PG – The Proctor & Gamble Co. – Options activity in the January 2011 contract on the consumer products company today indicates one investor expects little fluctuation in shares over the next 14 months. Shares of PG are slightly up by less than 0.25% to stand at $61.90. The trader initiated a sold strangle by selling 2,000 puts at the January 60 strike for 5.73 each, and by selling 2,000 calls at the higher January 65 strike for a premium of 3.82 apiece. The gross premium pocketed on the sale amounts to 9.55 per contract. The strangle-seller retains the full premium if shares of PG remain ‘strangled’ within the parameters of the strike prices described. The investor will benefit from lower option implied volatility on the stock, as well as from the inevitable erosion of extrinsic value (time decay) over the life of the option contracts.
DRYS – DryShips, Inc. – Investors initiated bullish positions on the Greek drybulk shipping company. Shares of the firm rallied 1.5% to $6.32. Option traders favored the call spread today and utilized the strategy in the January 2010 contract to position for continued upward movement in the price of the underlying by expiration. Approximately 25,000 calls were purchased at the January 7.5 strike for an average premium of 45 cents each, spread against the sale of roughly the same number of calls at the higher January 9.0 strike for 15 cents apiece. The average net cost of the bullish transaction amounts to 31 cents per contract. DryShips’s shares must rally 23% in order for call-spreaders to breakeven at $7.81. Investors stand ready to accumulate maximum potential profits of 1.19 per contract if the stock surges 42% over the current price to $9.00 by expiration in January.
DTV – The DIRECTV Group, Inc. – Shares of the second-largest pay television provider in the U.S. are up 1.5% to $29.52. DTV posted third-quarter revenue of $5.47 billion yesterday, exceeding average analyst expectations of $5.4 billion. One option trader tuned in to profits today by rolling an existing bullish position to a higher strike price. The investor originally purchased 4,000 calls at the now deep in-the-money November 25 strike for 1.95 apiece on October 13, 2009. The trader sold the calls for 4.80 each today, taking in net profits of 2.85 per contract, for a total of $1.14 million. Next, the same investor reestablished a long call position at the in-the-money December 29 strike, purchasing 4,000 calls for a premium of 1.80 each. The DTV-bull can accrue additional profits if shares rally at least 4% from the current price to surpass the breakeven point at $30.80 by expiration.
M – Macy’s Inc. – It could be that Macy’s below par fourth quarter forecast will result in nothing more than the current 8.2% share price decline to $17.84. The return of the consumer had helped provide wind behind the sails for many retailers, but ongoing doubts about its veracity periodically yields overly zealous expectations and results in declines seen today. The option market doesn’t predict especially stormy seas ahead and some appear to sense the worst is already baked in the cake today. Option traders employed a limited potential put spread strategy using December expiration put options at the 17 and 16 strikes. That suggests rather limited declines in the underlying. Elsewhere we noted a bullish reversal play in which January 15 strike puts appear to have been sold at 55 cents in order to fund bullish expectations at the 19 strike. Implied volatility gave way despite the share price decline to a 53% reading from 60% ahead of earnings data.
EMC – EMC Corp. – Massachusetts-based computer hardware company, EMC Corp., attracted a large-volume bearish risk reversal to the January 2010 contract today. Shares are trading 1% higher to $17.22. The investor sold 20,000 calls at the January 17.5 strike for an average premium of 75 cents apiece in order to partially offset the cost of purchasing the same number of in-the-money put options at the same strike for 1.10 each. The net cost of assuming the pessimistic stance on EMC amounts to 35 cents per contract. The trader responsible for the reversal may hold a long position in the underlying stock. If this is the case, the put options serve as downside protection in the event that shares of EMC decline beneath the effective breakeven point at $17.15 by expiration.
