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Bulls Find Lululemon Call Options Irresistible as Shares Soar

Today’s tickers: LULU, IRM, GAP, SNDK, STI & DFS

LULU - Lululemon Athletica, Inc. – Shares of the yoga clothing and accessories maker stretched and lengthened up to new all-time highs yet again today, attracting bullish options players more than willing to flex their call-buying muscles in the December and January 2011 contracts. LULU’s shares jumped more than 8.95% to secure an intraday- and new all-time high of $69.25 in the final thirty minutes of the trading week. The Canadian company’s shares have been unstoppable, rallying an incredible 167.5% to today’s high from a 52-week low of $25.75 on February 5, 2010. Shares are up 1,490.8% since March 6, 2009, when the stock touched down at an all time low of $4.33 a share at around the same time the S&P 500 Index hit rock-bottom in the most recent economic recession. Investors unwilling to stand in the way of such a driving force picked up call options on Lululemon to position for additional share price gains going forward. Traders purchased some 1,100 in-the-money calls at the December $65 strike for an average premium of $2.67 each. Call buyers at this strike profit if LULU’s shares exceed the average breakeven price of $67.67 through December expiration. Other bullish players sold roughly 1,650 puts at the December $65 strike to pocket premium of $1.08 per contract. Put sellers keep the full premium received on the transaction as long as shares trade above $65.00 through expiration in one week. Investors short the puts are happy to have shares of the underlying stock put to them at an average price of $63.92 a share in the event that the puts land in-the-money at expiration. Bullish players skipped to the January 2011 contract to purchase out-of-the-money calls, as well. Investors bought more than 1,000 January 2011 $70 strike calls for an average premium of $2.21 each. Uber-bullish players picked up another 2,000 calls at the higher January 2011 $75 strike at an average premium of $1.19 a-pop. Call buyers at this strike are poised to profit should shares in LULU surge 10.0% over today’s high of $69.25 to surpass the average breakeven price of $76.19 by expiration day next month. Options implied volatility on LULU is up 23.4% at 51.79% heading into the close.

IRM - Iron Mountain, Inc. – A three-legged bullish options combination play on Iron Mountain today indicates one strategist is positioning for shares of the provider of information management services to climb higher ahead of July 2011 expiration. Iron Mountain’s shares are currently up 0.75% to arrive at $23.48 as of 1:55 pm in New York. The investor lowered the cost of obtaining upside exposure through a long stance in out-of-the-money calls by selling a put spread. The optimistic individual sold 10,000 calls at the July 2011 $22.5 strike for a premium of $1.80 each, purchased 10,000 puts at the lower July 2011 $20 strike for an average premium of $0.925, and picked up 10,000 calls at the July 2011 $25 strike at a premium of $1.50 a-pop. Net premium paid to initiate the spread amounts to $0.625 per contract, thus preparing the trader to make money if Iron Mountain’s shares surge 9.135% over the current price of $23.48 to surpass the effective breakeven point at $25.625 by expiration day in July. Selling the credit put spread substantially lowered the breakeven point to $25.625 from the breakeven of $26.50 the trader would have faced had he simply purchased the calls outright instead. But, the cost savings come with a potential price should shares in IRM move against the investor. The party responsible for the transaction could wind up losing as much as $0.875 per contract on the put spread if shares plunge 14.8% to trade below $20.00 by expiration day. Of course, if shares are down around $20.00 ahead of July expiration, the calls are then set to expire worthless and their full cost of $1.50 per contract plus the loss of $0.875 per contract on the put spread combines for maximum potential losses of $2.375 per contract on the trade. The three-legged bull, however, has weighed such risk and decided it is worth his while given the unlimited upside potential gained in the process.

