Call Buyers Flock to Cisco After Broker Upgrade

Today’s tickers: CSCO, TGT, LVS, DISCA, HGSI, OREX, EWJ & GE

CSCO – The largest maker of networking equipment received an upgrade to ‘outperform’ from ‘neutral’ at Credit Suisse Group AG, boosting shares up more than 2.5% to $21.05. Option-bulls were seen picking up call options at the August 22 strike price 3,600 times for an average premium of 42 cents each. Call buying was observed up at the August 23 strike where 2,300 lots were purchased for 18 cents apiece. Shares of CSCO must rally another 10% to the breakeven point at $23.18 in order for call-buyers at the higher August 23 strike to amass profits by expiration. Other traders locked into gains by scooping up protective put options 3,800 times at the August 21 strike for 79 cents per contract. Finally, bullish sentiment spread to the September 23 strike price where 3,000 calls were coveted for 34 cents each. – Cisco Systems, Inc.

TGT – A bullish reversal on the retailer today suggests that at least one investor is hoping for shares of TGT to appreciate through expiration in October. The stock is currently trading flat at $39.56. The sale of 5,000 put options at the October 40 strike price for a premium of 3.20 apiece was spread against the purchase of 5,000 calls at the same strike for 2.70 each. The individual responsible for the transaction receives a net credit of 50 cents and will add to his profits if shares rally through $40.00 by expiration. Perhaps this investor is expecting the stock to rise because the reasonably-priced store may attract a greater percentage of cash-strapped back-to-school shoppers this year. – Target Corp.

LVS – Investors of the hotel and casino operator have enjoyed a more than 15.5% rally in shares of LVS to $9.95. The stock jumped after the firm announced plans to “apply for an initial public offering of shares in its Macau casinos in Hong Kong as early as next month”. Option traders hoping for a continued rally, were seen purchasing call options in the near-term August contract. The August 12 strike price had 1,700 calls bought for 40 cents apiece while the higher August 13 strike also had 1,700 lots coveted for about 26 cents each. The stock would need to improve 33% from the current price in order for August 13 strike call-buyers to profit at the breakeven price of $13.26. – Las Vegas Sands Corp.

DISCA – Shares of the global media and entertainment company have rallied 1% to $23.56 today despite a downgrade to ‘equal weight’ by analysts at Morgan Stanley. One option trader looked to the August 20 strike price to sell 20,000 puts for a premium of 15 cents per contract. It appears that the transaction was tied to stock. Perhaps this individual purchased shares of the underlying and simultaneously sold the put options to offset the cost of getting long the stock. If that’s the case this investor is bullish and hoping for continued upward movement in the price of DISCA. The trader must remember that he is vulnerable to having shares of the stock put to him by expiration in the event that DISCA is trading lower than $20.00. – Discovery Communications, Inc.

HGSI – Shares of the biopharmaceutical company have exploded to reach a new 52-week high today. Currently the stock has gained more than 206% to stand at $10.17 after the firm’s experimental lupus drug, Benlysta, reportedly reduced patients’ symptoms in a year-long study. Option traders exchanged more than 110,000 contracts by noon (EDT) and were seen taking bullish stances on the stock. Investors, who perhaps missed out on the rally, chose to sell put options in the near-term August contract. The August 10 strike price had 3,400 puts sold short by traders for an average premium of 1.33 apiece. Put-sellers will retain the full premium if the puts land out-of-the-money by expiration. Otherwise, these individuals bear the risk of having shares of the underlying put to them at an effective price of $8.67. One investor chose to initiate a bullish reversal by selling 2,200 puts at the August 7.5 strike price for 25 cents each in order to purchase 2,200 calls at the August 12.5 strike for 45 cents per contract. The spread cost the trader a net 20 cents and will prove profitable if shares can rally through the breakeven point at $12.70 by expiration. Additional bullishness was seen through pure-call buying plays. The August 10 strike price had 2,100 calls coveted for an average premium of 1.33 each while the higher August 12.5 strike had about 2,800 calls picked up for 54 cents each. Option implied volatility on HGSI has imploded from Friday’s closing reading of 354% to the current value of 80%. – Human Genome Sciences, Inc.

OREX – The biopharmaceutical company focused on developing treatments for obesity has enjoyed a massive 21.5% rally in shares today to $6.93. The bullish price movement is due to reports that Contrave, OREX’s experimental diet pill, slimmed patients in three studies. The firm now hopes to garner U.S. approval to begin selling the medicine in the first half of 2010. One option trader was seen positioning for continued upward price movement through expiration in September. A bullish reversal was initiated through the sale of 2,500 puts at the September 5.0 strike price for 20 cents each spread against the purchase of 2,500 calls at the higher September 7.5 strike for 60 cents apiece. The net cost of the bullish transaction amounts to 40 cents. Shares of OREX must rally higher by 14% before the investor begins to profit at the breakeven price of $7.90. – Orexigen Therapeutics, Inc.

EWJ – A relief rally stemming from CIT’s eleventh-hour reprieve from a Chapter 11 bankruptcy filing has created a positive equity market tone. The ramifications swathe other assets with a weakening Japanese yen one of the victims in this case. It could be that this has set off the ambitions of one option trader today as he looks to the September options on the EWJ in search of a continued run-higher for far eastern stocks. Shares in EWJ are 0.8% firmer at $9.33 as this option trader appeared to buy 50,000 call options at the 10 strike in search of further upside movement for share prices at Japanese companies. The trade at just a dime per contract was already cheap enough, but the trader also sold 25,000 put options at the lower 9 strike for 20 cents. Given the two-for-one ratio involved the trader has a free stab at any rally above the 10 strike. The situation gets sticky below the short put strike, but we should remember that this trader may be trying to defend a short position in the underlying in the first place. – iShares MSCI Japan Index fund

GE – Early gains in shares at GE have given way to a more subdued reaction and after a rise after the bell to $11.92 have eased to $11.66. Option buyers aimed for the August 12 calls en masse earlier pushing premiums to 46 cents before falling to 34 cents. Later in the morning put buyers stepped up to buy around 20,000 contracts suggesting that shares would make a beeline for a share price of below $10 prior to September’s expiration. On Friday post-earnings this too was a popular venue as investors parsed the conference call commentary. It appears that even after the weekend’s digestion phase, there’s a nagging doubt about either the outlook for demand or the prospects for General Electric to grow earnings. – General Electric