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Daily Options Intelligence Report

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Option trader prescribes bullish risk reversal on CVS

Fri, Nov 20 2009, 06:32 GMT
by Andrew Wilkinson

Interactive Brokers LLC

CVS - CVS Caremark Corp. – Shares of the pharmacy retail chain are up 1.5% to $31.11 perhaps due, in part, to the ‘buy’ rating it received at UBS today. Optimistic options activity took place in the December contract as one investor initiated a bullish risk reversal. It appears the trader sold 4,400 puts at the December 31 strike for an average premium of 94 cents apiece in order to finance the purchase of the same number of calls at the higher December 32 strike for 63 cents each. The investor pockets a 31 cent credit on the trade, which he retains in full as long as shares remain above $31.00 through expiration. Additional profits accumulate if CVS’s shares rally above $32.00.

LIZ - Liz Claiborne, Inc. – A 15,000-lot covered call in the January 2011 contract on Liz Claiborne today suggests shares are likely to recover, albeit at a glacial pace. Shares of the apparel and accessories retailer suffered a 5% decline to $4.55 during the trading session. One investor effectively purchased shares of the underlying stock for $3.30 apiece by selling 15,000 calls at the January 2011 5.0 strike for a premium of 1.25 each. Thus, the trader stands ready to accrue gains of 51% if shares of LIZ appreciate to $5.00 by expiration. The long-term positioning of the covered call play provides several advantages to the investor. One advantage is that the call options do not expire for another 13 months, which leaves ample time for LIZ’s shares to appreciate up to the strike price of $5.00. The 15,000-lot call transaction represents nearly 50% of the total existing open interest on LIZ of 31,502 contracts. Note that shares last traded above $5.00 yesterday at approximately 10:35 am (EDT).

ITMN - InterMune, Inc. – A bull call spread on the biotechnology company today suggests shares could rally significantly by expiration in April 2010. Bullish options activity on the stock belies the more than 3% decline in ITMN’s shares during the session to $10.94. The call spread involved the purchase of 3,750 calls at the April 15 strike for an average premium of 2.25 each, marked against the sale of the same number of calls at the higher April 25 strike for 75 cents apiece. The net cost of the transaction amounts to 1.50 per contract. The optimistic investor is positioned to amass maximum potential profits of 8.50 per contract if shares of the biotech firm explode up to $25.00 by expiration in April. Shares must rise at least 50% in order for the investor to breakeven at $16.50. The stock traded higher than the breakeven price on September 18, 2009, when shares were at $16.91. Finally, we note that shares of ITMN have not breached the $25.00-level since July 18, 2007. 

WSM - Williams-Sonoma, Inc. – Better-than-expected third-quarter earnings for the home furnishings retailer helped WSM shares buck the downward trend felt by the overall market today. Shares are up slightly by 1% to $21.24 as of 10:10 am (EDT). Williams-Sonoma posted profits of 16 cents per share, which exceeded average analyst forecasts by a factor of three. Option implied volatility contracted 21.64% to 48.23% this morning following earnings.

AEP - American Electric Power Co., Inc. – Put options on the public utility holding company are in high demand this morning with shares trading 2% lower to $31.05. Option traders established fresh put positions in the November contract. Some investors exchanged 3,000 puts at the now in-the-money November 32.5 strike price. Perhaps these individuals are looking to bank profits to the downside ahead of expiration on Friday. Approximately 5,000 puts traded at the November 31 strike. Traders also initiated 2,600 fresh put positions at the in-the-money December 32 strike. Investor exchanged nearly 12,000 option contracts on American Electric Power Company by 10:15 am (EDT).

NTAP - NetApp, Inc. – Shares of the computer hardware company are up 4% today to a new 52-week high of $30.82 following earnings. The firm raked in second-quarter profits of 37 cents per share, which exceeded average analyst expectations by 7 cents. Option implied volatility on NTAP is down 21.42% to stand at 37.71%, which is the lowest reading of volatility on the stock since September of 2008. 

Published on  Fri, Nov 20 2009, 06:34 GMT