Today’s tickers: WFC, MA, S, ESRX, CREE, RIMM & CELG
WFC Wells Fargo & Co. – Shares have rallied slightly by about 1% to $14.37. Options investors were very active on the stock today, but one trade in particular caught our attention in the May contract where one investor has established a protective collar in conjunction with a large volume-sale of call options as a vehicle to fund the strategy. To initiate the collar, this trader purchased shares of the underlying stock and simultaneously purchased 42,000 puts at the May 12 strike price for a premium of 1.70. The put options serve to protect this investor should shares experience a significant decline over the course of the next two months. The sale of 42,000 calls at the May 20 strike price for 1.00 was established for a couple of reasons. First, the 1.00 premium pocketed on the sale effectively reduces the cost of the put options to just 70 cents apiece. Second, the short position at the upper strike price has effectively given this trader an exit strategy should shares rally to $20.00 by expiration. If such a rally were to occur, the shares could be called away from him at expiration and he would have reeled in gains of 39% on the $5.63 rise in the value of the underlying. Of course, if this scenario were to take place, the puts purchased would expire worthless and the net cost of 70 cents he paid out today would be lost.
MA MasterCard, Inc. Class A – The global payment solutions company is off by more than 4.5% to $159.87. MA appeared on our ‘most active by options volume’ market scanner after one investor took a bullish stance on the company using options. At the May 180 strike price 10,000 calls were purchased for 5.40 apiece while at the May 200 strike 10,000 calls were sold for a premium of 1.40 per contract. The net cost of the trade amounts to 4.00 and yields a maximum potential profit for the investor of 16.0 if shares were to rally up to $200.00 by expiration next month. Shares would need to experience a rally of about 15% from the current price in order to reach the breakeven point at $184.00. MasterCard has not traded above $184.00 since October of 2008, but this investor appears to be optimistic that MA will rebound in the near future.
S Sprint Nextel Corp. – Shares of the communications company have rallied by more than 6% amid news that Sprint is now offering converged services to cable companies. The services will allow customers to integrate their phone service with other devices such as TV, broadband, home and mobile phones. The company sprinted onto our ‘most active by options volume’ market scanner after a couple of large volume trades were established in the August contract. It appears that the sale of 20,000 puts at the August 3.0 strike price for 50 cents apiece was enacted to partially fund a bull call spread. The purchase of 20,000 calls at the August 4.0 strike for an average price of 82 cents each was spread against the sale of 20,000 calls at the August 6.0 strike for a premium of 25 cents per contract. The net cost of the call spread, excluding the premium received on the sale of the puts, amounts to 57 cents and yields a maximum potential profit of 1.43 if shares rally to $6.00 by expiration. The premium pocketed on the sale of the puts effectively reduces the cost of the spread to just 7 cents, and so increases the potential amount of profits to 1.93 if all goes according to plan for this investor. Option implied volatility has made its way down from a starting value of 105% this morning, to the current reading at 95%.
ESRX Express Scripts Inc. – Express Scripts Inc. – A bullish note from an analyst indicating that fears for earnings at the full service pharmacy benefits management company were overdone has sent option traders scrambling for further upside in its shares, which are higher by 2% at $47.08. Last week the shares in the company, which counts managed care organizations and employers amongst its customers, reached a 52-week low at $42.75. Investors used options today to place a view that shares would rise as high as $55.00 or 17% before April’s expiration. Investors positioned in both this and May expiration call options using a bullish call spread combination in which 50 calls were bought against the sale of offsetting 55 strike calls. In the May contract the net premium paid summed to 1.40 per contract offering maximum potential upside of 3.60 should shares jump as these investors predict. In order for the trade to begin delivering profits ESRX would need to rise to $51.40 before expiration. Not all of today’s positions were spreads as many braver bulls went straight for the jugular at the 55 strike in April where the premium paid was 25 cents. Call demand pressured implied volatility which rose marginally to 57%..
CREE Cree Inc. – The developer and manufacturer of semiconductor materials and devices appeared on our ‘hot by options volume’ market scanner this morning amid an 8% rally in its shares to $25.40. The catalyst for the increase in shares may be related to “renewed takeover chatter” as reported by one news source. Additionally, the company’s CEO has cited increased demand for highly efficient LED lighting over the course of the year as businesses work to cut costs. Option investors snapped up calls at the now in-the-money April 25 strike price, driving premiums up by more than 100%. More than 7,600 calls were purchased at the April 25 strike for an average of 1.01 each. More bullishness was apparent at the April 30 strike where more than 2,100 calls were bought for an average premium of 20 cents. Optimism spread to the May contract where the 30 strike price had 2,100 calls purchased for an average of 62 cents. Shares would need to continue to move upward by about 18% from the current price in order for contracts at the 30 strike price to land in-the-money by expiration. Option implied volatility reached a high of 78% today, but has since come off a bit to stand at 74%.
RIMM Research In Motion Limited – Today is the first operating day for the online applications store for the BlackBerry phone and shares are up by 6% to $45.90. Looking to compete with Apple Inc.’s iphone, RIMM has launched BlackBerry App World, which will offer customers games, music, and other applications for download. With the advent of the program, the company is hoping to “broaden its smart phones’ appeal beyond business users” because about half of its clientele fall outside of the business demographic. Option traders took bullish stances by purchasing calls and selling puts in the April contract. The now in-the-money April 45 strike price had more than 8,300 calls purchased for a premium of 3.18 each, while the April 50 strike had more than 6,300 calls bought for 1.55 per contract. Calls were purchased as high up as the April 60 strike price where 1,100 were coveted for 23 cents. Protection on the downside was shed as evidenced by the sale of 4,700 puts at the April 40 strike for 1.50 each, and by the sale of 3,100 puts at the April 45 strike for a premium of 3.58. It will be interesting to see how the fledgling applications program will compare to Apple’s App Store which currently offers more than 15,000 applications.
CELG Celgene Corporation – The global integrated biopharmaceutical company has seen its shares fall by more than 15% to $37.68 after it released a grim outlook for 2009. The biotech company announced that it sees profits coming in at around $2.05 per share down from earlier estimates of $2.15. The revision in earnings to the lower end of its previous forecast occurs amid weak first quarter sales of its cancer drug, Revlimid. The medicine is used to treat a form of blood cancer called multiple myeloma and is Celgene’s leading product. Despite the disappointing preliminary first quarter results, the company is looking for sales to accelerate in the second half of 2009 and beyond. Option traders took action on the stock and were seen selling more lots than they were buying. The April 40 strike price had some 3,800 calls sold for an average premium of 1.21, while the sale of 1,900 calls at the April 45 strike price commanded a 25 cent premium. Options activity affirmed the pessimistic view taken on the stock as investors purchased downside protection at the April 35 strike by picking up 2,000 puts for 79 cents apiece. These options yield a breakeven point of $34.21 and indicate that traders foresee further declines in the share price.
