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Options Strategists Take the Wheel at Ford Motor Co.

 Today’s tickers: F, NKE, TSRA, PCX, STI, CSCO & SNDK

F - Ford Motor Co. – A couple of large-volume spreads initiated in longer-dated call and put options on the automaker caught our eye this afternoon. Shares in Ford Motor Company increased 0.90% this afternoon to stand at $17.00 in the final minutes of the trading day. It looks like one bullish player employed the use of a debit call spread in the April 2011 contract while a more cautious investor utilized a ratio put spread expiring in June of 2011. The options optimist picked up 10,000 calls at the April 2011 $17 strike for a premium of $1.25 each, and sold the same number of calls at the higher April 2011 $20 strike at a premium of $0.29 apiece, in order to position for continued bullish movement in the price of the car manufacturer’s shares. The trader paid a net premium of $0.96 per contract for the spread, and is positioned to make money should Ford’s shares rally another 5.6% over the current price of $17.00 to exceed the effective breakeven point at $17.96 by expiration day in April. Maximum potential profits of $2.04 per contract are available to the call-spreader if Ford’s shares jump 17.6% to first surpass the current 52-week high of $17.42 on the stock, and ultimately trade above $20.00 ahead of expiration. Further along in the June 2011 contract, another strategist dabbled in put options, perhaps as a way to hedge a long position in the underlying shares through the first half of 2011, or alternatively to bet on a pullback in Ford’s shares. It looks like the investor picked up 12,500 puts at the June $17 strike at a premium of $1.63 each, and sold 25,000 puts at the lower June 2011 $14 strike for a premium of $0.54 a-pop. The trader paid a net $0.55 per contract for the ratio spread and starts making money if Ford’s shares slip beneath the effective breakeven price of $16.45 ahead of June expiration. The investor may walk away with maximum potential profits of $2.45 per contract in the event that the automaker’s shares plunge 17.6% to settle at $14.00 at expiration day. Selling twice as many lower strike puts exposes the trader to losses should shares plummet 32.05% from the current price of $17.00 to breach the lower breakeven point at $11.55 by June expiration. Ford is scheduled to report U.S. sales for the month of December on January 4, 2011.

NKE - Nike, Inc. – Options on the world’s largest seller of athletic apparel are active ahead of the release of the firm’s second-quarter earnings report after the closing bell this afternoon. Shares in Nike, Inc. are up 2.22% in the final hour of the trading session to secure an intraday- and new 52-week high of $92.27. The impending earnings announcement and increased demand for options on the sneaker-seller lifted Nike’s overall reading of options implied volatility 10.5% to 25.02% as of 3:30pm in New York. Investors taking a bullish stance on Nike scooped up more than 2,400 now in-the-money calls at the January 2011 $90 strike for an average premium of $3.19 apiece. Call buyers are prepared to make money should Nike’s shares rise 1.0% to surpass the average breakeven point to the upside at $93.19 by January expiration. More than 8,500 calls changed hands at the January 2011 $95 strike versus previously existing open interest of 5,750 contracts. It looks like some 3,800 of the calls traded on the ask for an average premium of $1.13 each. Higher-strike call coveters profit if shares surge 4.2% to trade above $96.13 by expiration day.

TSRA - Tessera Technologies, Inc. – Shares in Tessera Technologies increased as much as 8.04% during the session to trade at $22.30, the highest in more than seven months, on news the firm won an appeal in a patent case against companies such as Qualcomm Inc., regarding chip packaging. The U.S. Court of Appeals for the Federal Circuit agreed with the International Trade Commission’s original ruling that found a number of companies had infringed on Tessera’s patents. The verdict sent shares in Tessera Technologies higher and spurred demand for January 2011 contract call options on the stock. Investors expecting TSRA to extend gains through expiration next month picked up roughly 1,000 now in-the-money calls at the January 2011 $21 strike for an average premium of $0.88 each. Bullish sentiment spread to the higher January 2011 $22.5 strike where more than 2,000 calls were purchased at an average premium of $0.46 per contract. Investors holding these contracts are prepared to make money should Tessera’s shares rally another 2.95% over today’s high of $22.30 to surpass the average breakeven price of $22.96 by expiration day. Trading traffic in TSRA calls is heaviest at the January 2011 $24 strike, where more than 5,390 calls have changed hands as of 2:45pm. While some of the contracts were purchased, it looks like the majority of these options were sold for an average premium of $0.16 each. Call sellers walk away with the full $0.16 in premium received on the sale of each call option as long as shares fail to rally above $24.00 and the contracts expire worthless at expiration. Investors pocketing premium appear to be suggesting that they do not expect to see Tessera’s shares gain another 7.6% by expiration day. Traders selling uncovered calls run the risk of absorbing losses in the event that TSRA’s shares jump 8.3% to trade above the upper breakeven price of $24.16 before the options expire next year.

