Mylan Rebounds After FDA Report Signals All Clear

By option_review

August 13, 2009

292

Today’s tickers: MYL, MU, ACAD, PAAS, PALM, KLAC, LDK, OIH & SM

MYL – The global pharmaceutical manufacturer released the final findings of an FDA investigation review of its Morgantown W Va. manufacturing plant, which came under the microscope following a local newspaper’s scathing report alleging health and safety wrong doings. The FDA found nothing wrong with the operations, much to the pleasure of Mylan shareholders as new investors sent its shares higher by 3.8% to $14.12. Mylan’s valuation now stands above the point it was trading at the day prior to the story. Shares fell from $13.93 to $11.66 on the report prompting investors to seek the safety of protective puts. Investors today are taking a different take and have scooped up almost 10,000 bullish call options expiring in September granting rights to buy shares at a fixed $15 per share. The number of open positions at that strike as of Wednesday evening was 8,576 contracts. Investors paying 55 cents for calls are predicting a break to a fresh 52-week high for Mylan’s shares indicating a rally by as much as 10% within a month. Around four times the number of calls traded today compared to puts. – Mylan Inc.

MU – The demand for call options on the manufacturer of flash memory products far outweighed that of calls as investor activity drove the call-to-put ratio up to more than 25-to-1. The call option feeding-frenzy was likely induced by the more than 3.5% rally in shares of MU to $7.00. About 1,000 calls were picked up at the nearer-term September 8.0 strike price for an average premium of 15 cents apiece. Bullishness spread to the October contract where traders splurged on 5,600 now at-the-money October 7.0 strike calls for an average premium of 66 cents each. Finally, traders got long of some 7,500 call options at the higher October 8.0 strike for about 40 cents per contract. A 20% increase over the current price per share by expiration, would allow investors long the October 8.0 strike calls to begin to accumulate profits above the breakeven point at $8.40. – Micron Technology, Inc.

ACAD – Shares of the biopharmaceutical company have soared upwards of 17.5% during the trading session and currently stand at $6.23. ACAD appeared on our ‘hot by options volume’ market scanner after one investor initiated a long butterfly spread in the September contract. The trader constructed the butterfly by purchasing wings in the amounts of 2,000 calls apiece at the September 7.5 strike price for 1.03 apiece and at the September 12.5 strike for 29 cents each. The body of the butterfly was sandwiched between the wings and involved the sale of 4,000 calls at the central September 10 strike for 55 cents per contract. The net cost of the trade amounts to 22 cents [1*1.03 + 1*0.29 – 2*0.55 = 0.22]. Shares must rise another 24% in order for the trader to begin to accrue profits at the breakeven point of $7.72. Maximum potential profits of 2.28 per contract will be attained if shares rise to $10.00 by expiration. Complete erosion of profits is possible in the event that ACAD shares rise higher than the upper breakeven point at $12.28. But, the butterfly strategy limits the trader’s potential losses to a maximum of 22 cents, or the price he paid to initiate the spread. Today’s trading volume of 36,030 lots represents more than 60% of the total existing open interest on the stock of 60,017 contracts. – ACADIA Pharmaceuticals, Inc.

PAAS – The silver mining company has enjoyed a more than 10% rally in shares to $20.77 after receiving an upgrade to ‘buy’ from ‘neutral’ at UBS with a target price of $23.00. Option traders looked to the now in-the-money September 20 strike to get long of 2,300 calls for an average premium of 1.39 apiece. More optimistic individuals looked to the higher September 21 strike to covet 2,000 calls for 1.15 each. The breakeven point on the higher strike calls of $22.15 is within the boundaries of the target price set at UBS today. Shares must rally 6% in order to breach the breakeven point described and for the calls to begin to yield profits to owners. – Pan American Silver Corp.

