Elan Reversals Indicate Bearish Sentiment

By option_review

June 30, 2009

621

Today’s tickers: ELN, NOK, WYE, ELX, GERN, VALE, NVDA & EXC

ELN – The neuroscience-based biotechnology company headquartered in Dublin, Ireland, jumped onto our ‘most active by options volume’ market scanner after a massive bearish reversal was initiated on the stock. Shares are currently lower by more than 5% to $6.59. It looks as though one trader sold 30,500 calls at the January 2010 10 strike price for 50 cents apiece in order to finance the purchase of 30,500 puts at the January 5.0 strike for 74 cents per contract. The net cost of getting long the protective put options amounts to 24 cents. We note that the existing open interest present at both strike prices exceeds the volume traded today. But, it does not appear that this trade represents an attempt to close a previously established position. – Elan Corporation PLC

NOK– The manufacturer of mobile devices has experienced a share price decline of more than 3% to stand at $14.55. We observed a number of bearish trades by investors active on the stock today amid a rating initiated as ‘underperform’ by analysts at BMO Capital Markets. Traders appear to be bracing for significant declines in the price of the underlying as the October 11 strike price saw more than 11,000 put options purchased for 32 cents apiece. Shares would need to plummet 27% from today’s price before profits begin to amass for put-holders at the breakeven point of $10.68. Additional evidence of bearish sentiment was seen at the January 2010 20 strike price where 5,400 calls were shed for 39 cents per contract. – Nokia Corporation

WYE– A sudden frenzy of bullish call activity on the pharmaceutical company was picked up by our scanners this afternoon amid a slight 0.5% decline in shares to $45.12. It appears that the investor or investors responsible for the call action expect Wyeth’s shares to move higher. Perhaps such sentiment stems from speculation regarding the proposed Pfizer-Wyeth merger, which will be put to a shareholder vote at Wyeth on July 20, 2009. In the nearer-term August contract, it looks as though a long call position was rolled to a higher strike price resulting in fresh buying of some 5,000 calls at the August 50 strike price for 15 cents apiece. The calls appear to have been rolled from the existing open interest at the lower August 45 strike where 5,000 lots look to have been sold for a premium of 1.65 per contract. Further along in the October contract, it seems two bull-call spreads were established across four exercise prices. One of the spreads involved the purchase of 21,500 calls at the deep-in-the-money October 42.5 strike price for 4.00 each against the sale of 21,500 calls at the October 47.5 strike for about 87 cents. The net cost of the spread amounts to 3.13 and yields maximum potential profits of 1.87 if shares rally to $47.50 by expiration. The more attractive of the two spread transactions involved the purchase of 16,500 calls at the October 45 strike for 2.20 each spread against the sale of 16,500 calls at the August 50 strike price for 20 cents. The parameters of the trade imply a net cost of 2.00 to the investor who stands to reel in profits of 3.00 per contract if shares can climb to $50.00 by expiration in October. – Wyeth

ELX – An interesting story has been developing at network gear-maker, Emulex in which the company is being courted by Broadcom Corporation. Two months ago Broadcom offered $9.25 per share for Emulex in an effort to integrate the two companies to develop new technologies for corporate data centers. The initial Broadcom overture came in December 2008 to which Emulex wrote a letter to the company stating it was not for sale, cutting off talks and writing a poison-pill provision into its bylaws. In an effort to convene a special shareholder meeting the company has boosted its offer to $11 per share and extended a tender offer deadline to July 1. Broadcom would then try to have the poison pill provision removed. However, shares at Emulex are down 8% to $10 today after the increase in Broadcom’s hostile bid. About three weeks ago we saw option traders scoop up put options at the July 10 strike for 45 cents apiece, while today there is increased interest in those same puts. We believe several investors are today banking gains on some established positions with puts trading hands at 75 cents today. Yet clearly there is a significant amount of fresh interest going on as investors speculate that Emulex means what it says and its shares will decline on account of the successful poison pill amendment. Some 27,000 puts are in play at the July 10 strike while the open interest reading of 17,000 has easily been surpassed. At the same August strike where only 44 contracts are open, defensive options have been bought more than 8,000 times so far today. As a result of the increased uncertainty surrounding this story options implied volatility has increased from 45 to 73%. – Emulex Corp.

GERN – The biopharmaceutical company engaged in the development of human embryonic stem cell-based therapeutics appeared on our ‘hot by options volume’ market scanner this morning amid a 19% surge in shares to $7.96. Shares of GERN have climbed about 43% since the start of the year after the firm received FDA clearance to commence the world’s first human clinical trial using human embryonic stem cells to treat acute spinal cord injury. Today’s rally arrives on the heels of an announcement that Geron has forged a partnership with a General Electric Co. (GE) unit. The biopharmaceutical company asserted that it will collaborate with GE Healthcare to develop commercial products that use human stem cells. Optimistic option traders were seen buying into the bullish news by picking up nearly 2,000 calls at the now in-the-money July 7.5 strike price for a premium of 74 cents apiece. Profits will begin to amass for call-holders if shares can climb higher than the breakeven point at $8.24 by expiration. Investors who expect shares of GERN to break through the current 52-week high of $8.50, looked to the August 10 strike price where some 1,300 calls were purchased for 43 cents per contract. A rally of approximately 31% from the current price would result in profits to traders long the August 10 calls beginning at a share price of $10.43. – Geron Corp.

VALE – Shares of the Rio de Janeiro-based iron-ore producer have slipped approximately 1.5% today to $17.59 following earnings which were scheduled for release after yesterday’s closing bell. Despite the slight decline in price, our attention was drawn to the August contract where one investor chose to initiate a bullish reversal play. The trader looks to have sold 10,000 puts at the August 16 strike price for a premium of 65 cents apiece in order to finance the purchase of 10,000 calls at the August 20 strike for 65 cents each. The reversal was established at no cost to the investor who has positioned himself to benefit from upward movement in the price of the underlying. Profits will pad this option player’s pockets if shares can rally approximately 14% to breach the breakeven point at $20.00 by expiration in August. Any interim disappointment could see this investor having a block of one million of Vale’s shares put to him at a 9% discount to today’s share price. – Vale S.A.

NVDA – The manufacturer of programmable graphics processors has realized a more than 2.5% decline in shares today to stand at $11.26. Wary of further bearish movement in the price of the underlying, option traders were seen scooping up put options in the near-term July contract. The July 11 strike price appears to have had about 20,000 puts purchased for an average premium of 33 cents apiece. Investors may be utilizing the puts to protect long positions in the stock or they could be looking to profit to the downside beneath the breakeven point at $10.67. – NVIDIA Corp.

EXC– The public utility holding company was launched onto our ‘most active by options volume’ market scanner after one trader played with 100,000 calls on the stock. Shares of the firm are currently higher by 1.5% to $51.22. It appears that this individual originally purchased 50,000 calls at the July 55 strike price for 40 cents apiece on June 25, 2009. Today he threw in the towel by selling-to-close all 50,000 lots for 20 cents. Apparently he does not see the July 55 calls landing in-the-money by expiration. Not yet ready to completely give up hope for a bullish rally, the trader accepted a loss of 20 cents per contract or $1,000,000, and reestablished a long position in the August contract. He paid a much more expensive 90 cents per contract, or $4,500,000, to get long of 50,000 calls at the August 55 strike. Shares must move higher than the breakeven point on the current call position in order to regain losses experienced on the closing sale in the July contract. EXC’s shares must move hard and fast in order to add about 10% to the current price. The investor will need the price of the underlying to reach the effective breakeven point at $56.10 to recoup losses and to breakeven by expiration in August. – Exelon Corporation

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