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Daily Options Intelligence Report

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Elan reversals indicate bearish sentiment

Wed, Jul 1 2009, 06:04 GMT
by Andrew Wilkinson

Interactive Brokers LLC

ELN – Elan Corporation PLC – The neuroscience-based biotechnology company headquartered in Dublin, Ireland, jumped onto our ‘most active by options volume’ market scanner after a massive bearish reversal was initiated on the stock. Shares are currently lower by more than 5% to $6.59. It looks as though one trader sold 30,500 calls at the January 2010 10 strike price for 50 cents apiece in order to finance the purchase of 30,500 puts at the January 5.0 strike for 74 cents per contract. The net cost of getting long the protective put options amounts to 24 cents. We note that the existing open interest present at both strike prices exceeds the volume traded today. But, it does not appear that this trade represents an attempt to close a previously established position.

NOK – Nokia Corporation – The manufacturer of mobile devices has experienced a share price decline of more than 3% to stand at $14.55. We observed a number of bearish trades by investors active on the stock today amid a rating initiated as ‘underperform’ by analysts at BMO Capital Markets. Traders appear to be bracing for significant declines in the price of the underlying as the October 11 strike price saw more than 11,000 put options purchased for 32 cents apiece. Shares would need to plummet 27% from today’s price before profits begin to amass for put-holders at the breakeven point of $10.68. Additional evidence of bearish sentiment was seen at the January 2010 20 strike price where 5,400 calls were shed for 39 cents per contract.

WYE – Wyeth – A sudden frenzy of bullish call activity on the pharmaceutical company was picked up by our scanners this afternoon amid a slight 0.5% decline in shares to $45.12. It appears that the investor or investors responsible for the call action expect Wyeth’s shares to move higher. Perhaps such sentiment stems from speculation regarding the proposed Pfizer-Wyeth merger, which will be put to a shareholder vote at Wyeth on July 20, 2009. In the nearer-term August contract, it looks as though a long call position was rolled to a higher strike price resulting in fresh buying of some 5,000 calls at the August 50 strike price for 15 cents apiece. The calls appear to have been rolled from the existing open interest at the lower August 45 strike where 5,000 lots look to have been sold for a premium of 1.65 per contract. Further along in the October contract, it seems two bull-call spreads were established across four exercise prices. One of the spreads involved the purchase of 21,500 calls at the deep-in-the-money October 42.5 strike price for 4.00 each against the sale of 21,500 calls at the October 47.5 strike for about 87 cents. The net cost of the spread amounts to 3.13 and yields maximum potential profits of 1.87 if shares rally to $47.50 by expiration. The more attractive of the two spread transactions involved the purchase of 16,500 calls at the October 45 strike for 2.20 each spread against the sale of 16,500 calls at the August 50 strike price for 20 cents. The parameters of the trade imply a net cost of 2.00 to the investor who stands to reel in profits of 3.00 per contract if shares can climb to $50.00 by expiration in October.

Published on  Wed, Jul 1 2009, 06:11 GMT