PALM – Shares of the mobile device maker have rallied more than 3% to $13.26 despite the downgrade the firm received to ‘sell’ from ‘hold’ at Morgan Joseph. Analyst Ilya Grozovsky set a target price for PALM 43% below the current market price to $7.50 because he expects sales of the Pre smart phone to underwhelm the Street. Perhaps option traders populating the September contract did not receive the bearish memo. Otherwise, they have taken a contrarian view that PALM will continue to rally through expiration. The September 17 strike price had 10,000 calls purchased for an average premium of 20 cents apiece. Investors holding these contracts are hoping to see shares rise at least 30% from the current price so they may accumulate profits starting at the breakeven point at $17.20. Whether the stock rises or falls remains to be seen. But, it is apparent from the jump in implied volatility from 75% yesterday to 82% today that traders generally expect increased volatility in the price of PALM from here. – Palm, Inc.

KLAC – The provider of supplier process control and yield management solutions to the microelectronics industries edged onto our ‘hot by options volume’ market scanner this morning amid bullish options activity. Shares of KLAC have increased nearly 1% during the trading session to stand at $31.14. A ratio call spread was initiated by an investor expecting upward movement in the price of the underlying by expiration in January 2010. The transaction involved the purchase of 2,000 calls at the January 32 strike price for a premium of 2.85 apiece spread against the sale of 4,000 calls at the higher January 36 strike for 1.35 each. The net cost of the trade amounts to just 15 cents and yields maximum potential profits to the investor of 3.85 per contract if the stock rallies to $36.00 by expiration. The trader will start to profit if the stock rises just 3% from the current price to surpass the breakeven point at $32.15. This individual must be careful if shares surpass $36.00 because he is short twice as many calls at that strike price. He faces potentially unlimited losses by expiration if the stock trades higher than $39.85. – KLA-Tencor Corp.

LDK – A quarterly loss posted at LDK Solar, the Chinese manufacturer of solar wafers used to convert sunlight into electricity, saw investors shave 18% off its share price today. Around noon shares were trading at $9.23. Investors were disappointed by an inventory write down and the fact that it undercut Wall Street’s revenue forecasts ahead. Still, that didn’t stop one investor from writing put options that expire in January 2011 at the lowly 2.5 strike. Such a devastating slump in its share price, dare we say, would eclipse the existing $3.75 low posted during the past 52 weeks. The investor appears to have written some 6,000 contracts at a 55 cent premium, which he’ll retain in the event that the company’s fortunes revive. As an option seller, his obligation to take delivery at expiration at the fixed price in the event a put buyer exercises the right to sell. The investor today is either presently bearish and short stock at LDK and looking for a target price to exit, or is mildly bullish and looking to take in premium on what he sees as an unlikely outcome. – LDK Solar Co.

OIH – Shares of OIH have jumped nearly 3% today to $106.13. Investors actively trading options on the fund today established both put and call spreads. A bearish investor lumbered into the September contract to enact a put spread. The transaction involved the purchase of 2,000 puts at the September 105 strike for a premium of 5.62 each marked against the sale of 2,000 puts at the lower September 95 strike for 1.94. The net cost of the spread amounts to 3.86 and yields maximum potential profits of 6.32 per contract if shares plummet 10% to $95.00 by expiration. Opposing the pessimistic position was a larger bull call spread set to expire in the same month. The purchase of 3,000 calls at the September 115 strike for 1.44 apiece was spread against the sale of 3,000 calls at the higher September 125 strike price for 30 cents. The investor responsible for this transaction spent a net 1.14 per contract and could potentially amass maximum profits of 8.86 apiece if the OIH were to surge 18% to $125.00 by expiration next month. Finally, uber-bullish sentiment in the January 2010 contract tipped the scales to favor a potential rally. Another call spread involved the purchase of 2,500 lots at the January 135 strike for 2.04 apiece against the sale of 2,500 calls at the higher January 145 strike for 1.01 per contract. Maximum profits of 8.97 each or a total of $2,242,500 would be attained by the trader if the value of shares increases 37% to $145.00 by expiration next year. – Oil Service HOLDRS

SM– Bullish call buying on the energy company was observed in the midst of a 1% increase in shares to $29.20. Investors hoping for continued upward movement in the price of the stock looked to the September 30 strike price where nearly 5,000 calls were coveted for an average premium of 1.50 per contract. Call-buyers will begin to accrue profits if SM can rally 8% higher to breach the breakeven point at $31.50 by expiration. We note that the 7,104 option contracts exchanged on SM today represent nearly 77% of the existing open interest on the stock of 9,252 lots. – St. Mary Land & Exploration Co.

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