Bearish Put-Spreader Paws Profits at Merck

By option_review

July 28, 2009

325

Today’s tickers: MRK, IMMU, AET, ODP, FSLR, EEM, MFA & XLI

MRK – The pharmaceutical company declared a quarterly dividend of 38 cents per share for the fourth quarter of 2009 today, amid a 3% decline in shares to arrive at the current price of $29.81. A bearish put spread established in the October contract suggests some investors are wary of further declines for the company. The spread involved the purchase of 7,400 puts at the October 31 strike price for 2.23 apiece against the sale of 7,400 puts at the lower October 29 strike for a premium of 1.28 each. The net cost of the transaction amounts to 95 cents, yielding the investor maximum potential profits of 1.05 if the stock slips to $29.00 by expiration. The current market price of MRK is currently lower than the breakeven point on the trade of $30.05. Thus, the investor responsible for the spread has already earned 24 cents by assuming a bearish stance on the stock. – Merck & Company, Inc.

IMMU – Shares of the biopharmaceutical company engaged in the development of products designed to treat cancer, autoimmune, and other serious diseases, have surged more than 14% to $5.24 during the trading session. Bullish movement in the stock was fueled by the news that IMMU has entered into a partnership and cross-licensing agreement with Alexis Biotech Ltd., of London, England. The firms are combining efforts in order to develop “targeted vaccines against cancers” such as melanoma and chronic lymphocytic leukemia, as well as infectious diseases such as AIDS. Option traders hoping for continued upward movement in the price of the underlying were seen getting long of bullish call options in the September contract. The September 7.5 strike price had approximately 3,500 calls coveted for 38 cents apiece. Investors holding the calls will begin to realize profits in the event that shares climb another 50% to surpass the breakeven point at $7.88 by expiration. – Immunomedics, Inc.

AET – The third-largest health insurer in the United States has enjoyed a rally in shares of more than 13% to $29.08 this afternoon after receiving an upgrade to ‘outperform’ from ‘neutral’ at Cowen and Company. Call options exchanged on the stock today exceeded the number of puts by a factor of more than 3-to-1, reflecting bullish sentiment by investors. The near-term August 30 strike price had more than 8,800 calls purchased for an average premium of 75 cents apiece by traders hoping the stock will continue to rise by expiration next month. Shares must climb 6% – or $1.67 – from the current price in order for call-buyers at the August 30 strike to begin to accumulate profits at the breakeven point of $30.75. – Aetna, Inc.

ODP – Shares at the global supplier of office products and services reached a 10-month high yesterday by rising to $5.43, but surrendered more than 17% of its value today by falling back down to $4.42. The second-largest office-supplies retailer declined after reporting second-quarter losses which were greater than analysts had anticipated. ODP has had a terrific run up, recovering 89%, since its shares were hammered down to a 52-week low of just 59 cents back on March 9, 2009. Option traders active on the stock today have not thrown in the towel on Office Depot just yet. Investors seem to expect that ODP will rise again by expiration in January 2010. The January 5.0 strike price had traders selling more than 9,800 puts for an average premium of 1.28 apiece in order to purchase upwards of 9,800 calls at the same strike for 88 cents per contract. Investors employing bullish risk reversals receive a net credit of 40 cents and are hoping to see shares breach the $5.00 level by expiration. Option implied volatility on the stock gave way following the earnings announcement, falling from a high of 97% to the current reading of 85%. – Office Depot, Inc.

FSLR– The designer and manufacturer of solar modules has experienced a 3.5% decline in shares today to $165.52. FSLR appeared on our ‘most active by options volume’ market scanner after one trader initiated a bearish put spread in the near-term August contract. The individual responsible for the transaction could be looking to profit to the downside, or may be protecting a long position in the underlying. The trade involved the purchase of 6,000 puts at the August 150 strike price for an average premium of 5.79 each against the sale of 6,000 puts at the lower August 125 strike for 1.20 apiece. The net cost of the pessimistic play amounts to 4.59 per contract and yields maximum potential profits to the downside of 20.41 in the event that shares fall to $125.00 by expiration. The stock must erode by 12% before the investor begins to realize profits at the breakeven point of $145.41. Option implied volatility on FSLR rose from 67% to 72% yesterday, and remains up at 72% today. – First Solar, Inc.

EEM – Shares of the emerging markets exchange-traded fund are lower by more than 1% to stand at $35.23. The September contract saw a large put spread established by a bearish investor hoping to profit from downward movement in the price of the underlying by expiration. The trader purchased 20,000 puts at the just out-of-the-money September 35 strike price for 1.67 each, spread against the sale of 20,000 puts at the lower September 29 strike for an average premium of 31 cents apiece. The net cost of the bearish play amounts to 1.36 and yields maximum potential profits of 4.64 to the investor if shares collapse to $29.00 ahead of expiration. We note that shares of EEM have remained higher than $29.00 since May 1, 2009. – iShares MSCI Emerging Markets Index

MFA – Earnings at the real estate investment trust have inspired investors to build on a solid second-quarter gain in MFA’s share price, which today reached pretty close to its 52-week high of $7.70 from last September as it hit $7.66 before sellers were enticed to let loose some stock. A sizeable options trade was also identified in which an investor, possibly already long the stock, sold around 38,000 call options expiring next month. The trade is huge on this issue since before today’s session investors held less than 11,000 option positions covering MFA. Call positions had been building with the August 7.5 strike the most watched recently. Today’s sale is either a bear expecting the share price rally to falter or is the work of an investor hoping to bank gains from being long the underlying who aims to have shares called at the strike price by expiration. The heavy volume traded for a 20-cent premium earlier, which incidentally boosts gains if the investor is already long. – MFA Financial Inc.

XLI – A bearish reversal was observed on the industrials fund today amid a 1% decline in shares to $23.28. The investor responsible for the transaction sold 7,500 calls at the December 26 strike price for 65 cents each, and purchased 7,500 puts at the December 21 strike for 1.00 apiece. The net cost of getting long the put options amounts to 35 cents. The trader will begin to profit to the downside if shares of the XLI decline by another 11% through the breakeven point at $20.65 by expiration. Nevertheless, a sustained reversal in equity prices would benefit this position in coming weeks. – Industrial Select Sector SPDR

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