Today’s tickers: USO, SU, DTV, AIG, CCE, PMCS & TRLG
USO – United States Oil Fund LP – Despite a stronger dollar so far during 2010 the price of crude oil has rebounded smartly and spent some time this week trading above $80 per barrel. Today’s sudden bout of risk aversion knocking equity prices running for cover has created fears of lower oil prices ahead according to options activity today. Investors targeted downside protection as they snapped up more than 10,000 put options reserving rights to sell shares in the fund that mimics the price of crude before expiration in March. Investors chose the fixed strike price of $36.00 to lock into selling rights compared to the fund’s share price of $37.67 – down 3.4% already today. Investors forced the premium of the put options from 45 cents to as high as 59 cents throughout the morning. It appears that today’s activity is fresh investor activity since it exceeds the number of open positions as of the close of business on Wednesday, while the volume also represents more than 20% of overall options volume today.
SU – Suncor Energy, Inc. – Despite the nearby bearish overture for the fortunes of crude oil prices, a decent-sized bullish options transaction was established on the Canadian energy company. Undeterred by a 3% decline in Suncor Energy’s share price to $28.24, one investor initiated a debit call spread in the June contract to position for a sharp rebound in Suncor’s share price by expiration in four months. The trader purchased 10,500 calls at the June $31 strike for a premium of $1.26 apiece, and sold the same number of calls at the higher June $36 strike for a premium of $0.30 each. The net cost of the spread amounts to $0.96 per contract. Maximum available profits of $4.04 per contract accumulate for the bullish trader if Suncor’s shares rally approximately 27.5% from the current value of the stock to $36.00 by June expiration. We note that shares traded as high as $38.22 on January 6, 2010.
DTV – The DIRECTV Group, Inc. – Covered-call selling is the theme of the day in Directv options trading as it appears investors are picking up shares of the underlying stock while simultaneously shedding out-of-the-money calls in the June contract. Shares of the provider of subscription television services slipped 0.90% during the session to $33.30. Approximately 25,300 calls were sold at the June $35 strike for a premium of $1.50 per contract this morning when shares of DTV were trading at approximately $33.40. Covered-call sellers effectively reduce the price paid per share of DTV stock by the amount of premium received on the sale of the call options. Thus, investors effectively purchased Directv shares for $31.90 apiece. The short call position establishes an exit strategy for these traders should shares of the underlying rally above $35.00 by June expiration. Investors stand ready to have shares called from them at $35.00 apiece – if the calls land in-the-money by expiration – and exit the position with maximum potential gains of 9.70% on the rally in shares from $31.90 to $35.00.
AIG – American International Group, Inc. – A bearish risk reversal enacted on AIG today indicates one investor believes the end is near for the insurance firm’s recent rebound in share price. American International Group’s shares are trading 1% higher on the day at $28.27. The pessimistic options player sold approximately 3,000 in-the-money calls at the May $28 strike for a premium of $2.80 apiece in order to offset the cost of buying roughly 3,000 puts at the same strike for $3.60 each. The net cost of the reversal amounts to $0.80 per contract. Profits accumulate for the trader if shares slip beneath the breakeven share price of $27.20 ahead of expiration day in May. Unless the investor is holding a long position in the underlying shares, the short calls pose significant risk. This is because naked call selling exposes investors to potentially unlimited losses should shares rally sharply ahead of expiration.
CCE – Coca-Cola Enterprises Inc. – Shares of Coca-Cola Enterprises, the largest bottler of Coca-Cola Co. beverages, are up 32% this morning to a new 52-week high of $25.37. Atlanta-based Coke plans to buy CCE’s North American operations in a deal valued at approximately $15 billion, according to this morning’s Wall Street Journal. The rapidly rising share price prompted bullish options trading activity on CCE right out of the gate this morning. It appears the majority of the 5,000 in-the-money calls exchanged at the March $25 strike were purchased for a last traded premium of $0.50 per contract. Investors holding the call options are positioned to quench their thirst for profits if CCE’s shares rally above the average breakeven price of $25.50 by expiration next month. News of the acquisition by beverage behemoth, Coca-Cola Company, sent CCE’s reading of overall options implied volatility down 15.65% to 19.26% as of 10:15 am (EDT).
PMCS – PMC-Sierra, Inc. – Bearish options traders attacked near-term call options on PMC-Sierra in early trading. Shares of the semiconductor developer are trading 3.35% lower to $8.13 today, but options activity on the stock suggests pessimistic players anticipate continued share price erosion ahead of expiration next month. Investors sold 5,100 in-the-money calls at the March $7.5 strike, taking in an average premium of $0.69 per contract. Call-sellers, who may or may not hold long underlying stock positions, keep the full premium on the sale only if PMCS shares decline 7.75% from the current value to trade under $7.50 by expiration day.
TRLG – True Religion Apparel, Inc. – Shares of pricey premium denim design firm, True Religion Apparel, surged 15% this morning to $23.90 after the company posted its best quarterly net sales ever. True Religion realized a 27.2% increase in 2009 fourth-quarter net sales to $92.8 million over net sales in the same period of 2008. Additionally, net profits for Q4 ’09 jumped 15.2% to $14.6 million versus $12.7 million in Q4 ’08. The clothing company offered 2010 net sales guidance of $360 million and earnings per share of $2.00 to $2.10 per share. Some option traders were prepared for the rapid rise in share price today. Those individuals banked profits by selling approximately 1,000 in-the-money calls at the March $22.5 strike for an average premium of $1.04 apiece. Options implied volatility on the stock plummeted 26.42% to 41.70% this morning following the earnings news and forward guidance.
