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Daily Options Intelligence Report

Bullish option strategies surround Priceline.com

Fri, Dec 19 2008, 10:03 GMT
by Andrew Wilkinson

Interactive Brokers LLC  |  View company's profile

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Today's tickers: PCLN, DFS, DNA, HBC, CAT & CX

PCLN – Priceline.com – Shares in online retailer have been on the rise for about the last week rising today to $71.33. For a stock whose option open interest measures just 110,000 contracts, today's trading marks a busy day. Both January and April contracts saw large volume involving three option legs, but from what we can piece together it appears that bullish patterns were evident. In the January contract for instance, an investor sold 3,750 put options at the well out-of-the-money 45 strike at 30 cents. Simultaneously the investor purchased twice as many call options at the 70 strike costing 4.60 while selling 1,200 calls at the neighboring 75 strike for a 2.60 premium. Overall the investor is net long and hopes the stock continues to rise. The pattern was a little less clear in the January contract but the 45 puts were sold against the 85 strike calls. The trading took place while shares were actually lower on the session at $69.15 before the option pattern possibly sent trade facilitators scurrying to cover net short positions via the stock.

DFS – Discover Financial – Along with its announcement of higher than expected quarterly profits, the credit card company said it had applied to the Fed for bank holding status and that it was seeking to participate in the Treasury Capital Purchase Program. That sent shares in the company 14.2% higher by lunchtime to $9.80 and took some of the pressure off option prices thanks to a decline in option implied volatility, which dropped 6 points to 118%. Option traders, however, were less convinces that the rebound would have staying power and sold calls in the January contract at the 10.0 strike receiving 1.10 for the risk they now bear. But they were also keen to buy protection against a further deterioration in this climate of a slowdown in spending and rising in delinquencies, where the government is toying with plans to protect consumers from the lenders cutting back on amounts they lend while they squeeze customers with higher rates. Option traders bought both 7.5 and 10.0 strikes at 60 cents and 1.50 premiums.

DNA – Genentech Inc. – We saw little news to explain the presence of Genetech in our market scanners this morning, where option volume at the December 80 strike puts of 5,000 matched volume trading at the January 85 strike. Today shares in DNA rose to a one-month high to $80.17. The calendar spread appears to be the closing leg of a trade at a price of 5.55 today, which was originally sold in July when shares were trading at $93.15. At the time the trader bought January puts at a higher strike and sold the nearer expiration at the lower strike to fund the trade. At the time the trader paid a net premium of 1.10 to establish the position, which has performed marvelously into December's expiration thanks to a share price decline.

HBC – HSBC Holdings ADR – We noted heightened option activity on British and Far Eastern lender, HSBC midweek and today sees more follow through as another broker turns sour on the best of breed bank. Thus far, HSBC has been well positioned to weather the storm and has been seen as a best of breed with a great Tier 1 capital adequacy ratio of 7.6. However, analysts now expect this to at least decline in 2009 as it bears emerging market losses from which location the bank earns two-thirds of its profits. Other banks, which have gone to their respective central bankers in order to replenish capital will catch-up with HSBC, while analysts are slow to now point out that HSBC is more exposed to deeper recession prospects from emerging markets. Investors snapped up put options across the board aiming as low as the January 30 strike where some 2,000 lots were bought for 30 cents, which compares to existing interest in the strike of 803 contracts. Puts were bought all the way up to the 60 strike, which is well in-the-money given HSBC's share price decline of 9.4% today to $47.10. Implied volatility rose 14% to 66% as a result of the growing speculation surrounding the stock.

CAT – Caterpillar Inc. – Despite a share price decline in today's session to $43.42 option investors retain a positive bias on Caterpillar's prospects no doubt with what one might coin as the Obama-put. Media is today banding about news of a proposed $850 billion stimulus package in the works, which is expected to address infrastructure and would be a boon to heavy equipment makers – at least that's the theory. Investors used the January 45 strike call option to add 11,000 more bullish bets on the company and paid a 2.55 premium, which implies that Caterpillar needs to rally to $47.55 by expiration for investors holding calls to make money. Through Wednesday investors held 16,014 lots of open interest at the strike price.

CX – Cemex SA– Another hot option stock we noted in yesterday's activity was Mexican cement manufacturer where collars seem to be in play. We're spying much the same today as the share price turns round and starts to fall. In the January contract an investor paid 50 cents for 10,000 puts at the 7.5 strike in used proceeds from the 12.5 strike where the premium was 35 cents.

Published on  Fri, Dec 19 2008, 10:04 GMT

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