Option Bulls Order Calls with a Side of Fries

By option_review

July 22, 2009

418

Today’s tickers: WEN, JNPR, VIX, CLX, BBY, AAPL & AXP

WEN – Despite the 2% decline in shares to $4.59 today, WEN was flooded by investors looking for bullish call options in the September contract. Approximately 9,000 calls were coveted by fans of the Frosty at the September 5.0 strike price for an average premium of 32 cents apiece. Investor’s long the calls are hoping the stock rises at least 16% through the breakeven point at $5.32 by expiration. The 10,861 option contracts exchanged on the stock today represents more than 66% of the existing open interest for WEN of 16,325 lots. We note that Wendy’s/Arby’s Group shares have not traded higher than $5.32 since April 29, 2009. – CBOE Volatility Index

JNPR – The network-equipment maker jumped onto our ‘most active by options volume’ market scanner today after a four-legged bullish trade was initiated in the near-term August contract. Shares of the firm are off by more than 2% today to stand at $25.27 perhaps on news that IBM plans to sell Juniper switches and routers under its own brand name. It appears that the investor responsible for the transaction is expecting JNPR to rebound as he was seen selling put options on the stock to fund the purchase of a call spread. The sale of 9,300 puts at the August 22 strike price for about 35 cents each, in combination with the sale of 9,300 puts at the lower August 21 strike for 25 cents apiece, yielded the trader a gross premium of 60 cents. The bullish investor then looked to the August 27 strike price where he purchased 9,300 calls for an average premium of 1.10 per contract spread against the sale of 9,300 calls at the higher August 30 strike for 25 cents each. The net cost of the call spread, after factoring in the sale of the put options, amounts to just 25 cents. Thus, the individual responsible for the transaction stands to bank maximum potential profits of 2.75 if shares of JNPR can rally up to $30.00 by expiration. The stock must rally higher by about 8% before the investor begins to accumulate profits starting at the breakeven share price of $27.25. – Juniper Networks, Inc.

VIX – Investors were found wading through molasses today helped by better earnings from Apple, but disappointed by financial companies, where the sector exemplified the view that it’s not plain sailing from here. The volatility index nevertheless declined as equity prices failed to drop in line with pre-market indications and more earnings reports helped relieve some stress. The Vix shed 0.9% to stand at 23.66 while investors used the contract expiring at the end of the summer to get creative. One investor sold September calls using the premium to offset the cost of buying puts. The in-the-money 30 strike puts carried a 3.60 premium creating a breakeven point at expiration of 26.40, while calls sold for 2.70 lifts the breakeven to 29.10. Throughout the morning this appears to have happened on volume of around 6,000 contracts. At the September 42 strike call it appears that one investor also wrote 25,000 options at a premium of around 85 cents, which will be returned unless volatility approximately doubles from its current torpor. – CBOE Volatility Index

CLX – A frenzy of bullish option trades were observed this morning on the producer of household cleaning products amid a 1.5% rally in shares to $59.64. Investors hoping for continued upward movement in the price of the stock purchased 1,800 calls at the August 60 strike price for an average premium of 1.08 apiece. Super-bullish traders were seen positioning for a significant near-term rally as more than 3,500 calls were coveted at the August 65 strike for 18 cents per contract. Individuals long the calls at the higher strike are hoping shares of CLX rise at least 9% to the breakeven point at $65.18 by expiration next month. Finally, optimistic sentiment spread to the September 65 strike price where 1,500 calls were scooped up for 31 cents a-pop. – The Clorox Company

BBY – Shares of the specialty retailer of consumer electronics have slipped more than 1.5% to stand at $35.81 today. However, the slight decline in the stock did not deter one investor from establishing a call spread in the August contract. The trader looks to have purchased approximately 5,100 calls at the August 38 strike price for a premium of 62 cents each spread against the sale of 5,000 calls at the higher August 40 strike for 22 cents apiece. The net cost of the transaction amounts to 40 cents, thus yielding maximum potential profits of 1.60 to the investor if shares can explode up to $40.00 by expiration. Shares of BBY must rally 7% in order for the trader to breakeven at a price of $38.40. We note that Best Buy has not traded higher than $38.40 since June 15, 2009, and has not breached $40.00 since May 5, 2009. – Best Buy Co., Inc.

AAPL – Several analysts lifted their share price targets after the company bucked the industry trend when it announced a 4.1% gain in notebook sales. The MacBook Pro notebook outshone the competition where sales have fallen 3.1%. Apple’s Thursday earnings revealed 15% higher profits of $1.23 billion as sales rose 12%. A $300 price slash in the cost of a MacBook Pro encouraged more first time users. Shares in Apple rose 4.1% to $157.75 as a result and it appears that long-time fans are just as bullish as ever. Ahead of April earnings when shares were trading at $119.57 on bullish option trader bought around 6,500 call options expiring in January at the 160 strike for around 6.50. Today his patience paid off and it appears that these calls were traded in for 14.10 per contract as the investor stretched to the same expiration 185 strike where 8,625 calls were bought for 5.60 per contract. – Apple Inc.

AXP – Bearish traders made a bee-line for put options on AXP right out of the gate this morning amid a 2.5% decline in shares of the global payments company to $28.64. Some investors targeted the now in-the-money August 29 strike price where 1,600 puts were picked up for an average premium of 1.77 each. Other traders scooped up 4,300 puts at the August 28 strike for 1.38 per contract, apparently bracing for further declines. The most bearish of investors looked to the August 27 strike price where more than 11,700 put options changed hands for 1.02 apiece. Shares of AXP would need to fall another 9% before downside protection kicks in beneath the breakeven point at $25.98. Pessimism spread to the September 30 strike price where one trader sold 3,750 calls short to receive a premium 1.65 each. This investor retains the full premium, which amounts to approximately $618,750, as long as shares remain below $30.00 through expiration in September. The short call position leaves the trader exposed to potentially unlimited losses if shares move higher than the breakeven price of $31.65. – American Express Co.

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