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Bullish Risk Reversal Player Eyes Hess Corp.

 Today’s tickers: HES, NOK, AES & NBG

HES - Hess Corp. – The energy company appeared on our scanners this morning after one options strategist initiated a bullish risk reversal in the February 2011 contract. Shares in Hess Corp. are currently down 0.45% to arrive at $75.82 as of 12:40pm. It looks like the investor responsible for the transaction sold 2,500 puts at the February 2011 $65 strike for a premium of $0.53 each, in order to buy the same number of calls at the higher February 2011 $85 strike at a premium of $0.55 apiece. The investor paid a net $0.02 per contract for the risk reversal. This strategy is a far cheaper method of gaining upside exposure for a Hess-bull than buying calls outright. Premium on the calls will appreciate if shares rally sufficiently ahead of expiration day, and the investor may be able to book profits by selling the calls at a higher premium whether or not they land in-the-money. The short stance in puts indicates this individual expects shares to remain above $65.00. He appears to be more than willing to bear the risk of having 250,000 shares of the underlying stock put to him if the puts land in-the-money at expiration because of the cost savings that put selling provides for the bullish stance. Hess Corp. shares are currently trading just below their 52-week high of $76.54, attained during trading on Wednesday. The bullish risk reversal suggests the investor is positioning for Hess Corp.’s shares to hit new highs in the next couple of months to expiration. Shares must rally at least 12.1% over the current price of $75.82 in order for the February 2011 $85 strike calls to land in-the-money before they expire in February.

NOK - Nokia Corp. – Options traders are picking up both call and put options on the mobile telecommunications company today in the February 2011 contract. It looks like investors are expecting shares to move ahead of expiration day in February. Shares in Nokia Corp. are down 0.60% to stand at $10.20 as of 11:10am in New York. Optimistic traders hoping to see Nokia’s shares rally purchased more than 2,700 in-the-money calls at the February 2011 $10 strike for an average premium of $0.71 apiece. Call buyers are poised to profit should the price of the underlying stock increase 5.00% over the current price of $10.20 to surpass the average breakeven point to the upside at $10.71 by expiration next year. Investors taking a bearish stance on the Finland-based firm scooped up more than 3,200 puts at the February 2011 $10 strike for an average premium of $0.48 a-pop. Put players profit if shares in Nokia Corp. fall 6.7% to breach the average breakeven price to the downside at $9.52 ahead of expiration day in February. Options strategists may be utilizing February expiry option contracts in order to lock in the right to buy or sell shares in the telecommunications company ahead of Nokia’s fourth-quarter earnings report, which is scheduled for release before the market opens on January 27, 2011.

AES - AES Corp. – The electricity generation company popped up on our scanners this morning after one options strategist threw in the towel on a sizeable previously established bullish position in January 2011 contract call options. Shares in the Arlington, VA-based firm fell 0.25% to $12.33 by 11:25am. It looks like the investor originally purchased some 17,500 calls at the January 2011 $12.5 strike for an average premium of $1.30 back on March 8, 2010, when the price of the underlying stock was hovering around $11.55. Today, the investor ditched the bullish stance on AES Corp., selling 17,500 of the January 2011 $12.5 strike calls for an average of just $0.225 in premium apiece. The erosion of time value on the calls over the past eight months worked against the trader in this case, and the 6.75% move higher in share price from a volume-weighted average price of $11.55 on March 8, to $12.33 today, proved insufficient to keep up with time decay. Options implied volatility on AES Corp. is lower by 7.4% to arrive at 25.29% as of 11:40am.

NBG - National Bank of Greece SA – Bearish options activity on the National Bank of Greece follows reports that Fitch Ratings placed five Greek banks on review for a potential downgrade after earlier in the week placing Greece’s sovereign debt rating on review. Shares in NBG are down 1.75% to stand at $1.67 just before 11:50am in New York. One pessimistic player expecting shares of National Bank of Greece SA to remain bogged down through the middle of 2011 sold 2,000 calls up at the May 2011 $2.5 strike to pocket premium of $0.15 per contract. The investor walks away with the full premium on the calls as long as the contracts expire worthless at expiration. The call seller may be engaging in naked out-of-the-money call selling, in which case he is willing to bear the risk that shares move against him at some point in the next five months. In this scenario, the investor faces losses if, for some unforeseen reason, shares in NBG rally more than 58.6% over the current price of $1.67 to trade above the upper breakeven point at $2.65 ahead of May expiration day. Alternatively, the trader may hold shares in NBG. Such covered call selling adds premium to his pocket and indicates he is more than happy to have the shares called from him at $2.50 apiece should the calls land in-the-money by expiration.


Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst


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