Ratio Call Spread Suggests Bullish Sentiment on Cabot Oil & Gas

By option_review

August 17, 2009

372

Today’s tickers: COG, HPQ, ALGN, VIX, WLP, UNH, CVX, & OIH

COGThe oil and gas company appeared on our ‘hot by options volume’ market scanner after a ratio call spread was established in the September contract. Broad market declines did not spare COG today as shares fell nearly 4% to stand to the current price of $33.75. The bullish investor responsible for the spread looked to the deep in-the-money September 30 strike price to purchase 3,000 calls for an average premium of 4.15 apiece. The long calls were marked against the short sale of 6,000 calls at the higher September 35 strike for 1.15 per contract. Thus, the net cost of the spread amounts to 1.85 and yields maximum potential profits of 3.15 if COG rallies up to $35.00 by expiration next month. The investor has already realized profits on the transaction because shares are currently higher than the breakeven point at $31.85. But, the ratio of 2 short calls for each long call leaves the trader vulnerable to potentially unlimited losses in the event that shares of COG surge higher than $38.15 by expiration. – Cabot Oil & Gas Corp. –

HPQThe global technology company has experienced a more than 1.5% decline in shares today to $43.26 ahead of its third-quarter earnings release, which is scheduled to follow the closing bell on Tuesday afternoon. At least one investor was seen bracing for bad news or at least for continued declines in the price of the underlying. The trader established a ratio put position by purchasing 5,000 puts at the August 42.5 strike for approximately 89 cents apiece, spread against the sale of 10,000 puts at the lower August 40 strike for 25 cents per contract. The net cost of the bearish transaction amounts to 39 cents and yields maximum potential profits of 2.11 if the stock slips to $40.00 by expiration this Friday. Shares must fall about 3% from the current price in order for the trader to begin to amass profits beneath the breakeven point at $42.11. Maximum profits of $1,055,000 will be retained by the investor if the stock falls to $40.00 and the lower strike puts remain out-of-the-money. If shares were to slip lower than $40.00, the trader may have shares of the underlying put to him at expiration given the ratio of 2 short put options to each long contract in his possession. Investor uncertainty has marched steadily higher throughout the day from 33% this morning to the current reading of 37% — a sign of building tension ahead of the firm’s third-quarter profit report. – Hewlett-Packard Co. –

ALGNInvestors in the maker of the Invisalign system are surely all smiles today as shares have exploded more than 30.5% higher to $13.20. The manufacturer of Invisalign, which is a proprietary method for correcting the misalignment of teeth, has nearly breached its 52-week high of $13.74 on today’s rally. Positive news regarding a settlement over patent litigation involving ALGN and Danaher Corp.’s Ormco unit, prompted one analyst at Northcoast Research to raise the stock to ‘neutral’ from ‘sell’. Bullish traders, hoping for continued gains in the stock, purchased approximately 1,000 calls at the September 15 strike price for an average premium of 23 cents apiece. Shares of ALGN must climb an additional 15% in order for call-buyers to begin to amass profits at the breakeven price of $15.23. Additional near-term optimism was observed at the August 10 strike price where traders shed 1,000 puts for 21 cents each. Other investors appeared to be banking gains on the rally by selling about 2,000 calls at the now in-the-money August 12.5 strike for a premium of about 80 cents. We note that 15,656 option contracts exchanged hands on Align Technology during the trading session, which comprises more than 53% of the existing open interest on the stock of 29,119 lots. – Align Technology, Inc. –

VIXRisk aversion is back with a vengeance on Monday’s early trade. Following through on Asian market weakness, S&P index futures were already 20 points lower pre-market and haven’t managed much of a bounce since the open. The Vix index has jumped 15% to 27.85 mid-morning, while the October Vix future is back above a reading of 30. In the November options it appears that one investor expects some follow through equity index weakness and positioned accordingly by selling 25 strike put options to lower the cost of 37.5 strike calls. The premium was reduced to just 50 cents but does position the investor vulnerable to a reversal in the direction for stocks, likely to be accompanied by lower implied volatility. – CBOE Vix index –

WLPBucking the market today with a 3.7% rally in its share price is Wellpoint at $54.08. Indeed the news emanating from Washington that President Obama may look for a compromise to universal health care reform has provided a lift to the sector. Around 10,000 call options have so far traded at the 55 strike price with the severity of the rally making for interesting movements in the premium, which has shifted from 40 cents to 1.25 during the morning. It’s also possible that within this volume one savvy investor has bought and sold at a handsome profit several thousand contracts. Elsewhere in the September contract investors have bought 4,500 60 strike calls where open interest ahead of today’s session was just 5,390 contracts. The uncertainty surrounding changes to government plans is being taken as a positive to healthcare insurance providers and this uncertainty has lifted options implied volatility on this stock by 18% to 44% this morning. – Wellpoint Inc. –

UNHAlso on the mend today are shares at UnitedHealth Group, which are so far 4.3% to the better at $29.25. Option investors bought calls expiring at the weekend at the 29, 30 and 31 strikes in hopes of further share price gains by then. At the 31 strike the current premium of 15 cents implies a further gain of 6.5% this week. Investors with more patience paid 1.15 in the September expiration at the 30 strike, while bigger optimists paid 1.95 at the December 32 strike. – UnitedHealth Group Inc. –

CVXWith the confidence in global recovery coming under scrutiny, crude oil prices are coming under pressure this morning. That naturally harms refiners from two stand points. Weaker demand hurts profits as do lower prices. Looking at an 18,000 trade printing late morning in the September contract, we conclude that one investor feels that shares at Chevron are in for a 10% slide before options expire. The trade involved the same amount of calls and puts at the same 60 strike and would argue for a slide from its present $66.65. Shares are lower by 2% so far today. If this is a sold straddle, the investor expects an expiration price at or close to $60.00 for Chevron. Its share price hasn’t reached that low since March 10. The 60 strike calls were traded for a 7.15 premium, while the puts appeared to trade to the 50 cents bid. Combining the two premiums yields a gross straddle ‘cost’ of 7.65, which would cap this investors view on the upside for Chevron in one month’s time to $67.65. The closer the share price declines towards the strike price by expiration, the better. Option implied volatility rose to 30% today. – Chevron Corp. –

OIHShares tracking oil service companies have declined by 4.5% in early trading. One options investor appears to be banking on a further decline to around $95 by September. A put-butterfly combination appears to have been trade centered on the 95 strike using surrounding 90 and 100 strikes to control the risk of this position. The position involved 6,000 contracts at the 90 and 100 strikes bought in exchange for 12,000 puts sold at the 95 strike, which implies the investor expects prices to gravitate there when expiration comes around. The net premium outlay of 53 cents implies a maximum profit to the investor of 4.47 per contract if the OIH touches down as expected. – Oil Service Holdrs Trust –

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