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Tuesday, August 16, 2022


Time Warner Bull Channels Stock and Option Combo Play

 Today’s tickers: TWX, KBE, KMB & AET

TWX – Time Warner, Inc. – A massive transaction combining Time Warner stock and options suggests one strategist expects bullish movement in shares of the media and entertainment company ahead of February expiration. Time Warner’s shares are currently trading 0.40% higher on the session at $33.30 as of 1:25pm. The combo-player initiated a delta neutral trade, selling 1,400,000 shares of the underlying at $33.00 each, and buying 40,000 calls at the February $34 strike for a premium of $0.56 apiece, on a 0.35 delta. This is another one of those stock and option combinations in which the investor wants to have his cake and eat it too. The short stock leg of the trade works in the event Time Warner loses value, but should the shares jump, the value of the calls is intended to swell and outpace losses on the now losing stock price. As the share price increases the delta on the calls moves higher meaning that the value of the calls appreciate at a faster rate leaving the investor better placed as a bull. In other words, gains from the rising value of the call options, given share price appreciation, will eclipse losses that accumulate from the short stance in TWX shares. Time Warner’s shares last traded above $34.00 back on May 30, 2010.

KBE – SPDR KBW Bank ETF – Large prints in March contract call options on the SPDR KBW Bank ETF this morning appear to be the work of one strategist taking profits off the table and extending bullish sentiment on the fund through expiration in a few months time. Shares of the KBE, an exchange-traded fund that replicates the performance of the KBW Bank Index and invests in regional banks and other diversified financial services industries, are currently down 0.50% to stand at $26.68 as of 12:30pm in New York. It looks like the investor originally purchased a total of 27,100 calls at the March $26 strike, picking 20,000 lots for an average premium of $1.075 each on December 13, and buying another 7,100 calls at that strike for a premium of $0.70 apiece on December 8, 2010. The price of the fund’s shares at the time of the original transactions ranged from a low of $23.75 to a high of $25.37. Today, the trader sold the chunk of 20,000 now in-the-money calls for a far richer premium of $1.60 each, and sold the other lot of 7,100 contracts for $1.75 a-pop. Net profits on the sale amount to $0.525 and $1.05 per contract, respectively. Similar profit-taking behavior was observed at the higher March $27 strike where it looks like the investor originally paid $0.70 per contract on December 14, 2010, to buy 5,700 of the calls. Selling the contracts today for $1.20 apiece, the investor pockets net profits of $0.50 per contract. Finally, the regional banks-bull extended optimistic sentiment on the fund by purchasing a total of 32,800 fresh calls up at the March $28 strike, paying $0.85 in premium for 12,800 of the contracts, and shelling out premium of $0.70 for the other 20,000 call options. The new long call position, which involves the same number of contracts overall as the original positions established back in December, prepare the investor to benefit from continued appreciation in the price of the underlying fund through March expiration.

KMB – Kimberly-Clark Corp. – Options traders appear to be placing bullish bets on the consumer products giant today, just a few weeks before the firm is slated to report fourth-quarter earnings before market opens for trading on January 25, 2011. Kimberly-Clark’s shares are currently down 0.30% at $62.92 as of 12:55pm, but earlier slipped to a session low of $62.81. Investors positioning for a rally in the toilet paper maker’s shares picked up at least 1,250 in-the-money calls at the February $62.5 strike for an average premium of $1.54 each. The 1,938 calls exchanged at that strike thus far today far exceed the 325 lots of open interest at that strike. Call buyers are poised to profit should KMB’s shares increase 1.8% over the current price of $62.92 to surpass the average breakeven point at $64.04 ahead of February expiration. Trading traffic in Kimberly-Clark call options is heaviest at the April 2011 $62.5 strike where 5,315 in-the-money contracts changed hands, versus previously existing open interest of just 847 lots at that strike. The majority of the calls were purchased for an average premium of $1.90 apiece. Investors holding these contracts make money if KMB shares gain 2.35% to trade above the effective breakeven price of $64.40 before the calls expire in April. The sharp rise in demand for KMB calls helped lift the overall reading of options implied volatility on the stock 12.8% to 13.96% in early afternoon trade.

AET – Aetna, Inc. – Shares of the health care benefits company are up 2.5% this afternoon to stand at $32.29 as of 1:45pm. Aetna’s shares are perhaps higher today in sympathy with managed care firm Centene’s shares after it received an upgrade to ‘overweight’ from ‘underweight’ by an analyst at Barclays. Aetna popped up on our scanners earlier in the session after a large number of calls were purchased in the April contract. It looks like the investor responsible for the transaction purchased 15,000 calls at the April $33 strike for a premium of $1.37 each. Buying the contracts prepares the bullish trader to profit should shares surge 6.4% over the current price of $32.29 to exceed the effective breakeven price of $34.37 ahead of April expiration. Aetna is scheduled to report fourth-quarter earnings before the market opens on February 4, 2011.


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