Call Spreader Eyes Near-Term Turn-Around In Valeant

Today’s tickers: VRX, DISH, GE & S

VRX - Valeant Pharmaceuticals, Inc. – Shares in Canada’s largest drug maker have lost roughly one-third of their value in just over one week’s time, and it looks like one options player is prepared to see the stock recover somewhat in the next couple of weeks. Valeant’s shares currently trade 6.15% lower on the session at $38.34. The stock fell sharply on Thursday after the company reported lower-than-expected profits for the second quarter. Massive prints in August contract call options point to one player’s optimism for a speedy, albeit limited, rebound in the price of the underlying by expiration this month. It looks like the investor initiated a bull call spread, buying 25,000 now in-the-money calls at the August $38 strike for a premium of $1.75 each, and selling the same number of calls up at the August $43 strike at a premium of $0.45 apiece. The net cost of the trade amounts to $1.30 per contract, thus preparing the options strategist to profit should shares in Valeant increase 2.5% over the current price of $38.34 to surpass the effective breakeven point on the spread at $39.30 by expiration day. Maximum potential profits of $3.70 per contract pad the investor’s wallet if shares in the drug maker gain 12.2% to trade above $43.00 by expiration in two weeks. Options implied volatility on the pharmaceuticals company stands 25.6% higher this afternoon at 67.51% as of 1:40 pm on the East Coast.

DISH - DISH Network Corp. – The sharp pullback in shares of DISH Network today appears to have paid off handsomely for one strategist holding put options on the stock. It looks like the investor more than doubled his money in the past 48 hours by selling puts originally purchased on Wednesday. Shares in the provider of direct broadcast satellite subscription television service in the US plunged 9.1% to an intraday low of $24.28 this morning. The trader likely purchased around 1,000 puts at the September $27 strike for an average premium of $1.09 each on Wednesday, and sold those puts today for an average premium of $2.40 a-pop. Net profits on the transaction amount to $1.31 per contract. Next, the investor extended bearish sentiment on the stock, buying a 1,500-lot September $22/$25 put spread at a net premium of $1.00 per contract. The fresh bout of pessimism on DISH yields profits to the trader in the event that shares slip beneath the effective breakeven price of $24.00 by September expiration. Maximum potential profits of $2.00 per contract are available on the spread should DISH’s shares fall another 9.4% to trade below $22.00 at expiration next month. The trader may be bulking up on puts ahead of the company’s second-quarter earnings report this coming Tuesday ahead of the market open.

GE - General Electric Co. – Sizable bearish put spreads on General Electric this morning indicate traders are bracing for the price of the underlying to potentially pull back to levels not seen since July 2009. Shares in GE currently trade just 0.30% lower on the day at $15.42 as of 12:20 pm ET. It looks like investors purchased around 20,000 puts at the November $15 strike for an average premium of $0.81 apiece, and sold the same number of puts at the lower November $12 strike at an average premium of $0.24 each. Premium paid for the spread amounts to an average of $0.57 per contract, which positions traders to profit should GE’s shares drop 6.4% to breach the average breakeven price of $14.43 by November expiration. Bearish players could make as much as $2.43 per contract in the event that shares in GE plunge 22.2% to trade below $12.00 at expiration day. Options implied volatility on GE is off its highest of the session, but remains elevated by 4.9% to stand at 42.82% in early-afternoon trade.

S - Sprint Nextel Corp. – Shares in Sprint Nextel Corp. are struggling to stay positive this afternoon, but fresh trading in November contract call options on the wireless provider suggest some market participants expect the price of the underlying to rebound before the year is out. Sprint’s shares are currently flat on the day to arrive at $3.74 as of 12:55 pm in New York. Investors exchanged more than 27,000 calls at the November $4.5 strike earlier in the session against open interest of 3,863 contracts. Not all of the interest was buying, but it does appear the majority of the contracts were purchased for an average premium of $0.23 apiece. Call buyers profit if shares in Sprint soar 26.5% in the next few months to top $4.73 by expiration day in November. Shares in Sprint had mostly been humming along above $4.50 from March through much of July, but the stock took a turn for the worse in the most recent two weeks to surrender nearly 30% of its value. Options implied volatility on Sprint is up 21.1% at 65.43% this afternoon.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst

Tags: DISH, GE, S, VRX

This entry was posted on Friday, August 5th, 2011 at 3:15 pm and is filed under Appears on main page, Uncategorized. You can leave a response, or trackback from your own site.

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Call Spreader Eyes Near-Term Turn-Around In Valeant