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Daily Options Intelligence Report

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Bank of America bearish option position closed – shares rally

Fri, Nov 6 2009, 05:38 GMT
by Andrew Wilkinson

Interactive Brokers LLC

BAC - Bank of America Corp. – One investor banked profits today by unraveling a massive bearish credit spread established back on October 28, 2009. The trader’s decision to take profits ahead of expiration could be a bullish sign for BAC. Shares are trading up 2% near the end of the trading day to stand at $15.00. The investor originally sold approximately 130,000 calls at the November 16 strike for an average premium of 49 cents apiece, spread against the purchase of the same number of calls at the higher November 17.5 strike for 15 cents each. The trader received a net credit of 34 cents per contract on the transaction. Today, the investor left money on the table by closing out ahead of expiration. It appears he sold the upper strike calls for 4 pennies and bought back the lower strike calls for 19 cents apiece. Net profits received for unraveling the spread amount to 19 cents per contract for a total of $2.47 million. One might interpret such a decision as a bullish signal for BAC because the trader decided to walk away with 19 cents – half of the maximum profit potential of 34 cents. The investor would only have been able to retain the full 34 cents if shares traded beneath $16.00 through expiration day in November.

MCD - McDonald’s Corp. – A bullish risk reversal in the January 2010 contract significantly reduced the price paid by one investor establishing an optimistic stance on the fast-food chain. Shares of MCD are trading 1.5% higher today to $61.20 despite yesterday’s downgrade to ‘hold’ by analysts at EVA Dimensions. The investor sold 13,000 put options at the January 60 strike for an average premium of 1.91 apiece to partially offset the cost of purchasing 13,000 in-the-money calls at the same strike for 2.51 each. The net cost of the reversal amounts to 60 cents per contract.

ADM - Archer Daniels Midland Co. – Food products company, Archer Daniels Midland, jumped onto our ‘most active by options volume’ market scanner this afternoon due to bullish activity in the March 2010 contract. Shares edged 0.5% higher to $32.37 during the trading session after the firm revealed better-than-expected first-quarter profits of 77 cents per share. One investor sold out-of-the-money put options to partially finance the purchase of a bull call spread. The call spread involved the purchase of 9,000 calls at the March 35 strike for 1.60 each, spread against the sale of the same number of calls at the higher March 40 strike for 40 cents apiece. The third-leg of the combo was the sale of 9,000 puts at the March 27 strike for 85 cents. The net cost of the bullish play amounts to 35 cents per contract. The investor will profit if shares rally at least 9% from the current price to surpass the breakeven point at $35.35 by expiration. We note that ADM’s shares have remained beneath $35.00 since June 11, 2008.

CVS - CVS Caremark Corp. – Shares of the pharmacy retail chain are trading nearly 20% lower this morning to $29.00 after the company stated its Caremark pharmacy benefits management unit lost $2 billion in business in the past few months. The stock plummeted despite the fact that CVS posted a 39% increase in third-quarter profits this morning. Option traders exchanged more than 56,000 contracts on the stock within the first 30 minutes of the trading session. Fresh positions were taken in both calls and puts in the November contract. Nearly 10,000 put options traded at the November 27.5 strike. Perhaps investors expect shares to surrender another 5% by expiration.

FSYS - Fuel Systems Solutions, Inc. – The supplier of fuel components and systems enjoyed a 24% rally in shares to reach a new 52-week high of $41.94 this morning after posting better-than-expected third-quarter profits. FSYS reported earnings of 88 cents per share, which smashed average analyst expectations of just 43 cents per share. The firm also raised its revenue forecast range from previous estimates of $370-$380 million to $415-$425 million for fiscal year 2009. Fresh call action appeared at the November 45 strike. Option implied volatility imploded following earnings. Volatility sunk 26% from yesterday’s closing value of 85% to an intraday low of 63%.

AEO - American Eagle Outfitters, Inc. – Shares of teen clothing retailer, American Eagle Outfitters, fell more than 12% in early morning trading to $15.68. Analysts were expecting a 1.7% increase in same-store sales for the third-quarter but the firm actually reported that sales fell 5% in the quarter. Bearish investors exchanged more than 3.5 put options on the stock for each call option in play. Option implied volatility is up 9.5% from 52% at the close on Wednesday to stand at the current value of 57%. 

Published on  Fri, Nov 6 2009, 05:46 GMT