PCX - Patriot Coal Corp. – Coal-calls are a hot commodity today with shares in Patriot Coal Corp. soaring 6.85% higher this afternoon to touch an intraday high of $18.71. The fourth-largest eastern U.S. coal producer was rated new ‘market outperform’ with a 12-month target share price of $25.00 at Howard Weil today, and was upped to ‘outperform’ from ‘market perform’ with a 12-month target price of $21.00 at FBR Capital Markets yesterday, on optimism regarding economic recovery. Investors positioning for Patriot’s shares to continue their run picked up more than 5,300 calls at the January 2011 $19 strike for an average premium of $0.70 each. Call buyers start making money if Patriot Coal’s shares surge 5.3% over today’s high of $18.71 to exceed the average breakeven price of $19.70 by January expiration. The surge in demand for call options on the stock helped lift Patriot’s overall reading of options implied volatility 7.7% to 49.32% by 12:40pm.

STI - SunTrust Banks, Inc. – The financial services firm popped up on our scanners this morning after one options strategist initiated a sizeable ratio put spread in the February 2011 contract. Shares in SunTrust Banks surged 3.95% during the first half of the session to secure an intraday high of $28.12. STI was rated new ‘outperform’ with a 12-month target share price of $31.00 at RBC Capital Markets on Monday. The put action observed on the banking company may be the work of an investor hedging a long position in the underlying shares, or could be an outright bearish player expecting STI’s shares to falter in the first couple of months of the new year. The investor picked up 4,000 puts at the February 2011 $27 strike for a premium of $1.25 each, and sold 8,000 puts at the lower February 2011 $23 strike at a premium of $0.26 a-pop. Net premium paid to establish the spread amounts to $0.73 per contract. Thus, the trader stands ready to profit if SunTrust’s shares fall 6.6% from today’s high of $28.12 to breach the effective breakeven point to the downside at $26.27 by expiration day in February. Maximum potential profits of $3.27 per contract are available to the trader should shares in SunTrust plunge 18.2% to settle at $23.00 at expiration. The sale of twice as many of the lower strike puts is an effective way to reduce the cost of buying up downside protection, and suggests the investor responsible for the transaction does not expect to see shares collapsing much below $23.00 ahead of expiration. Catastrophic declines in SunTrust’s shares could, however, result in losses to the put player if the stock falls 29.8% off the intraday high of $28.12 to breach the lower breakeven price of $19.73 before the options expire in February.

CSCO - Cisco Systems, Inc. – It looks like some options strategists foresee brighter days ahead for the maker of switches and routers. One optimistic player appears to have employed a three-legged bullish trade, selling a put spread in order to buy out-of-the-money calls in the April contract. Shares in Cisco Systems are down slightly by 0.15% this afternoon to stand at $19.59 as of 12:45pm in New York. Cisco’s shares are still down 20.0% since November 10, 2010. The investor positioned for a rebound by selling 1,375 in-the-money puts at the April 2011 $21 strike for a premium of $1.88 each, buying the same number of puts at the lower April 2011 $19 strike at a premium of $0.82 apiece, and buying 1,375 calls at the April 2011 $21 strike for a premium of $0.60 a-pop. The trader pockets a net credit of $0.46 per contract on the spread, and adds to profits if CSCO’s shares rally 7.2% over the current price of $19.59 to trade above $21.00 by expiration in April. The put spread exposes the trader to maximum potential losses of $1.54 per contract should shares of the networking company slip below $19.00 ahead of expiration day next year. But, the risk appears to be worth it for this trader because of the uncapped upside exposure provided by the long calls as well as the $0.46 net credit pocketed on the transaction.

SNDK - SanDisk Corp. – Call options on the maker of data storage products are flying off the shelves today with shares in SanDisk Corp. rallying as much as 5.10% to hit a new three-year high of $51.72. Investors hoping to see the good times continue scooped up January 2011 contract call options on SanDisk, which was upgraded to ‘outperform’ from ‘market perform’ at Raymond James. Bulls picked up more than 1,800 now in-the-money calls at the January 2011 $50 strike for an average premium of $2.67 apiece. Traders holding these contracts are poised to profit should SanDisk’s shares increase another 1.8% over today’s high of $51.72 to surpass the average breakeven price of $52.67 by January expiration day. Trading traffic in SanDisk Corp. call options is heaviest at the higher January 2011 $55 strike where more than 8,100 calls have changed hands as of 12:05pm in New York. It looks like the majority of the contracts, approximately 4,800 calls, were bought by bullish players for an average premium of $0.93 apiece. Call buyers at this strike make money if SNDK’s shares surge 8.1% to exceed the average breakeven point to the upside at $55.93 by expiration day next month. Options implied volatility on SanDisk is higher by 8.4% in early afternoon trade to arrive at 37.47% by 12:10pm.


Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst


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