A Healthy Strangle Hold At Cardinal

Today’s tickers: CAH, GLD, DOW, MA, FXI, NTAP, AET, STI & SLV

CAH– The Ohio-based healthcare company has experienced a more than 11% decline in shares to $32.50 after its earnings forecast for 2010 came in below analyst expectations. The fact that CAH upped its quarterly dividend to 17.5 cents per share – an increase of 25% – did not appear to have slowed the bearish decline any in the stock today. One option trader does not expect much of a recovery in the long-run as he was observed selling a strangle in the December contract. The transaction involved the sale of 6,000 puts at the December 30 strike price for a premium of 2.43 apiece as well as the sale of 6,000 calls at the December 35 strike for about 1.84 each. The gross premium taken in by the investor amounts to 4.27. The trader will retain the full premium as long as shares remain ‘strangled’ by the strike prices described above. Otherwise, the premium will begin to erode if shares move in either direction beyond the strike prices. He will be penniless if shares breach either breakeven point located at $25.73 to the downside and at $39.27 to the upside. The strangle appears well positioned as the stock would need to fall through the 52-week low of $27.51 before the investor faces losses to the downside. Losses to the upside would require a significant rally of about 21% by expiration. – Cardinal Health, Inc.

GLD – Bullish option traders dominated the January 2010 and 2011 contracts on the gold ETF today amid a rally of less than 1% to $96.39. The nearer-term January 2010 contract attracted one trader who appears to have established a covered call by selling 15,000 calls for a hefty premium of 5.80 each at the January 110 strike price. This position allows him to effectively purchase the underlying shares for $90.59 because of the premium he has received for writing the call options. He is now long the stock and short the calls. The short call position provides an exit strategy to the trader who will have realized gains of 21% if the shares are called from him by expiration next year. Another GLD-bull extended optimism one year further and chose to sell 8,000 puts short at the January 2011 95 strike price for a sweet premium of 13.98 per contract. The investor receives the rich premium associated with writing the puts and is happy to have shares of the ETF put to him by expiration if the puts land in-the-money. If the shares are eventually put to him, the premium effectively reduces the price per share to just $81.02. – SPDR Gold Trust

DOW – Shares of the manufacturer of plastic materials, agricultural and other specialized products have rallied sharply by about 8% to $18.44. The stock has had an excellent run-up over the past couple of months. DOW shares touched down to a 52-week low of $5.89 on March 10, 2009, and have since gained 68% to arrive at the current price. Option traders appear to expect such strength to continue as bullish call buying was observed in the July contract. The July 21 strike price saw some 3,700 calls bought at an average premium of 50 cents apiece. The breakeven point of $21.50 on the trade suggests that investors long of the calls will be looking for an additional rally of approximately 17% in order to amass profits by expiration. – The Dow Chemical Company

MA – Option trades on the global payment solutions company this morning revealed that one investor is utilizing out-of-the-money put options to garner profits over time. Shares of the firm are currently off more than 1% to stand at $171.62. It appears that this individual has established a pattern of selling short puts. Back on May 11th it seems the trader sold 4,000 puts short for an average premium of 2.93 and today closed out the position by buying the same 4,000 puts back for 1.58 each. He has likely banked gains of 1.35 on the trade. To continue his strategy he looks to have sold another 4,000 puts short at the October 145 strike price for a hefty premium of 6.93 apiece. The investor will reel in profits on the new short position depending on when and at what price he buys back the options in the future. – MasterCard, Inc.

FXI– The China ETF has slipped nearly 2% to $38.75 perhaps prompting one trader to enact a ratio put spread in the near-term June contract. The ratio spread was established through the purchase of 10,000 puts at the in-the-money June 39 strike price for a premium of 1.68 each against the sale of 20,000 puts at the June 35 strike for about 40 cents apiece. The net cost of the downside protection amounts to 88 cents and yields maximum potential profits to the downside of 3.12 if shares decline to $35.00 by expiration. Perhaps the investor is long underlying shares of the fund and has initiated the spread to offset potential losses that might accrue if the FXI moves lower by expiration in just a few weeks. – iShares FTSE/Xinhua China 25 Index Fund

NTAP – Investors hoping to see NetApp successfully take control of Data Domain Inc. (DDUP) must be feeling a bit anxious today after EMC Corp. initiated an unsolicited bid of $1.8 billion for DDUP. EMC’s offer is 17% higher than NTAP’s original bid of $1.5 billion extended two weeks ago. NTAP is a supplier of enterprise storage and data management software and hardware products and has experienced a share price decline of nearly 4% to $19.89 after EMC’s extension of a more attractive bid. Some option traders are bracing for a recovery in NTAP’s shares through expiration in July. The July 21 strike price had 3,500 calls bought for 85 cents apiece while the higher July 22 strike witnessed 2,400 calls coveted for about 55 cents each. Perhaps these call-buying optimists expect NTAP to challenge EMC for potential control of buyout target, Data Domain. Investor uncertainty climbed higher as evidenced by the rise in option implied volatility from 45% yesterday to the current reading of 50% for NTAP. – NetApp, Inc.

AET – We observed some bullish call buying activity in the health care benefits company today after the stock appeared on our ‘hot by options volume’ market scanner. Shares of the firm are currently higher by 1.5% to $27.78. The July 30 strike price had more than 6,100 calls pocketed for an average premium of 1.00 per contract. Apparently, a number of option investors are positioning themselves for continued bullish movement in the stock by expiration in July. Shares of AET would need to rally by about 12% from the current price in order to breach the breakeven point at $31.00. Any price exceeding the breakeven point by expiration will result in profits to investors who are long the calls. Shares are trying for a third time since April to breach what’s now shaping up to by tough overhead resistance at around $28.00. – Aetna, Inc.

STI– Shares of the financial services firm have surged more than 9.5% to $15.17 amid an upgrade to ‘outperform’ from ‘market perform’ by an analyst at Morgan Keegan. The rally has spurred a frenzy of options activity on the stock. Some investors were likely banking gains as some 7,700 calls were shed at the in-the-money June 14 strike price for an average premium of 1.26 apiece. Investors have amassed open interest at this strike of more than 22,000 and bulls were likely waiting patiently in the wings for today’s move. The 14 strike also saw hefty call buying too. Similar mixed results were observed with some 4,500 calls traded at the higher June 15 strike price which is now in-the-money. Pure bullishness was seen at the July 19 strike price where more than 5,000 calls were purchased for about 40 cents each. Call buyers here are hoping to see shares of STI rally higher by 28% to surpass the breakeven share price of $19.40 by expiration. – SunTrust Banks, Inc.

SLV– Bullish option trades on the silver ETF continue today as investors position themselves for continued upward movement in the underlying price of the fund. Shares are currently higher by more than 1% to $15.55 today. We noticed one trader extending optimism to the October contract where he established a bull call spread. The transaction involved the purchase of 6,000 calls at the October 17 strike price for an average premium of 1.10 each which were spread against the sale of 6,000 calls at the higher October 22 strike for 30 cents. The net cost of the trade amounts to 80 cents and yields maximum potential profits of 4.20 to the investor if shares were to rally to $22.00 by expiration. The price per share would need to surge approximately 41% from the current price in order for the call-spreading silver bull to reap the total profits available by July’s expiration. – iShares Silver Trust ETF