Bullish Call Activity In Perfect World

Today’s tickers: PWRD, ADBE, VLO, VIX, COH, BKC, ANF, VALE & IPG

PWRD – In a perfect world shares of PWRD would have rallied on the news that the company lifted its revenue forecast for the second quarter, alas, the stock has dipped slightly today by less than 1% to $29.06. The Chinese online game developer edged onto our ‘hot by options volume’ market scanner after one investor was seen taking a bullish stance in the December contract. Perhaps this individual is a fan of Battle of Immortals, which PWRD developed as a massive multiplayer online role playing game that has subsequently produced stronger-than-expected revenues. The investor targeted the December 35 strike price to purchase approximately 3,000 calls for an average premium of 3.22 per contract. Shares of the gaming company must surge 32% from the current price in order for the trader to begin to amass profits at the breakeven point of $38.22. Apparently, this gaming-bull expects the stock to blow through the current 52-week high for PWRD of $30.00 attained on June 19, 2009. – Perfect World Co., Ltd.

ADBE– Shares of the diversified software company are lower today by more than 6% to $27.49. Our attention was drawn to the October and January 2010 contracts where investors took to selling straddles. The nearer-term October contract had a 5,000-lot straddle sell for a gross premium of 5.43 each at the 30 strike price. The investor responsible for the transaction will retain the full premium if shares settle at $30.00 by expiration. Losses would accrue if shares were to shift outside of the breakeven point to the upside at $35.43 or below the breakeven point to the downside at $24.57. Further out at the January 2010 30 strike price, another trader employed the use of a sold straddle strategy in the amount of 6,700 contracts for a gross premium of 7.25. This individual is also looking for shares to gravitate to $30.00 by expiration at the start of next year. We note that both straddles were tied to underlying stock transactions at the time of sale. – Adobe Systems, Inc.

VLO– The maker of refined products such as conventional gasoline and diesel fuels has shed more than 4.5% off its share price today to stand at $16.35. The bearish movement in the underlying was matched by pessimistic option trading by investors. The near-term July contract had more than 4,000 calls sell for an average premium of 65 cents apiece indicating some traders do not expect the July 17 strike calls to land in-the-money by expiration. Similar bearish call selling was observed at the September 19 strike price where more than 4,100 calls were shed for about 75 cents per contract. The option premium enjoyed by call-sellers will be retained as long as the call options described remain out-of-the-money by expiration in July and September. – Valero Energy Corporation

VIX– It would appear that there’s a bear market heading this way. Stocks were uncomfortably tossed out of bed Monday morning as the World Bank increased the rate of global contraction compared to its reading just three months ago. Meanwhile it also revised down expectations for 2010 growth. The dollar has rallied and the VIX index is higher as traders are lured towards defensive option positions. The VIX is 13% higher at 31.73 – still a tepid reading gauging by previous elevated readings post-Lehman’s bankruptcy, but still it’s creeping higher. And option activity suggests in some quarters that we should expect the bearish grip to take hold. For example one investor targeted the July contract to implement a 55/60 call spread that would do well only if the index jumped by around three-quarters from present. The 8,000 lot spread was placed for a 17 cent per contract premium. In the August contract the most heavily-trafficked series was the 60 strike call where some 25,000 lots changed hands for premiums of around 1.30 apiece. – CBOE Volatility Index

COH – Shares of the handbag designer have bucked the down-trend experienced by the broader market today by rallying approximately 2% to $26.72. Bullish movement in the price of the underlying has been helped by Coach’s new Poppy collection, which is targeted toward younger consumers and budget-sensitive shoppers. The new line does not officially launch until Friday, but the firm’s marketing and promotional efforts have generated media and customer excitement ahead of the launch. Option trading on the stock today suggests that investors expect some near-term upward price movement but do not expect to see shares surpass $29.00 by expiration in July. The July 29 strike price had 2,000 calls sold short for 45 cents apiece, while the higher July 30 strike price had more than 7,400 calls shed for 26 cents per contract. Traders selling the calls short accept the premiums described and bear the risk of having to cover their positions if shares were to climb more than 8.5% by expiration. The trades observed were not marked as being tied to stock in anyway. However, if the investors are long shares of the stock then these transactions could represent covered call selling. Traders in this case would have effective exit strategies if the July 29/July 30 strike calls land in-the-money by expiration next month. – Coach, Inc.

