CX – Cemex SAB de CV – The Mexican cement company’s shares have edged slightly lower by less than 0.5% to $13.04 this afternoon due to the firm’s plan to issue stock to pay down debt. Option traders have braced for further declines by employing bearish risk reversals in the October contract. It appears investors shed 6,500 calls at the October 14 strike for 43 cents apiece in order to partially finance the purchase of 6,500 puts at the lower October 12 strike for 45 cents each. The net cost of picking up protective put options is reduced to just 2 pennies per contract. If traders are long the underlying stock, downside protection will kick in if shares slip beneath the breakeven point at $12.98 by expiration next month.
RIMM – Research in Motion Limited – Blackberry producer, Research in Motion, attracted bullish investors who initiated call spreads on the stock today. Shares are slightly higher by less than 0.25% to stand at the current price of $84.25. One investor targeted the November contract where it appears put options were sold to offset the cost of purchasing a call spread. The spread involved the purchase of 6,000 calls at the November 105 strike for 1.28 each against the sale of 6,000 calls at the higher November 120 strike for 33 cents per contract. Finally, the November 70 strike had 6,000 puts shed for an average premium of 1.87 apiece. The investor receives a net 91 cent credit on the three-legged strategy. He will retain the full premium as long as shares of RIMM remain higher than $70.00 by expiration day. Additional profits are available to the trader if the stock surges 25% from the current price to breach the $105.00 level. Maximum potential profits of 15.00 per contract would be attained if Research in Motion skyrocketed 42% to $120.00. Another trader put on a ratio call spread in the January contract. The bullish trade was established through the purchase of 1,500 calls at the January 90 strike for 6.81 spread against the sale of 3,000 calls at the higher January 115 strike for a premium of 1.42 apiece. The net cost of the transaction amounts to 3.97 per contract. The investor will begin to garner profits if shares rise through the breakeven point at $93.97 by January’s expiration.
FCX – Freeport-McMoran Copper & Gold, Inc. – Shares of the metals and mining company have added 4% during the trading session to arrive at $72.85, a scant 1.45 beneath the current 52-week high on the stock of $74.30. At least one investor observed in options land today is expecting continued bullish movement in the price of the underlying. The trader initiated a call spread by purchasing 10,000 calls at the November 75 strike for an average premium of 4.40 each, and selling 10,000 calls at the higher November 80 strike for 2.75 apiece. The net cost of the bullish strategy amounts to 1.65 per contract and yields maximum potential profits of 3.35 if shares rally up to $80.00 by expiration. Profits will begin to accumulate in the event that shares of FCX increase 5% over the current level to breach the breakeven point at $76.65.
LAVA – Magma Design Automation, Inc. – Perhaps the upgrade Magma received to ‘buy’ from ‘hold’ at Canaccord Adams this past Friday inspired the covered call strategy we observed on the software company today. Friday’s upgrade was accompanied by a 12-month target price of $2.50, which also happens to be the value of the lowest strike price in the October contract on the stock. Shares of the software company are currently unchanged at $1.82. It seems one investor put on a covered call by selling 10,000 calls at the October 2.5 strike for about 5 pennies per contract and simultaneously purchasing shares of the underlying for $1.85 each. The sale of the calls effectively reduces the cost of getting long the stock to $1.80 per share. Shares of LAVA will be called away from the investor in the event that LAVA rallies higher than $2.50 by expiration. If this occurs, the investor will exit the position with gains of about 39% in his pocket – not including almost 3% from the additional call option income.
XLF – Financials Select Sector SPDR – The financials exchange-traded fund rose nearly 2.5% today to $15.34. Despite the bullish movement in shares, we noticed pessimistic trading in the November contract. It appears one investor shed 5,000 calls at the November 15 strike for 95 cents each to offset the cost of purchasing 5,000 puts at the same strike for 74 cents premium. The bearish risk reversal results in a net credit to the trader of 21 cents, which he will retain in full if shares settle at $15.00 at expiration. Finally, additional profits are available to the investor if shares of the XLF slip below $15.00 ahead of expiration day in November.
