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Daily Options Intelligence Report

Surge in Electronic Arts has call options in action

Wed, Sep 23 2009, 16:12 GMT
by Andrew Wilkinson

Interactive Brokers LLC  |  View company's profile


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ERTS – Electronic Arts, Inc. – Demand for call options on the video game software company is booming this morning perhaps due to unconfirmed takeover rumors that the ERTS could be acquired by Microsoft (MSFT). Shares surged nearly 5% to $19.40, spurring heavier than normal options activity on the stock. Bullish investors stampeded toward the October contract right out of the gate this morning and looked to the October 20 strike to purchase more than 9,300 calls for an average premium of 57 cents apiece. Optimism spread to the higher October 21 strike where 5,000 calls were coveted for 38 cents each. Finally, super-bullish traders picked up more than 4,200 calls at the October 22 strike by shelling out 21 cents per contract. Investors long the higher strike calls will begin to accrue profits if shares of ERTS rise 14.5% to surpass the breakeven price of $22.21 by expiration next month. Swirling rumors and increased options activity today pushed option implied volatility on Electronic Arts up 25% to the current intra-day high of 54% volatility.

MSFT – Microsoft Corp. – Meanwhile shares in MSFT are higher today at $25.95 and option activity suggests this may yet continue. In the April 25 strike put options a seller of around 4,000 contracts stands out where the premium received is 1.87. This investor seems prepared to buy shares of the software-maker within seven-months if it remains below this strike through expiration, while if it does rally the premium remains in his wallet. Elsewhere call option activity seemed to suggest a near-term rise above $25 with activity in the January contract suggesting investors were putting on call spreads at around 1.75. That would imply a breakeven share price of $26.75 and a maximum gain of 3.25 per contract.

ALTH – Allos Therapeutics, Inc. – Profit taking by one Allos Therapeutics optimist was observed this morning through the use of 20,000 put options in the October contract. Shares of ALTH are currently trading slightly higher by less than 0.5% to $8.60. It appears the investor originally sold 10,000 puts short at the October 5.0 strike on September 4, 2009, for a premium of 50 cents apiece. ALTH was trading at $7.52 at the time of the sale and have since climbed 14% to the current price. Thus, the trader was able to purchase-to-close the short position today by buying all 10,000 lots back for just 20 pennies each. Net profits enjoyed on the transaction amount to 30 cents per contract for a total of $300,000. Hungry for additional profits, the trader employed a similar strategy by shedding 10,000 puts at the higher October 7.5 strike, to receive 52 cents per contract. The investor will be able to bank gains on the new short put position if he can buy back the options for less than 52 cents by expiration. Risks inherent in the trade are that shares sink lower and drive up put premiums. If the October 7.5 strike puts land in-the-money by expiration the investor may have shares of the underlying put to him at $7.50 each. Losses would amass in the event that the biopharmaceutical company’s shares slip through the breakeven point to the downside at $6.98.

MT – ArcelorMittal – The steel producer has experienced a slight 0.5% dip in shares to $39.64 during the trading session. Near-term options activity indicates bullishness by traders targeting out-of-the-money calls in the October contract. It appears 1,500 calls were picked up at the October 43 strike for an average premium of 77 cents each. Heavy call volume was generated at the higher October 44 strike where more than 7,000 contracts were exchanged by 11:00 am (EDT). Approximately 5,300 calls were purchased for 55 cents premium per contract. Traders buying the calls will bank profits if shares of ArcelorMittal rise 12% from the current price to breach the breakeven point at $44.55. Shares of MT last traded higher than the breakeven point back on October 3, 2008, when the stock was at $44.90.

Published on  Wed, Sep 23 2009, 16:13 GMT


Interactive Brokers LLC http://www.interactivebrokers.com/ | info@interactivebrokers.com

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The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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