Today’s tickers: LRCX, AZN, BRCD, F, MTG, RSH & FL
LRCX – Lam Research Corp. – Contrarian option players initiated bullish trades on Lam Research Corporation today even though shares are trading 7% lower to $32.79. Investors sold nearly 5,000 in-the-money put options at the March $35 strike for an average premium of $1.71 apiece. Put-sellers are perhaps positioning for a rebound in the price of the underlying stock ahead of expiration next month. Traders keep the $1.71 premium per contract on the sale only if LRCX’s shares rally above $35.00 by expiration day. Short-put sellers receive the premium in exchange for bearing the risk that the puts land in-the-money at expiration and shares of the underlying stock are put to them at an effective price of $33.29 apiece. Optimism spread to the April $35 strike where 1,000 calls were picked up for an average premium of $1.15 apiece. Lam Research’s shares must jump 10.25% from the current value before call-buyers start to accumulate profits above the breakeven share price of $36.15. The increase in demand for options on LRCX today boosted options implied volatility on the stock about 11.1% to 37.54%.
AZN – AstraZeneca PLC – A bearish risk reversal was initiated on pharmaceuticals firm, AstraZeneca, today despite news the firm is raising its 2010 earnings outlook to $5.90-$6.30 per share up from $5.75-$6.15 per share. AstraZeneca improved its 2010 outlook after revealing plans to pay $783 million to settle a tax dispute with United Kingdom regulators. Shares were up earlier in the session, but are currently trading lower by less than 0.10% to $43.51. The pessimistic play involved the sale of 5,000 calls at the July $50 strike for a premium of $0.60 apiece, spread against the purchase of 5,000 puts at the lower July $40 strike for a premium of $1.35 each. The net cost of the reversal transaction amounts to $0.75 per contract. The investor responsible for the trade is perhaps hoping to accumulate profits to the downside should the stock trade beneath the breakeven share price of $39.25 by expiration in July.
BRCD – Brocade Communications Systems, Inc. – The supplier of networking equipment forecast maximum 2010 earnings of $0.58 per share, which underwhelmed analysts expecting $0.60 per share. A plethora of analyst downgrades combined with the lower-than-expected 2010 profit forecast pummeled Brocade’s share price down 23.50% to $5.32 today. BRCD was downgraded to ‘hold’ from ‘buy’ at Stifel Nicolaus and was cut to ‘sector perform’ from ‘outperform’ at RBC Capital, as well. Bearish options trading exploded on the stock right out of the gate this morning as investors utilized both calls and puts to take pessimistic positions. Action at the March $5.0 strike saw sellers ditch 1,300 in-the-money calls for an average premium of $0.59 apiece. Call sellers keep the premium received today if shares of the underlying stock trade below $5.00 ahead of March expiration. Put buyers at that strike picked up 2,200 contracts for a premium of $0.13 apiece, hoping to profit if BRCD-shares slip beneath an expiration breakeven point of $4.87. Similar call selling and put buying transactions took place in the April and October contracts, as well. One investor was apparently ready and waiting for Brocade’s share price to hemorrhage and banked profits today by buying-to-close a previously established short call position. It appears the trader originally sold 8,765 calls at the January 2011 $7.5 strike for a premium of $1.25 apiece back on January 22, 2010. Today, he closed out the position by buying the calls for just $0.44 each and walks away with net profits of $0.81 per contract.
F – Ford Motor Co. – On a down day for stocks, Ford’s shares are trading higher by 1.4% at $11.36. An interesting stock with option combination traded earlier involving the sale of stock at $11.44 against the simultaneous sale of 100,000 put options at $1.21 per contract. In essence the trader wants Ford shares to decline and the short put aspect means that if at expiration that Ford’s shares are trading below the $10 strike price, the investor could have that 10 million shares put to him. With a delta of 0.3 on the original trade the investor would have sold approximately 330,000 shares today. Assuming the price does decline the position would become larger and the delta would increase the closer we move towards the strike price. If the trade works as planned the investor’s bravery gets rewarded through buying the stock at a discount to the prevailing market price by the amount of the premium written today. That also acts as a cushion in the event shares rally. Shares reached $12.14 on November 1, 2009.
MGT – MGIC Investments Corp. – Shares of the largest U.S. mortgage insurer are up more than 4% this morning to $7.84 on news the firm is implementing a new pricing scale to better compete with government-backed competitors. Options traders initiated fresh bullish positions using both calls and puts on the stock. Plain-vanilla call buyers targeted the April $10 strike, purchasing 2,200 calls for an average premium of $0.41 apiece. These contracts positions MTG-bulls to amass profits only if the firm’s share price surges more than 32.50% over the current price to surpass the breakeven point at $10.41 by April expiration. Other investors shed 1,400 puts at the June $7.5 strike to take in an average premium of $1.10 per contract. Put-sellers keep the full premium received on the sale if MTG’s shares trade above $7.50 through expiration in June. The short sale of the put contracts implies traders are happy to have shares of the underlying stock put to them at an effective price of $6.40 apiece if the puts land in-the-money.
RSH – RadioShack Corp. – The consumer electronic goods retailer’s shares are down more than 7.15% to $19.15 in early trading following the firm’s fourth-quarter earnings report yesterday. Shares are down sharply despite the fact that RadioShack’s earnings of $0.60 per share exceeded average analyst expectations by one penny a share. One bearish investor’s options trade in the March contract suggests he does not expect RadioShack’s shares to rebound ahead of expiration next month. The trader initiated a call credit spread by selling roughly 5,000 calls at the March $20 strike for a premium of $0.55 apiece, marked against the purchase of 5,000 calls at the higher March $22.5 strike for $0.09 each. The investor pockets a net credit of $0.46 per contract, which he keeps as long as shares of the underlying stock fail to rally above $20.00 ahead of expiration day.
FL – Foot Locker, Inc. – Bearish investors are buying put options on the global retailer of footwear and athletic apparel this morning with shares of the underlying stock down 1.25% to $12.88. It looks like traders anticipating further share price erosion picked up 2,000 puts at the March $12.5 strike for an average premium of $0.45 per contract. The puts yield profits to investors if Foot Locker’s shares trade beneath the effective breakeven share price of $12.05 ahead of expiration next month. Options implied volatility on the stock jumped 15.04% to 45.69% in morning trading.