GAP - Great Atlantic & Pacific Tea Co., Inc. – Reports suggesting the grocery-store chain operator may file for bankruptcy as soon as this weekend sent shares crashing down by as much as 69.6% to an intraday low of $0.86 today and spurred frenzied trading in call and put options. Meanwhile, investor uncertainty, as measured by GAP’s reading of options implied volatility, skyrocketed along with demand for GAP options, climbing as much as 219.34% to touch a high of approximately 529.40% during the session. The beleaguered New Jersey-based grocer was attacked from all sides right out of the gate this morning by investors scrambling to get a hold of puts and calls in the December and January 2011 contracts. More than 56,980 contracts have changed hands on GAP as of 12:50 pm, which is more than 50% of volume represented by the 112,460 lots of overall previously existing open interest on the stock. Investors concerned that shares may continue to decline purchased more than 2,600 now in-the-money puts at the December $1.0 strike for an average premium of $0.32 apiece. Traders buying these contracts outright may amass maximum potential profits of up to $0.68 per contract, on average, if the grocer’s shares fall to $0.00 ahead of expiration day next Friday. The December $0.50 strike puts were also popular, with some 1,700 contracts purchased for an average premium of $0.14 each. All put action at this strike is new given the open interest reading of zero. Essentially all of the in- and out-of-the-money December contract calls represent fresh positioning, as well. Investors are buying and selling calls in December perhaps to hedge short positions in GAP shares in the case of buyers, or to pocket available premium for sellers of the options. More than 8,100 calls traded at the December $1.0 strike for an average premium of $0.39 apiece. It looks like the majority of the contracts traded to the bid, suggesting many participants expect shares to flounder and the call options to expire worthless a week from today. Puts and calls expiring next month were also popular, but generated far less volume than front-month contracts by 1:00 pm on the final trading day of the week.

SNDK - SanDisk Corp. – Bullish options traders are scooping up in- and out-of-the-money call options on the maker of data storage products this afternoon, with shares in SanDisk Corp. currently up 4.8% to stand at $49.92 as of 1:05 pm. Trading traffic is heaviest at the December $50 strike where more than 10,970 calls changed hands thus far in the session. It looks like the majority of the contracts were purchased at an average premium of $0.70 per contract by investors expecting SNDK shares to hit new 52-week highs ahead of expiration next Friday. Bulls also picked up another 1,250 calls at the higher December $55 strike for an average premium of $0.12 each. Optimism regarding prospects for SanDisk’s shares spread to the January 2011 $55 strike where some 1,600 calls were coveted at an average premium of $0.96 a-pop. Investors buying these contracts are prepared to make money should shares surge 12.3% over the current price of $49.82 to exceed the average breakeven point at $55.96 ahead of expiration day in January. Uber-bulls looked to the higher January 2011 $60 strike to purchase 1,725 call options at an average premium of $0.32 per contract. Rising investor demand for SanDisk call options helped fuel a 14.1% increase in the stock’s overall reading of options implied volatility to 44.60% in the second half of the trading day.

STI - SunTrust Banks, Inc. – One options strategist extended bullish sentiment on SunTrust Banks this morning by rolling a previously established long call stance up to a higher strike price in the January 2011 contract. Shares of the regional financial services firm are up 0.10% to stand at $27.05 as of 11:30 am in New York, but earlier increased as much as 0.85% to touch an intraday high of $27.25. After surveying changes in the level of open interest in calls at the January 2011 $25 strike, it appears the trader originally purchased as many as 10,000 calls at that strike for a premium of $1.39 each on December 2, 2010, when STI shares were trading around $25.37. Today, the investor sold 5,000 in-the-money calls at the January 2011 $25 strike for a much richer premium of $2.66 apiece. Under the assumption that the purchase and sale of the calls is the work of the same individual, net profits on the sale of 5,000 of the calls represented in open interest at that strike amounts to $1.27 per contract. Next, it appears the investor purchased a fresh batch of 5,000 in-the-money call options at the higher January 2011 $27 strike for a premium of $1.41 a-pop. The trader is positioned to make money on the new bullish stance should SunTrust’s shares surge 5.0% over the current price of $27.05 to exceed the effective breakeven point at $28.41 by January expiration day. SunTrust Banks is slated to report fourth-quarter earnings before the market opens on January 21, 2011, which is the same day the calls in the spread expire.

DFS - Discover Financial Services – The credit card issuer and electronic payment services provider popped up on our scanners this morning due to bullish activity in December contract call options. Discover’s shares increased as much as 1.00% at the start of the session to touch an intraday high of $18.96. Call buyers may utilizing the contracts to speculate on potential bullish movement in the price of the underlying stock ahead of- and following the release of- the firm’s fourth-quarter earnings report on December 16, 2010, before the market opens for trading. Investors scooped up approximately 5,000 calls at the December $20 strike for an average premium of $0.15 per contract. Bullish players are prepared to make money should shares in Discover Financial Services rally another 6.3% over today’s high of $18.96 to surpass the average breakeven point to the upside at $20.15 ahead of December expiration. The purchase of the December $20 strike calls also suggests traders hope to see the price of DFS shares exceed the current 52-week high of $19.21 before the options expire next Friday. The sharp rise in demand for calls on Discover helped lift the stock’s overall reading of options implied volatility 8.6% to 37.26% by 11:25 am in New York.


Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst

 


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