Today’s tickers: HPQ, MCO, GLD, PCLN & USB
HPQ – Hewlett-Packard Company – Shares of the tech bellwether have slid over 8% to $31.25 after disappointing earnings were reported yesterday. HPQ’s first quarter profits fell 13% and revenues underwhelmed analysts expectations by $3 billion. Despite the negativity surrounding weaker-than-expected earnings and hazy second quarter estimates by the tech group, option investors appear to be more optimistic judging by trades played out today. At the March 30 strike price, over 4,200 puts were sold for an average premium of 1.11 per contract indicating a an increased willingness to have stock put to them for the sake of writing what traders deem expensive put options. In other words they feel the fall in the share price is likely overdone. Elsewhere, 2,000 calls were scooped up by one bullish trader at the March 37.5 strike price for 15 cents apiece. If shares can rally by about 20% from today’s price to a breakeven of $37.65 by expiration next month, this investor will reap the benefits of a playing the contrarian optimist.
MCO – Moody’s Corp – A 1.3% rise in shares of ratings agency, Moody’s to $22.61 hasn’t undone investors’ appetite for bearish put plays on the company. Investors holding established bear plays at the February 22.50 strike rolled 5,000 puts into the March contract. But as they did so they stepped up the premium to 75 cents and acquired selling right on more shares at a lower strike price. Some 12,500 puts expiring in April were purchased at the 15.0 strike, which is just south of the current 52-week low at $15.32. Options implied volatility is marking time at 69% and very close to the historic reading on Moody’s shares at 68%. The stock goes ex-dividend today and trades without rights to the 10 cent dividend announced in December.
GLD – SPDR Gold Trust – A weaker dollar has failed to undo appetite for gold today, which is breaking even at $978.20 per troy ounce (March futures price). The SPDR Gold Trust has turned up on our market scanner due to some sizable options action involving January 2010 call options. The trades appear to have taken CBOE involving around 14,000 calls at the 100.0 strike against the same amount of 150.0 strike calls. Today shares in the SPDR are trading at $96.27 representing 1/10th of an ounce of the precious metal. Time and sales on the trades are somewhat misleading and we’re unsure whether an investor is closing out of a bullish long spread or establishing a fresh bull play predicting that 2010 will see gold’s price anywhere between $1,000 and $1,500 per ounce. The net premium involved in today’s trade is 7.85, which means that an investor bullish on gold will break even as a result of a long call spread at $1,007.85. The 150.0 strike calls would have been sold if this was a call spread, but the print clearly shows the calls were bought above the best available offer, which leaves us scratching our heads. If the investor is selling the 100.0 strike to buy the upper strike the credit spread must mean the investor expects the firestorm to be extinguished by next year and that gold will lose its shine leaving him to reap the credit from the trade.
PCLN – Priceline.com Inc. – Shares of the online travel company have shot upward by over 16% today to $80.18 inspiring option investors. One trade in particular stood out in the April contract. A butterfly spread was established at the three strikes of 70.0, 80.0 and 90.0 where a total of 40,000 lots changed hands. While all of the calls traded to the middle of the market, we believe that this spread was more likely purchased than sold. If we are correct in our thinking then this investor enacted the spread at a cost of 2 dollars, leaving him short the 20,000 calls at the central strike (the ‘body’ of the butterfly) and long 10,000 calls on either side (the ‘wings’). The investor likely believes that $80 is an accurate share price for Priceline.com, and therefore stands to gain the maximum profit of 8.00 per contract if shares remain there by expiration. Confidence in the $80 valuation on PCLN is likely boosted by today’s share price rally. So long as shares remain above $72.00 and below $88.00 the investor breaks even and earns most at the central strike. The risk-reward ratio established by this trade is effectively 1:4 because the 2 dollar risk is trumped by the potential 8 dollar reward reeled in if shares remain at $80. This long scenario seems more probable than a short butterfly in which the investor might have bought the body (20,000 calls at the April 80 strike) and sold the 10,000 calls (wings) resulting in a 4:1 risk-reward ratio. The investor would then be looking for a break outside of the range in order to secure the 2 dollar premium on the sale. If shares were to remain stagnant then the investor stands to lose 8 dollars per contract.
USB – US Bancorp – Though shares of the financial services company remain just 80 cents above the 52-week low at $10.90 today, option traders have initiated some bullish positions across multiple contracts. In March at the 12.5 strike price, over 15,000 calls were purchased for an average price of 1.24 apiece. If shares can rally to $13.74 – a jump of about 26% – by expiration, the call-buyers optimism will prove profitable. Further bullishness was observed in June at the 7.5 strike price, where over 15,400 puts were sold for approximately 1.01 per contract. Perhaps this put-shedding is a result of increased confidence that USB has reached its low-point for the time being, and thus, put protection is unnecessary at such a low strike price. At the very least, a share price gain gives put sellers time to sit on their hands and watch premiums erode.
