Today’s tickers: BAC, HES, SII & DHI
BAC – Bank of America – A New Year and a fresh start in the corner office for incumbent CEO Brian Moynihan at Bank of America. Comments from his maiden voyage speech at a conference today noted that banks had over lent and consumers had taken on too much debt. It’s time to get back to work and as a responsible lender Mr. Moynihan wants to take the lead and do the right thing. His point that the worst of the crisis is now behind us in the context of credit seems to have been taken to heart by investors surrounding BAC’s shares today lifting it 3.9% to $15.65. Option investors appear to have taken profits on January call options at the $14 and $15 strikes instead favoring the $16/$19 strikes to play a bullish call spread combination. Volume patterns suggest the sale of around 33,000 call options for three cents at the upper strike while the $16 calls appear to have been purchased for around 18 cents thus lowering the breakeven at this point to a further rally of 3.1%. Investors also appeared to sell 22,000 puts expiring this month at the $15 strike – a sustained rally would render these worthless at expiration. Puts expiring February at the same $15 strike were also ditched at a premium of 73 cents, while option implied volatility remained unchanged at 37%.
HES – Hess Corp. – A New Year jump in commodity prices was largely inspired by a sustained bout of cold weather sending crude oil prices on the rise above $80. Shares in oil companies rose with those at Hess up 4% at $62.92, while one long-term option bull appeared to purchase 6,750 bullish call options using the January 2011 expiration. The $75 strike price traded at an average price of $4.60 per contract implying a break even share price at expiration of $79.60, requiring an annual rise for shares at Hess of 26.5% from its current level.
SII – Smith International Inc. – Oil services provider, Smith international is also higher by 2.8% today at $27.92 while our scanners picked up unusual options volume. We’re missing one data point to completely and accurately identify this trading strategy, but we think we get the gist. The option combination involved the purchase of puts expiring in April at the $23 strike where an investor paid 73 cents for 7,500 contracts. At the same time two April call strikes traded. The $27 strike saw 5,000 lots sold for a $2.68 premium, which means that as a damage limitation strategy the remaining volume of 4,000 lots at the higher $33 strike call line was likely bought. The credit call combination provides a way of financing the purchase of the protective put options while the sale of the higher strike calls limits the damage in the event the share price goes higher.
DHI – DR Horton Inc. – A bullish options player used a calendar put option spread using the January 2011 and January 2012 to play out bullish expectations on shares of homebuilder today. Shares rose 2.3% to $11.12 encouraging the bull to sell 15,000 put options expiring in two years for a $2.50 per contract premium at the $10 strike. In order to ensure the investor doesn’t get caught holding the bag in the event of a demise in the homebuilder, he also bought the same amount of protection using the January 2011 puts at the $10 strike. The lower premium of 1.60 was paid. The logic presumably is that if the builder has survived for this long into a construction recession, it’s likely to weather the storm. Selling longer-dated premium in that respect makes sense while the nearer expiration offers a timely hedge. The investor gets to retain the 90 cent differential assuming the trade goes to plan.
