Today’s tickers: HGSI, MDRX, JPM, ESV, FLR & SD
HGSI – Human Genome Sciences, Inc. – Shares in biotechnology company Human Genome Sciences are down 3.95% this afternoon at $25.23 as of 3:15 pm, but one options trader populating the December contract today is positioning for the stock to rebound ahead of a key FDA decision on its lupus drug treatment, Benlysta. A preliminary FDA review is set for release in one week, while an advisory panel with outside experts is scheduled to provide their input before the FDA provides a final ruling by December 9, 2010. The optimistic options player is well positioned to benefit from a strong rally in the biotech firm’s shares should approval of the lupus treatment become a reality. The trader purchased 5,000 calls at the December $26 strike for a premium of $4.30 each, and sold the same number of calls at the higher December $32 strike at a premium of $1.36 apiece. Net premium paid for the spread amounts to $2.94 per contract. Thus, the investor makes money if Human Genome’s shares reverse course and rally 14.7% over the current price of $25.23 to surpass the effective breakeven point to the upside at $28.94 by expiration day. The call-spreader stands ready to amass maximum potential profits of $3.06 per contract if shares jump 26.8% to trade above $32.00 by December expiration. Options implied volatility on the biotechnology company is up 12.1% at 141.59% as of 3:30 pm, and will likely continue to ascend ahead of the FDA’s critical ruling.
MDRX – Allscripts-Misys Healthcare Solutions, Inc. – Call options on the provider of clinical software, services, information and connectivity solutions to physicians and other healthcare providers are in high demand today ahead of the firm’s third-quarter earnings report, which is scheduled for release after the market closes on Monday. Shares in Allscripts are currently up 1.3% at $19.44 as of 2:15 pm. Plain-vanilla call buyers were the first to arrive on the scene, but the majority of the options volume generated on MDRX today was the work of one trader. The investor appears to have enacted a debit call spread, buying more than 7,000 calls at the November $20 strike for an average premium of $0.43 each and selling about the same number of calls up at the November $21 strike at an average premium of $0.13 apiece. The net cost of the transaction amounts to $0.30 per contract, thus preparing the responsible party to profit should MDRX shares rally another 4.4% over the current price of $19.44 to surpass the effective breakeven price of $20.30 by November expiration. The trader could walk away with maximum potential profits of $0.70 per contract if Allscripts’ shares surge 8.025% in the next couple of weeks to trade above $21.00 by expiration day. More than 28,500 option contracts have changed hands on MDRX this afternoon versus total previously existing open interest of 10,172 lots on the stock. Impending third-quarter earnings and the sharp rise in demand for options on the software company boosted the stock’s overall reading of options implied volatility 35.1% to 43.91% by 2:25 pm in New York trading.
JPM – JPMorgan Chase & Co. – Bank stocks are rallying this morning after the Wall Street Journal reported the Fed may allow healthy banks to raise dividends. The Fed may release guidelines for assessing whether banks are healthy and strong enough to up dividends or buy back shares as early as this month, according to news reports. JPMorgan’s shares took off running and increased as much as 3.9% to hit an intraday high of $41.34 in the first half of the session, with shares currently trading higher by 2.9% to stand at $40.95 as of 11:00 am in New York. One options investor was quick to take a bullish stance on the financial services firm right out of the gate this morning. The trader enacted a three-legged spread on the stock, selling 5,000 puts at the December $38 strike for a premium of $0.63 each, buying the same number of in-the-money calls at the December $40 strike at a premium of $1.78 per contract, and selling 5,000 calls at the higher December $43 strike for a premium of $0.55 apiece. The net cost of the transaction amounts to $0.60 per contract and positions the options player to profit as long as JPM’s shares exceed the effective breakeven price of $40.60 through December expiration. Maximum potential profits of $2.40 per contract are available to the investor if the price of the underlying stock jumps 5.00% over the current price of $40.95 to exceed $43.00 by expiration day next month. As of 11:10 am, investors have exchanged more than 165,000 option contracts on JPMorgan, with more than two calls changing hands on the stock for each single put option in play thus far today.
