 per contract. Put sellers keep the full premium received on the transaction as long as shares in Brocade Communications exceed $5.00 through expiration day in April. Investors employing this strategy appear ready and willing to have shares of the underlying stock put to them at an effective price of $4.59 apiece should the puts land in-the-money by expiration. The switch maker’s shares have managed to remain above their 52-week low of $4.64 since August 25, 2010, and have not dipped below $5.00 since September 1, 2010. Options implied volatility on Brocade is down 20.0% at 40.36% following earnings.

LOW - Lowe’s Companies, Inc. – The second-largest U.S. home improvement retailer popped up on our scanners within the first 20 minutes of the trading session after one investor appears to have initiated a sizeable risk reversal in the January 2011 contract. LOW’s shares are currently down 1.00% at $22.11 just before 10:55 am in New York trading. It looks like the options strategist purchased 910,000 shares of the underlying stock at a price of $22.15, sold 14,000 calls at the January 2011 $22.5 strike for a premium of $0.72 apiece, and purchased 14,000 puts at the lower January 2011 $20 strike at a premium of $0.30 each, on a 0.65 delta. The trade seems to have been built on the expectation that LOW’s shares will move sharply lower ahead of January 2011 expiration. The home improvement retailer’s shares underperformed the most recent S&P rally that was largely led by consumer-sensitive stocks. With the broad-market rally cooling off, the investor is predicting shares in LOW will slide lower in the next couple of months. Lowe’s shares hit their current 52-week low of $19.35 on August 11, 2010.

NUAN - Nuance Communications, Inc. – Shares of the speech-recognition software provider jumped 12.15% at the start of the trading day to hit an intraday- and new 2-year high of $19.19 after Apple Inc.’s Steve Wozniak said in a tech-blog video clip that the company recently purchased Nuance. NUAN posted better-than-expected fourth-quarter earnings after the closing bell on Monday, but did not mention any merger with Apple and today called Wozniak’s words speculative. The firm earned $0.33 a share, beating average analyst expectations by a penny. Shares in Nuance are currently up 4.9% at $17.95 as of 11:15 am. The takeover chatter sent speculators into a call-option feeding frenzy on Nuance right out of the gate this morning. Investors expecting shares in NUAN to continue higher picked up more than 1,500 calls at the December $19 strike for a premium of $0.64 each, and scooped up nearly 2,000 calls at the higher December $20 strike at an average premium of $0.46 apiece. The December $21 strike, which is currently the highest available strike price in the front month, generated volume of 3,485 calls in the first half of the session versus zero previously existing open interest at that strike. It looks like the majority of those call options were purchased by bullish players for an average premium of $0.32 a-pop. Call buyers at the December $21 strike make money if NUAN’s shares surge 18.8% over the current price of $17.95 to surpass the average breakeven point at $21.32 by expiration day next month. Rising demand for options on Nuance and takeover speculation lifted the stock’s overall reading of options implied volatility 10.9% to 44.05% by 11:30 am.

WAG - Walgreen Co. – A sizeable ratio call spread on Walgreen Co. may be the work of a contrarian trader anticipating a near-term rebound in the price of the underlying shares, which are currently down 2.55% to stand at $34.00 as of 11:30 am in New York. It looks like the investor picked up 7,500 calls at the December $35 strike at a premium of $0.50 each, and sold 15,000 calls up at the December $36 strike for a premium of $0.20 apiece. The trader paid a net premium of $0.10 per contract for the spread and stands ready to make money should WAG’s shares rally 3.2% over the current price of $34.00 to exceed the effective breakeven point at $35.10 by December expiration day. Maximum potential profits of $0.90 per contract are available to the investor should shares in Walgreen Co. surge 5.9% to settle at $36.00 at expiration. Selling twice as many calls at the December $36 strike substantially reduced the trader’s net cost of taking a bullish stance on the pharmacy operator. However, the ratio also exposes the investor to potentially devastating losses in the event that shares jump 8.5% to trade above the upper breakeven point of $36.90 ahead of expiration next month. Walgreen’s overall reading of options implied volatility is higher by 8.0% to arrive at 24.60% by 11:40 am.

IFF - International Flavors & Fragrances, Inc. – Shares of the manufacturer of flavor and fragrance products used in a variety of consumer goods slipped 0.90% to $51.51 in early-afternoon trading. The bearish move in the price of the underlying stock did not deter one strategist from placing a bullish bet on the stock with near-term put options. It looks like the investor sold more than 2,400 puts at the December $50 strike to pocket an average premium of $0.56 per contract. The trader keeps the full premium received on the transaction as long as shares in International Flavors & Fragrances exceed $50.00 through expiration day. The investor’s decision to sell the puts at the December $50 strike indicate optimism on IFF, but also suggests he is willing to have shares of the underlying stock put to him at an effective price of $49.44 should the puts land in-the-money at expiration. 


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