Put Sellers Endorse AFLAC Rally

By option_review

July 30, 2009

339

Today’s tickers: AFL, IYR, ENDP, ABC, GE, & DOW

AFL – The world’s largest seller of supplemental health insurance reported that second-quarter profits fell 35% on “larger-than-usual realized investment losses”. Despite the decline in earnings, options activity on the stock today revealed bullish sentiment by investors amid a more than 8% rally in shares to $38.34. Traders hoping for further upward momentum purchased 1,200 calls at the September 40 strike price for an average premium of 1.37 apiece. Call-buyers will profit if shares of AFL climb 8% higher and surpass the breakeven point at $41.37 by expiration. Additional bullish positioning was seen at the November 35 strike price where 5,000 puts were shed for 2.63 per contract. Investors short the put options receive premium in exchange for bearing the risk that shares decline by expiration. If the puts land in-the-money, traders would have shares of the underlying put to them at an effective price of $32.37. Otherwise, these put-sellers retain the full 2.63 premium. – AFLAC, Inc.

IYR – Shares of the U.S. real estate exchange-traded fund have moved nearly 4.5% higher during today’s trading session to stand at $36.14. Contrarian option traders flooded the ETF, despite the surge in shares, and drove the put-to-call ratio up to more than 19-to-1. The favored approach taken by bearish investors today was the plain-vanilla put spread. The first of two trades up for discussion involved the purchase of 3,000 puts at the September 36 strike price for a premium of 2.00 apiece spread against the sale of 3,000 puts at the lower September 33 strike for 85 cents each. The net cost of the trade amounts to 1.15 and yields maximum potential profits of 1.85 per contract if shares slip to $33.00 by expiration. A much larger put spread was established further out in the January 2010 contract. The trade may have been the work of an investor seeking downside protection on a long position in the underlying. Otherwise, the trader responsible for the spread is hoping to amass profits on bearish movement in the stock. The transaction involved the purchase of 40,000 puts at the January 30 strike price for 1.97 each, spread against the sale of 40,000 puts at the lower January 25 strike for an average premium of 77 cents per contract. The net cost amounts to 1.20 to the investor who will realize maximum gains of 3.80 if the IYR declines to $25.00 by expiration. Shares would need to fall 20% from the current level in order for the trader to begin to amass profits beneath the breakeven point at $28.80. – iShares Dow Jones U.S. Real Estate Index

ENDP – The pharmaceutical company edged onto our ‘hot by options volume’ market scanner after one option trader ramped up a bullish position on the stock. Shares of ENDP are currently higher by more than 2.5% to $20.84 on reports that the firm increased sales of key pain treatments in the second-quarter. It appears that the investor originally scooped up bullish call options on July 1, 2009, when he paid an average premium of 1.19 apiece for 3,500 lots at the August 17.5 strike price. The trader’s optimistic outlook for the firm was rewarded today when he sold the 3,500 calls for a premium of 3.50 per contract. The investor reeled in profits of about 2.31 each, a total of $808,500, by closing out the position. Finally, the same individual, hoping for continued bullish movement in shares, chose to reestablish a 3,500-lot long call position at the now in-the-money September 20 strike for 1.85 each. The investor will begin to amass profits on the new position if shares rise 5% higher and surpass the breakeven point at $21.85 by expiration. – Endo Pharmaceuticals Holdings, Inc.

ABC – Shares at the drug wholesale tore away in Wednesday’s session ahead of Thursday’s earnings, which in the event did beat expectations and investors taking profits. Option implied volatility slumped 25% leading to lower premiums on both puts and calls while its share price eased to $20.12. Option sellers appeared to close bearish plays at next month’s expiry targeting the 16 strike. Some 16,000 bear puts are currently open, while today’s volume at that strike indicated around half of these may have been sold at losses at an average premium of 7.5 cents. The company indicated revenues later this year should be higher rather than lower then earlier estimates leaving $21.72 marking the next target for bulls, the 52-week high from last August. Option implied volatility came into 29%. August call options felt the brunt of the volatility collapse today. One option investor traded a block of 5,400 calls at the 20 strike at an 80 cent premium while shares where at $20.37. The subsequent prick of the volatility bubble, perhaps coinciding with an 11am earnings conference call saw premiums decline with those same calls now trading at 50 cents. – AmerisourceBergen Corp.

GE – A shift to “buy” from “neutral” from a Goldman Sachs analyst helped both shares in the industrial conglomerate and buoyed broader market sentiment. GE’s shares jumped 7% to $13.15 while option bulls were out in force as evidenced by the call to put ratio of 2.9 indicating almost tripe the appetite for bullish call strategies. The analyst predicted that GE’s health is good enough to allow it to maintain ownership of GE Capital and while that uncertainty provided near term relief, the future gauge of fear hardly budged with option implied volatility dropping from 40% to 39%. The heaviest tracked options activity showed up at the August expiration 14 strike calls where 48,000 lots changed hands at premiums ranging from 13 to 24 cents. As prices rose toward the top of that range throughout the morning on decent volume, one option investor sold a block of 12,000 contracts at a 20 cent premium. Prices have decayed further since that time. The current probability of landing in-the-money by August 21 expiration is just one-in-four. The odds of a move to $14.00 by September is 35%. – General Electric

DOW – The largest U.S. chemical maker has enjoyed a more than 8% rally in shares today to $21.95 after reporting second-quarter profits which exceeded analyst estimates. DOW posted earnings of 5 cents per share and surpassed average analyst expectations of a loss of 7 cents. Cost-cutting measures and improved sales volume for the quarter boosted the stock and prompted an analyst at Citigroup Global Markets to upgrade the shares to ‘buy’ from ‘hold’. Option traders hoping for continued upward movement in DOW targeted the near-term August 22 strike price where 2,200 calls were picked up for an average premium of 98 cents apiece. Investors will bank profits on the calls if shares can climb 5% higher to the breakeven point at $22.98 by expiration. Elsewhere, traders were seen locking in gains by purchasing protective put options in the September contract. Approximately 5,000 puts were purchased for 1.00 apiece at the September 21 strike price. Downside protection for these investors will kick in if shares slip beneath the breakeven point of $20.00 by expiration. – The Dow Chemical Company

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