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Call Options Fly Off the Shelves at AIG

 Today’s tickers: AIG, CAT, DTV, WPI, PBR, DNR, V & M

AIG - American International Group, Inc. – The insurer’s shares rallied as much as 12.2% today to touch an intraday- and new 2-year high of $60.96 on news the firm secured $4.3 billion in bank credit lines. Mounting confidence in the insurance company along with the rising value of AIG shares inspired bullish options traders to purchase in- and out-of-the-money calls today. Weeklies were popular with options traders expecting to see shares end the year on a high note. Investors picked up more than 2,900 now in-the-money calls at the December ’31 $57.5 strike for an average premium of $0.93 each, and coveted upwards of 2,900 in-the-money call options at the higher December ’31 $60 strike at an average premium of $0.51 a-pop. Optimistic individuals also purchased some 1,300 call options at the December ’31 $65 strike for an average premium of $0.27 apiece. Options strategists looked to the January 2011 contract to place bullish bets, as well. Notable in-the-money call buying was observed here, as well as fresh interest in calls at the January 2011 $62.5 strike where more than 1,700 contracts were purchased for an average premium of $1.46 each. The sharp increase in demand for American International Group calls pushed the overall reading of options implied volatility on the stock higher by 25.2% to 50.30% in the final 15 minutes of the trading day.

CAT - Caterpillar, Inc. – It looks like some options investors expect the machinery maker’s shares to trend higher at the start of 2011. CAT-bulls are buying call options in the January 2011 contract this afternoon despite the 0.45% decline in the price of the underlying stock to $94.04. Options traders exchanged more than 7,200 calls at the January 2011 $95 strike by 3:10pm in New York trade. It looks like the majority, or approximately 5,300 of the call options, were purchased for an average premium of $1.58 a-pop. Call buyers make money if CAT’s shares rally more than 2.7% over the current price of $94.04 to first break above the current 52-week high of $94.89, and ultimately exceed the average breakeven point to the upside at $96.58 by January expiration day. Options implied volatility on the stock spiked 16.7% higher late in the session to arrive at 25.13% as of 3:15pm.

DTV - DIRECTV – Shares of the digital television entertainment company edged 0.20% lower in the final hour of the session to trade at $39.84. One options investor is positioning for shares in DTV to remain range-bound through expiration in January 2012. It looks like the trader initiated a short strangle, selling 5,000 calls at the January 2012 $45 strike for a premium of $1.90 each, and selling the same number of puts at the lower January 2012 $35 strike at a premium of $2.25 apiece. Gross premium pocketed on the strangle amounts to $4.15 per contract. The investor keeps the full amount of premium received on the transaction as long as shares in DTV trade within the boundaries of the strike prices described through expiration day in just over one year’s times. The strangle-seller may take profits off the table by buying back the position at some future date ahead of expiration. The long-dated contracts have a great deal of time value priced into the premium received by the investor today. The cost of buying back the strangle will fall as time erodes, and the trader may be able to close out the position profitably before the contracts expire in 2012. The short stance in both call and put options could result in losses to the investor, however, if DTV’s shares rally above the upper breakeven price of $49.15, or if shares slip beneath the lower breakeven point at $30.85 ahead of expiration.

WPI - Watson Pharmaceuticals, Inc. – The manufacturer of generic and brand name pharmaceutical products received near-term bullish bets by options strategists positioning for the price of the underlying to appreciate ahead of January 2011 expiration. Shares in Watson Pharmaceuticals are currently up 0.50% to stand at $51.93 as of 1:25pm. Last week, Watson said it received FDA approval for its low dose, chewable oral contraceptive drug. Investors expecting shares in Watson to edge higher purchased more than 1,500 in-the-money calls at the January 2011 $50 strike for an average premium of $2.25 a-pop. Call buyers at this strike make money if Watson’s shares rally to a new 52-week high of $52.25 ahead of expiration day. Bulls also purchased some 1,490 calls at the higher January 2011 $55 strike for an average premium of $0.25 each. Investors holding these contracts stand ready to accrue profits should shares in the pharmaceuticals firm surge 6.4% over the current price of $51.93 to surpass the effective breakeven price of $55.25 by January expiration. The rise in demand for Watson’s call options helped lift the stock’s overall reading of options implied volatility 11.8% to 22.81% by 1:30pm.

