Western Digital in the Hot Seat

Today’s tickers: WDC, XLF, EEM, RRI, MYL, XHB, ROK, IACI, & XME

WDC – The manufacturer of hard disk drives has enjoyed a 3% rally today to stand at $31.31. Near-term bullish bets were initiated by option traders expecting further gains in the stock. It appears that some investors established call spreads on WDC by purchasing 14,000 calls at the now in-the-money August 31 strike price for an average premium of 1.77 each, and simultaneously selling 14,000 calls at the higher August 35 strike for about 37 cents per contract. The net cost of the spreads amount to approximately 1.40 apiece. Call-spreaders will begin to realize profits on today’s transaction if WDC can climb 3.5% higher to the breakeven point at $32.40. Maximum profits of 2.60 would be attained by investors if the stock increases to $35.00 by expiration. Finally, plain-vanilla call buying was observed at the August 32 strike where some 3,200 calls were coveted for an average premium of 1.12 per contract. We note that the volume of more than 45,433 contracts seen on WDC today represents 45% of the total existing open interest on the stock of 101,598 lots. – Western Digital Corp.

XLF – The financials ETF has climbed 1.5% higher to $12.61. Notable bullish action was observed at the December 13 strike price this afternoon where it seems some 35,000 calls were purchased for an average premium of 93 cents per contract. Shares of the XLF would need to rally 10% higher and surpass the breakeven point at $13.93 in order for traders to begin to amass profits by expiration at the conclusion of 2009. – Financial Select Sector SPDR

EEM – A mess of deep in-the-money put purchases were initiated on the emerging markets fund today amid a 0.5% increase in the price of the underlying shares to $35.60. The greatest volume was seen at the March 2010 38 strike price where about 7,400 puts were picked up for 5.70 apiece. The March 40 strike appears to have had 2,700 puts purchased for 7.00 each while the higher March 41 strike had 1,200 puts bought for 7.71 per contract. Put-buying continued at the March 42 strike price with 1,600 lots lifted for a premium 8.46 each. The higher March 43 strike had 2,300 puts purchased for 9.22 apiece while the March 44 strike had 1,000 puts coveted for a whopping 10.01 per contract. – iShares MSCI Emerging Markets Index

RRI – Shares of the electric power provider have surrendered 2% today to arrive at $5.34. Despite the decline in the price of the stock, a massive chunk of calls was purchased in the near-term August contract. Approximately 15,500 call options were picked up at the in-the-money August 5.0 strike price for 69 cents apiece. Perhaps the investor responsible for the transaction expects RRI to recover, or at least remain higher than $5.00, by expiration next month. The stock must climb 35 cents from the current price in order for profits to begin to amass at the breakeven point of $5.69. Option implied volatility has jumped on RRI from 61.5% at the start of the trading day, up to the current reading of more than 77.5%. – RRI Energy, Inc.

MYL – Shares of the largest maker of generic medicines in the U.S. have tumbled more than 12.5% today to $12.12 amid reports that its employees were “overriding quality control procedures”. The bearish news sent option traders scrambling for put options on the stock. The near-term August 10 strike price had more than 5,500 puts picked up for an average premium of 19 cents apiece. Shares of MYL must decline by another 19% to $9.81 in order for profits to begin to accumulate for traders long the contracts. The now in-the-money August 12.5 strike had another 4,000 puts purchased for 84 cents each. Pessimistic positioning spread to the September 10 strike where 2,100 puts cost investors 27 cents premium. Finally, downside protection was coveted as far out as the October 10 strike price where 2,100 puts were bought for 38 cents apiece. Investor uncertainty regarding Mylan has increased substantially as seen by the surge in option implied volatility from 37% this morning to the current reading of 65%. – Mylan, Inc.

XHB – The stock market isn’t quite getting the lift that one might have thought possible from the third straight monthly gain in sales of new homes. The report from the Commerce Department showed that June’s new sales were 21.8% lower than a year ago but up 11% month-over-month for a 384,000 seasonally adjusted annualized rate. Average new home prices fell $13,000 to $206,200 between May and June. Homebuilder stocks did flourish and a basket of these stocks gained 2% to $13.83. Options on the ETF were active and pointed to a mixed outlook. August expiration puts at the 14 strike traded some 10,000 times at a mid-market price of 75 cents per contract. This could have been one investor buying stock with built-in protection kicking in at $13.25. However, time and sales data shows that these puts traded simultaneously against the sale of the same amount of call options expiring in December with a 16 strike price for around 65 cents. In this case an investor might have shares put to him at or before August expiration for $14.00 per share and is looking to have them called from him before year end. So this actually appears to be an efficient way of positioning for further market upside of around 14% and at the same time reaping both premiums along the way. – SPDR S&P Homebuilders ETF

ROK – Shares of the industrial power conglomerate that manufactures Control and Power Systems are just a shade easier at $39.54, while one option trader lifted the price of August at-the-money put options from 2.15 to 2.40 this morning as he purchased 12,000 lots at 2.40. This creates a breakeven price for an investor either going long the stock or simply speculating on impending downside for the company’s prospects at $37.60. In late April when the company last reported, the company noted signs of stabilization but stated that it was too early to call a bottom. The company is scheduled to release third quarter numbers Tuesday with the street expecting a 20 cent per share number. The recent surge in the share price to $40 puts the company back to a valuation not seen since September 2008. Today’s trading pattern is likely to be a hedge in the event of disappointment. Since shares broke through May’s peak at $35.23 option implied volatility has also advanced by 10% to 48.9% ahead of earnings. – Rockwell Automation Inc.

IACI – Media and advertising owner whose portfolio includes Ask.com and Match.com is performing well as a budding recovery entices investors to look increasingly at prospects for online advertising revenues. Its share price has advanced from a July 9 low point at $15.58 to today’s peak at $18.75 for a 20% advance. One investor scooped up 35,000 protective put options in the January 2010 contract employing the 17.5 strike paying a 1.20 premium to possibly protect a holding in the underlying against a setback against the recent rally. Option implied volatility continues to move mildly higher to read 30.7%. – Interactive Corporation

XME – Medium-term bullish plays were seen today despite the fact that shares of the metals and mining fund have slipped slightly lower by less than 0.5% to $39.60. Investors gearing up for a rally looked to the December 50 strike price where more than 12,400 calls were picked up for an average premium of 1.55 apiece. A 30% rise in the price of the underlying shares by expiration would allow traders long the calls to breakeven at $51.55. Additional bullishness was seen through the sale of 6,000 puts at the nearly in-the-money December 39 strike for 4.80 per contract. Traders responsible for the sale accept the premium of 4.80 in exchange for bearing the risk that shares decline by expiration. Individuals short the put options would have the underlying shares put to them in the event that the XME falls 14% through the breakeven point to the downside at $34.20. But, the full premium is retained as long as the stock remains higher than $39.00 by expiration. – SPDR Metals and Mining ETF