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Contrarian Player Positions for Rebound in Cytokinetics Shares in 2011

 Today’s tickers: CYTK, SNDK, XCO, GIII & CFN

CYTK - Cytokinetics, Inc. – One bullish options investor appears to be taking advantage of the massive pullback in the price of the biopharmaceutical company’s shares today by initiating a sizeable buy-write strategy using call options expiring in June of 2011. Cytokinetics’ shares fell as much as 23.2% during the session to touch an intraday low of $2.25 despite seemingly positive results from its Phase 2a trial of its experimental drug therapy aimed at improving quality of life for patients suffering from Lou Gehrig’s disease. Reports indicated the firm plans to launch another mid-stage trial to test multiple doses of the drug over a three-month period in the first half of 2011. The covered-call seller populating CYTK today is well positioned to benefit from a rebound in the price of the underlying shares in the first half of 2011. It looks like the investor purchased 395,000 shares of CYTK at a price of $2.32 each, and sold 3,950 calls at the June 2011 $2.5 strike for a premium of $0.45 a-pop. The sale of the call options effectively reduces the price paid to get long the stock from $2.32 a share to $1.87 each. Thus, the buy-write strategist is positioned to accrue maximum gains of 33.7% on the long stock position in the event that Cytokinetics’ shares surge 11.1% over today’s low of $2.25 to exceed $2.50 a share ahead of expiration day in June. The investor may have the underlying stock position called from him at $2.50 each if the calls land in-the-money at expiration, thus allowing him to exit the position with the 33.7% rise in shares from $1.87 to $2.50. More than 4,050 calls changed hands at the June 2011 $2.5 strike today, versus previously existing open interest of just 451 contracts at that strike.

SNDK - SanDisk Corp. – Bulls are picking up in- and out-of-the-money call options on the maker of flash-based storage products once again today with shares in SanDisk Corp. trading 1.5% higher this afternoon at $50.35 just before 1:00 pm. Earlier in the session, SanDisk’s shares jumped 2.75% to hit an intraday- and new 52-week high of $50.97. Near-term bullish players purchased more than 2,000 in-the-money calls at the December $50 strike for an average premium of $1.35 apiece. Investors holding these contracts are prepared to make money should SNDK shares rally another 2.00% over the current price of $50.35 to trade above the average breakeven point at $51.35 ahead of expiration on Friday. Longer-term optimistic traders looked to the July 2011 $55 strike where some 2,000 call options were picked up at an average premium of $5.05 a-pop. Call buyers at this strike are poised to profit in the event that SanDisk Corp.’s shares jump 19.25% in the next seven months to surpass the average breakeven price of $60.05 by July expiration.

XCO - EXCO Resources, Inc. – The Texas-based oil and natural gas exploration and production company popped up on our scanners this morning after one investor initiated sizeable covered call strategy on the stock. EXCO’s shares rallied as much as 4.7% today to touch an intraday high of $19.38 on news Wilbur Ross purchased a 7.5% stake in the company. The buy-write strategist appears to have purchased 300,000 shares of the underlying stock for a price of $19.30 each, while selling 3,000 in-the-money calls at the January 2011 $19 strike for a premium of $0.80 apiece. The sale of the calls effectively cheapens the cost of getting long XCO shares to $18.50 each. If the calls are in-the-money at expiration, and the shares are called away from him at $19.00 apiece, the investor exits the position with maximum potential gains of 2.7% on the rise in shares from the effective purchase price of $18.50 to $19.00. If shares cool ahead of expiration, the trader may choose to keep the shares and benefit from bullish movement in the price of the underlying stock at any price above $18.50. More than 3,350 calls changed hands at the January 2011 $19 strike in the first half of the trading session, versus previously existing open interest of just 399 contracts at that strike. Options implied volatility on EXCO Resources collapsed 20.8% lower to 23.86% by 11:30 am in New York.

GIII - G-III Apparel Group, Ltd. – Shares of the maker of outerwear, sportswear and accessories, and women’s suits and dresses under licensed brands such as Cole Haan and Calvin Klein edged 1.15% lower this afternoon to $34.57 by 12:45 pm in New York. Earlier in the session, G-III’s shares rallied as much as 1.8% to hit an intraday- and new 52-week high of $35.60. It looks like one options investor expects shares of the apparel manufacturer to remain range-bound through expiration day next month. The trader appears to have initiated a short straddle, selling 2,250 calls at the January 2011 $35 strike for a premium of $2.05 each, along with the sale of 2,250 puts at the same strike for an average premium of $1.875 apiece. Gross premium pocketed on the transaction amounts to $3.925 per contract. The investor keeps the full amount of premium received if shares settle at $35.00 at expiration. The trader’s profits start to erode if shares shift in either direction away from the central strike price. Short positions in both call and put options in this case expose the investor to potentially devastating losses should shares rally above the upper breakeven price of $38.925, or if shares slip beneath the lower breakeven point at $31.075 ahead of January expiration day. The 4,500 contracts utilized in the short straddle exceed the 3,406 lots of overall previously existing open interest on the stock.

CFN - CareFusion Corp. – Demand for March 2011 contract call options on the medical technology company suggests some investors are positioning for the price of the underlying stock to rally significantly ahead of expiration next year. CareFusion’s shares are currently down 0.90% to arrive at $23.97 as of 11:35 am in New York. More than 5,010 calls changed hands at the March 2011 $25 strike within the first 30 minutes of the session, versus paltry previously existing open interest of just 866 contracts. It looks like the majority of the calls, roughly 4,515 contracts, were purchased at an average premium of $1.27 a-pop. Call buyers are prepared to make money should shares in CareFusion Corp. surge 9.6% over the current price of $23.97 to surpass the average breakeven point at $26.27 ahead of March expiration. The sharp rise in demand for CareFusion calls helped lift the stock’s overall reading of options implied volatility 19.1% to 31.19% by 11:40 am.

 


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