GNW – Genworth Financial, Inc. – Bearish option trades belie the more than 6% rally in shares of the financial security company to $8.59 during today’s trading session. It appears that one investor has spread the sale of 10,000 calls at the December 10 strike price for 1.00 apiece against the purchase of 10,000 puts at the September 7.5 strike for about 56 cents each. The bearish reversal play occurred in the midst of plain-vanilla put purchasing at the September 7.5 strike, where approximately 8,000 puts were picked up for 56 cents per contract. Perhaps investors enacting such trades are bracing for a pullback in the price of GNW by expiration in September. The long puts will begin to generate profits if the stock slips 19% lower through the breakeven point at $6.94. The investor responsible for the bearish reversal has received a net credit of 44 cents and may add to his profits if the September 7.5 strike puts land in-the-money by expiration. The short call position in the December contract leaves the investor vulnerable to potentially unlimited losses above the effective breakeven point at $10.56, unless of course the trader holds a long position in the underlying. If the trader owns the stock, then he may be near-term bearish and long-term bullish. The short call position would serve the same purpose as a covered call. If GNW trades above $10.00 by expiration, the investor may shed the position in the underlying and walk away with profits earned on the appreciation in the value of the stock.
ERTS – Electronic Arts, Inc. – Bullish reversals on the developer of video game software caught our attention today amid a rally of nearly 4% on the stock to $21.11. Investors were seen shedding puts in order to finance the purchase of out-of-the-money calls in the December contract. Approximately 2,500 puts were sold at the December 16 strike for 43 cents each, while another 2,500 puts were surrendered at the higher December 17 strike for 62 cents apiece. Traders utilized premium enjoyed on the sale of puts to get long of 5,000 calls at the December 25 strike price for an average premium of 93 cents. The average net cost of purchasing the calls amounts to about 40 cents per contract. A rally in ERTS of 20% will allow call-holders to begin to amass profits above the average breakeven point at $25.40. Finally, plain-vanilla bullish call buyers looked to the December 24 strike price to scoop up 4,700 calls for 1.20 each.
RCL – Royal Caribbean Cruises Ltd. – Investors in the global cruise company have seen the stock surge more than 6% during the trading session to $17.47. Bullish reversals were employed by option traders hoping to profit on further upside movement in the stock by expiration in September. It appears that approximately 8,000 puts were shed at the September 15 strike for an average premium of 64 cents each in order to partially finance the purchase of 8,000 calls at the September 17.5 strike for 1.36 apiece. The net cost of getting long the calls amounts to 72 cents per contract. The calls are nearly in-the-money, but an additional 4% rally is required in order for investors to breakeven at a price of $18.22. Plain-vanilla call buying was also apparent at the September 17.5 strike where it seems approximately 5,000 calls were coveted for 1.36 each. Calls purchased without the discount produced by the simultaneous sale of put options increases the breakeven point to $18.86, and requires an 8% rally in shares before traders may realize profits.
WFT – Weatherford International Limited – The provider of equipment and services used in the production of oil and natural gas wells jumped onto our ‘most active by options volume’ market scanner this afternoon after bullish option traders flooded the September and January 2010 contracts. Shares of WFT are currently higher by more than 2% to $18.67 despite reports that the firm’s EBITDA for the most recent quarter reached a three-year low. Bullish investors employed various strategies in order to position for continued upward movement in the price of shares. The nearer-term September 19 strike price had 4,000 calls purchased for an average premium of 1.15 apiece, which were spread against the sale of 4,000 calls at the higher September 22 strike for 26 cents per contract. The net cost of the call spread amounts to 89 cents and yields maximum potential profits of 2.11 to the trader if shares rally to $22.00 by expiration. Investors observed in the January 2010 contract chose to execute plain-vanilla call buying, which imposes no upper limit on maximum possible gains like in the call spread previously described. Approximately 3,500 calls were purchased at the January 24 strike price for 1.00 apiece. Super-bullish traders picked up nearly 11,000 calls at the higher January 25 strike for an average premium of 76 cents per contract. Investors long the higher strike calls will begin to bank profits if shares of WFT rally at least 38% from the current price to breach the breakeven point at $25.76 by expiration.