BKC– The fast food chain’s ticker symbol appeared on our ‘hot by options volume’ market scanner this morning after investors initiated bullish stances on the flame-broiled burger maker. Shares of the firm have slipped slightly by nearly 2% to $16.49 today and analysts at Deutsche Bank have reiterated their ‘buy’ rating on the stock. Traders looked to the October 20 strike price to purchase more than 5,000 calls for an average premium of 55 cents each. These individuals will begin to profit if shares of BKC can rally 25% higher to $20.55 by expiration. Burger King’s shares have remained well below $20.55 since tumbling sharply on April 14, 2009, from approximately $22 to $18. – Burger King Holdings, Inc.

ANF – The global fashion brand aimed at ‘tween, teen, and young adult demographic groups, showed up on our ‘most active by options volume’ market scanner early this morning after an investor was seen taking a bullish stance on the stock through expiration in November. Shares of the clothing retailer are slightly lower by less than 1% to stand at $25.78. It appears that the trader has bought a call spread and funded the purchase by selling 5,000 puts at the November 17.5 strike price for an average premium of 1.05 per contract. The bull call spread involved the purchase of 5,000 calls at the November 30 strike price for 2.15 apiece spread against the sale of 5,000 calls at the higher November 35 strike for 90 cents each. The net cost of the three-legged trade amounts to just 20 cents and yields maximum potential profits of 4.80 to the trader if shares can rally to $35.00 by expiration day. Shares of A&F must rise 17% from the current price before this investor begins to amass profits at the breakeven point of $30.20. – Abercrombie & Fitch Co.

VALE – Brazilian stocks and commodities prices have slipped following the World Bank’s assessment that the global economy is likely to shrink 2.9% this year. Vale’s shares have suffered a 6.5% decline to $17.34 today, creating increased demand for put options on the stock. One investor was observed taking a more bearish stance on the world’s largest iron ore miner in the July contract. It appears that he originally purchased 7,500 puts at the July 20 strike price for a premium of 1.34 each back on June 1, 2009, when shares were trading at $20.41. Today the trader sold the in-the-money puts for 2.63 in order to close out the position and take in profits of 1.29 per contract. The investor then appears to have taken a more bearish view on the stock by purchasing 15,000 puts at the lower July 17 strike price for a premium of 74 cents apiece. The trader will begin to amass profits on the new position if shares fall approximately 6% and breach the breakeven point at $16.26. – Vale S.A.

IPG – The advertising and marketing services company exploded onto our ‘most active by options volume’ market scanner after one investor traded 100,000 contracts on the stock, which represents nearly all of the existing open interest on the stock of 106,457 lots. Shares of IPG have plummeted more than 7% today to arrive at $5.16. The share price erosion has not deterred one bullish trader from positioning himself for a massive recovery in the stock through expiration in October. The investor established an enormous ratio call spread by purchasing 60,000 calls at the October 7.5 strike price for 40 cents apiece spread against the sale of 40,000 calls at the higher October 10 strike for a nickel per contract. The net cost of the transaction amounts to approximately 35 cents and yields maximum potential profits of 2.15 to the trader if shares can nearly double from the current price to $10.00 by expiration. The ratio of three calls to every two put options will allow the trader to remain long a portion of the underlying shares of IPG should shares break through $10.00. We note that a trade of this magnitude may be tied to stock in some way, although the transaction was not marked as such. A potential bullish driver for today’s trade may be the firm’s early settlement of tender offers for its 5.4% notes due in 2009 as well as its 7.25% notes due 2011. Option implied volatility on the stock has jumped from 65% to as high as 78% throughout the trading day. – Interpublic Group of Companies, Inc.