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Monday, February 26, 2024

Options Strategist Portends Sharp Rally in St. Jude Medical

Today’s tickers: STJ, POT, SNDK & FXI

STJ – St. Jude Medical, Inc. – A three-legged bullish options combination play on St. Jude Medical cost $8,500 to initiate today, but the strategist responsible for the transaction could walk away with more than $1.26 million in his wallet come January 2012 expiration. The options player appears to have sold puts on the medical devices maker to offset premium required to purchase a bull call spread. Shares in St. Jude Medical are currently down 1.9% to stand at $46.49 as of 1:10pm on the East Coast.

The investor sold 1,700 puts at the Jan. 2012 $40 strike for a premium of $1.70 each, purchased the same number of calls up at the Jan. 2012 $50 strike at a premium of $2.45 per contract, and sold 1,700 calls at the Jan. 2012 $57.5 strike for premium of $0.70 apiece. The net cost of putting on the three-way trade amounts to $0.05 per contract or a total of $8,500. The spread positions the trader to make money should STJ’s shares rally 7.7% over the current price of $46.49 to exceed the effective breakeven price of $50.05 at expiration next year. Maximum potential profits of $7.45 per contract, or $1,266,500, are available to the investor if the price of the underlying stock jumps 23.7% in the next seven months to trade above $57.50 at expiration in January. The trader loses the $8,500 paid to establish the position if shares fail to rally as predicted. Additional losses accumulate if shares are sharply lower at expiration. The short stance in Jan. 2012 $40 strike puts indicates the investor may wind up having 170,000 shares of the underlying put to him at $40.00 each should the options land in-the-money at expiration day. The maximum payload requires STJ shares to soar well above their most recent 5-year high of $54.18, achieved on May 2. The price of the underlying has exceeded $40.00 since December 2010.

POT – Potash Corp. of Saskatchewan, Inc. – Demand for September contract call options on the producer of fertilizer and industrial feed products suggests some options traders are positioning for shares in POT to flourish over the next several months. Shares in the Saskatoon, SK-based company are off their lows of the session, trading 0.70% lower on the day at $52.58. Investors populating POT options this morning are heavily favoring call options, with more than 5.5 calls changing hands on the stock for each single put option as of 11:25am in New York trade. The International Fertilizer Industry Association said yesterday global fertilizer demand is the highest it has ever been. Trading traffic in Potash call options is heaviest out at the September $57.5 strike where more than 6,500 calls traded against previously existing open interest of 1,881 contracts. It looks like nearly all of the calls were purchased for an average premium of $1.63 a-pop. Call buyers profit if POT’s shares jump 12.5% by expiration day to surpass the average breakeven price of $59.13. Shares in the largest fertilizer producer by market value last traded above $59.13 back on April 26. Options implied volatility on the stock is up this morning, and currently stands 6.7% higher on the session at 34.13%. Potash Corp. is scheduled to report second-quarter results ahead of the opening bell on July 28.

SNDK – SanDisk Corp. – Bearish investors took to SanDisk options today with shares in the producer of data storage products declining as much as 5.4% to an intraday low of $40.55. Tech-sector stocks were some of the hardest hit today following disappointing earnings reports from the likes of Micron Technology, Inc. and Oracle Corp. It looks like some early-bird put buyers secured options that have appreciated in the hours since the opening bell given declines in the price of the underlying stock and the 14.0% spike in options implied volatility on 40.51%. Fresh bearish positioning is heaviest out at the August $39 strike where more than 4,000 puts changed hands against open interest of just 12 contracts. It looks like the majority of the puts were purchased earlier in the session for an average premium of $1.81 a-pop. The August $39 strike puts now tout a heftier asking price of $2.01 each as of 12:15pm. Investors long the puts at an average premium of $1.81 stand prepared to profit should shares in SNDK plunge 8.3% from today’s low of $40.55 to breach the average breakeven price on the downside at $37.19 by August expiration. Meanwhile, near-term bears focused their attention on put options in the front month. Investors positioning for shares in SanDisk to extend losses scooped up some 1,150 puts at the July $41 strike for an average premium of $1.65 each, and picked up another 1,000 put options at the lower July $40 strike at an average premium of $1.09 apiece. July contract options expire ahead of SanDisk’s second-quarter earnings report on July 22.

FXI – iShares FTSE China 25 Index Fund – Chinese stocks are higher on optimism tightening measures previously taken by that country’s central bank to combat inflation are working, and that further interest rate hikes may not be necessary at the present time. China’s Premier Wen Jiabao noted in an opinion piece in the Financial Times that efforts to temper rising prices have been effective. In U.S. trade, the FXI, an exchange-traded fund that tracks the performance of 25 of the largest and most liquid companies in the Chinese equity market, rallied more than 1.00% today to $41.70. The fund attracted one long-term bullish options strategist who appears to be positioning for shares in the ETF to continue to rise through expiration in February 2012. It looks like the trader initiated a reversal, selling 7,100 puts at the Feb. 2012 $36 strike for a premium of $1.48 in order to partially finance the purchase of 7,100 calls up at the Feb. 2012 $44 strike at a premium of $2.34 a-pop. Net premium paid to establish the spread amounts to $0.86 per contract. Thus, the investor responsible for the transaction profits in the event that shares in the FXI increase 7.6% in the next eight months to exceed the effective breakeven price of $44.86 at February expiration. FXI shares were trading above $44.86 as recently as the June 1.

Andrew Wilkinson

Senior Market Analyst


Caitlin Duffy

Equity Options Analyst


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