ESV – Ensco PLC – The provider of offshore contract drilling services to the oil and gas industry popped up on our ‘hot by options volume’ market scanner in this first half of the trading session after one options trader dabbled in near-term put options. Shares in Ensco are down 0.35% to arrive at $49.70 as of 12:05 pm. According to the Wall Street Journal, London-based Ensco has been in takeover talks with Pride International, a U.S. company that is considering putting itself up for sale. Seadrill Ltd., an Oslo-listed firm, is reportedly also eyeing Pride as a potential takeover target. The put player populating ESV today appears to be rolling out of a previously established position in deep out-of-the-money puts and initiating a fresh ratio put spread in the November contract. It looks like the trader may have originally sold 2,600 puts at the November $43 strike for a premium of $0.65 per contract back on October 19, 2010, when the ESV shares were trading around $46.67. Premium on these put options has collapsed with the rise in the price of the underlying, allowing the investor to buy back the contracts for $0.06 each today. Next, the investor employed a completely different strategy that appears to be a protective play on ESV in case shares continue to slide ahead of November expiration. The trader initiated a ratio put spread, purchasing 2,080 puts at the November $49 strike at an average premium of $0.875 each, and selling 4,140 puts at the lower November $46 strike for a premium of $0.20 apiece. The net cost of the spread amounts to $0.475 per contract, thus establishing limited downside protection in the event that ESV’s shares fall 2.35% from the current price and trade below the average breakeven point at $48.525 ahead of expiration day. Of course, it is also possible that the investor is not using the spread to hedge a long position in the underlying shares. In this case, the transaction is an outright bearish bet that shares are set to decline. The trader in this scenario stands ready to amass maximum potential profits of $2.525 per contract if shares fall 7.4% from the current price of $49.70 to settle at $46.00 at expiration. In either scenario, the trader could wind up having 204,000 shares of the underlying stock put to him at $46.00 each if the put options at the lower strike land in-the-money at expiration. But, in initiating this position, the investor has already weighed such risks and this suggests he does not expect ESV’s shares to collapse too substantially in the next couple of weeks because he will face losses over and above the premium paid for the ratio spread if shares slip beneath a lower breakeven price of $43.475 ahead of November expiration.
FLR – Fluor Corp. – Shares of the largest publicly traded construction company surged as much as 13.1% today to touch an intraday- and new 52-week high of $56.32 after the firm increased its share buybacks by 7.2 million to a total of 12 million shares and announced David Seaton will succeed CEO Alan Boeckmann starting February 3, 2011. Fluor’s shares are currently up 10.45% at $55.01 as of 12:40 pm. A number of options traders are taking bullish positions on the stock this afternoon by picking up calls and selling puts in the November contract. Investors picked up approximately 2,600 in-the-money calls at the November $55 strike for an average premium of $0.97 per contract. Call buyers at this strike make money if Fluor’s shares rally 1.745% over the current price of $55.01 to surpass the average breakeven price of $55.97 ahead of November expiration. Optimism spread to the higher November $60 strike where another 1,300 call options were coveted for an average premium of $0.20 apiece. Finally, bullish players appear to have sold some 2,900 puts at the November $55 strike for an average premium of $1.32 per contract. Put sellers keep the full premium received on the transaction as long as FLR’s shares exceed $55.00 through expiration day. Investors employing this tactic are apparently happy to have Fluor shares put to them at an effective price of $53.68 each in the event that the puts land in-the-money by expiration in a couple of weeks. News of the appointment of the CEO’s successor and the boost in FLR’s repurchase program helped ease the stock’s overall reading of uncertainty, sending options implied volatility 9.1% lower to 30.43% as of 12:45 pm in New York trading.
SD – SandRidge Energy, Inc. – Weaker-than-expected third-quarter earnings out of the Oklahoma City-based natural gas and oil company sent its shares sharply lower today and inspired some options traders to throw in the towel. SandRidge’s shares fell as much as 17.235% this morning to secure an intraday low of $4.85 after the company posted a net loss of $0.06 a share, which disappointed analysts looking for positive earnings of $0.02 a share. Within the first 15 minutes of the trading day, options traders abandoned hopes of SD’s shares rebounding substantially ahead of December expiration and ditched previously established bullish positions on the stock. More than 47,000 calls changed hands at the December $6.0 strike today for a premium of $0.10 each, with the majority of today’s volume generated by sellers opting to take the money and run. Open interest at that strike is sufficient to cover the number of calls traded there today. Upon further inspection, it looks like open interest was mostly built up between July 29 and August 6 at premiums ranging from $0.35 to $0.87 each. SandRidge’s overall reading of options implied volatility is down 10.2% to stand at 52.67% following earnings.