PBR - Petroleo Brasileiro SA – The oil producer popped up on our scanners today after one options strategist initiated a bullish butterfly spread using February 2011 contract calls. Shares in the Brazilian oil company are currently up 0.70% this morning to stand at $34.52 as of 11:40am in New York. In the final trading day before the Christmas holiday last week, PBR said it found evidence of oil in an onshore well in the Lagoa Bonita field. It looks like the butterfly-spreader is speculating on a sharp rise in the price of the oil company’s shares ahead of February expiration. The investor scooped up approximately 6,600 calls at the February 2011 $36 strike for a premium of $0.87 each, sold roughly 13,200 calls at the February 2011 $37 strike at a premium of $0.54 per contract, and purchased some 6,600 calls at the higher February 2011 $38 strike for a premium of $0.36 a-pop. The net cost of establishing the spread amounts to $0.15 per contract. Thus, the trader makes money if PBR’s shares rally another 4.7% over the current price of $34.52 to surpass the effective breakeven point at $36.15 ahead of February expiration day. Maximum potential profits of $0.85 per contract are available to the bullish player should shares surge 7.2% to settle at $37.00 by expiration in February. PBR’s overall reading of options implied volatility is higher by 6.8% to arrive at 26.88% as of 11:50am.

DNR - Denbury Resources, Inc. – A substantial buy-write strategy on the oil and natural gas exploration and development company caught our eye this afternoon. Shares in Denbury Resources are trading 0.40% lower on the day at $19.10 just after 1:00pm in New York. It looks like one bullish strategist purchased 470,000 shares of the underlying stock at a price of $19.20 each, and sold 4,700 calls at the March 2011 $20 strike for a premium of $0.75 apiece. The sale of the calls effectively reduces the price at which the investor bought into DNR shares to $18.45 from $19.20, and establishes an exit strategy on the underlying position should the March 2011 $20 strike calls land in-the-money by expiration. The investor responsible for the covered call transaction may enjoy gains of up to 8.40% on the rally in shares from $18.45 to $20.00 if the calls land in-the-money, and the shares are called from him at $20.00 apiece, by expiration day in a few months time. More than 5,320 calls changed hands at the March 2011 $20 strike by 1:10pm, which is substantial compared to the 983 lots of previously existing open interest at that strike.

V - Visa, Inc. – Call options are in high demand at Visa, Inc. today with shares of the global payments technology provider rising as much as 2.4% to an intraday high of $70.37. Visa’s shares are recovering from an 18.65% decline off a six-month high of $81.75 on December 13 to a low of $66.50 on December 17, 2010. Shares of the credit card company, given the intraday high of $70.37, are up 5.8% off the December 17 low of $66.50. Near-term bulls expecting shares to continue to rebound picked up calls and sold out-of-the-money puts this morning. Investors purchased more than 1,800 in-the-money calls at the January 2011 $70 strike for an average premium of $2.00 apiece. Call buyers start to accrue profits in the event that Visa’s shares exceed the average breakeven price of $72.00 ahead of January expiration. Other options optimists shed more than 1,300 puts at the January 2011 $65 strike to pocket premium of $0.44 each. Put sellers may be ditching downside protection they no longer feel is necessary in the near term. Alternatively, traders could be selling the contracts outright to pocket available premium. Investors initiating opening sales of the put options keep the full premium received as long as Visa’s shares exceed $65.00 through expiration day next month. Bullish sentiment spread to the February 2011 $75 strike where some 2,800 calls were picked up for an average premium of $1.50 a-pop. Trading traffic in out-of-the-money calls is heaviest in the March 2011 contract. Investors purchased more than 5,800 call options at the March 2011 $75 strike at an average premium of $2.10 each, and scooped up another 5,900 calls at the higher March 2011 $80 strike for an average premium of $1.28 apiece. Options players buying the March 2011 $75 strike contracts are prepared to profit should shares in Visa, Inc. surge 9.6% to surpass the average breakeven price of $77.10, while March $80 strike call-coveters make money if shares jump 15.5% to trade above the breakeven point to the upside at $81.28 by March expiration. Visa’s overall reading of options implied volatility is up 8.1% at 28.53% as of 12:30pm in New York.

M - Macy’s, Inc. – Shares of the department store operator are currently down 0.40% to arrive at $25.06 just after 12:30pm, after having fallen as much as 2.3% to an intraday low of $24.58 earlier in the session. Heavy snow fall on the East Coast tempered the after-Christmas shopping rush retailers expected to see and weighed down Macy’s, Inc. shares today. But, some options traders are still optimistic on the retailer heading into the New Year. Bullish players hoping to see the department store operator attain a new 52-week high ahead of expiration day in the first month of 2011 scooped up more than 3,400 calls at the January 2011 $26 strike for an average premium of $0.38 each. Call buyers are poised to profit should shares in Macy’s jump 5.3% over the current price of $24.58 to exceed the average breakeven point at $26.38 by expiration day in January. Macy’s overall reading of options implied volatility is up 8.9% to stand at 33.06% as of 12:45pm.


Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst


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