Bull Constructs Three-Legged Spread on Beazer Homes USA

 Today’s tickers: BZH, HBC, MON, EBAY, ELX & PMCS

BZH – Beazer Homes USA, Inc. – A three-legged options combination play initiated on the homebuilder that designs, sells and builds single-family and multi-family homes in the U.S. indicates one strategist sees shares improving ahead of August expiration. Shares in Beazer Homes USA rose 1.5% this afternoon to $5.99 in the final hour of the session. The homebuilding company will reveal its performance for the first quarter before the market opens for trading on February 4, 2011. The investor responsible for the bullish spread sold 5,000 puts at the August $4.0 strike for a premium of $0.25 each, purchased 5,000 calls at the August $6.0 strike for a premium of $1.05 a-pop, and sold the same number of calls at the higher August $7.0 strike at a premium of $0.60 apiece. The net cost of putting on the trade amounts to $0.20 per contract. Thus, the trader stands ready to make money should shares in BZH rally 3.5% over the current price of $5.99 to surpass the effective breakeven point to the upside at $6.20 by expiration day. Maximum potential profits of $0.80 per contract are available to the trader if the homebuilder’s shares surge 16.9% to trade above $7.00 by the time the contracts expire in August. Selling the upper-strike calls as well as the out-of-the-money put options greatly reduced the cost of taking a bullish stance on the stock. The sale of the August $4.0 strike put options suggests this trader is more than willing to bear the risk of having 500,000 shares of the underlying stock put to him at $4.00 each should the puts land in-the-money at expiration.

HBC – HSBC Holdings PLC – Some investors trading options on the financial services firm are positioning for the price of the underlying to appreciate in the next couple of months, while others appear to be taking profits off the table today. Shares in London-based HSBC Holdings increased as much as 4.9% during the current session to hit an intraday high of $56.25. Traders hoping HBC’s shares rally to a new 52-week high picked up 2,000 call options at the March $57.5 strike for an average premium of $1.44 per contract. Call buyers at this strike profit if shares surge 4.8% over today’s high of $56.25 to surpass the average breakeven price of $58.94 by March expiration. Bulls also purchased around 1,400 in-the-money call options at the February $55 strike for an average premium of $2.19 each. HSBC Holdings reports earnings for the third quarter before the opening bell on February 28, 2011. The February contract calls will have expired ahead of the earnings announcement, but the March expiry call options will still have plenty of plenty of life left in them at that point. Finally, it looks like one bullish player reeled in profits by buying-to-close a previously established short stance in March contract put options. The investor appears to have sold some 6,000 puts at the March $47 strike for a premium of $0.50 each back on January 4, 2011. Today, the trader bought back the options for $0.225 apiece to pocket net profits of $0.275 per contract. The overall reading of options implied volatility on HSBC Holdings is up 6.6% to stand at 23.75% as of 2:45pm.

MON – Monsanto Co. – Bulls are grazing on Monsanto Company options today with shares of the seed manufacturer rising as much as 3.5% during the session to hit an intraday- and 10-month high of $75.09 by 12:35pm in New York. Shares of the maker of agricultural products are up nearly 60% since October 5, 2010. Options traders initiated diverse tactics to position for further upside movement in the price of the underlying stock. One investor harvested substantial profits today by selling call options purchased in December. It looks like the trader purchased some 2,500 calls at the February $70 strike for as much as $1.82 apiece in the final week of 2010. Today the investor sold the now in-the-money calls at that strike 2,500 times for a hefty premium of $5.50 per contract to pocket net profits of around $3.68 each. Next, the trader extended bullish sentiment on the stock, augmenting his exposure to the upside by purchasing 6,000 fresh calls out at the April $85 strike for a premium of $1.25 a-pop. The new bullish stance on the stock positions the investor to make money should the St. Louis, MO-based company’s shares surge 14.9% over today’s high of $75.09 to exceed the effective breakeven price of $86.25 by expiration day in April. Shares in MON last traded above $86.25 back on January 11, 2010. Elsewhere on the Monsanto options field, we observed bullish players engaging in plain-vanilla call buying to position for continued near-term appreciation in the price of the underlying. Investors picked up roughly 1,500 calls at the January $80 strike for an average premium of $0.14 each this morning. Notable traffic in out-of-the-money calls expiring in February is another sign of optimism on the seed maker this afternoon. Options implied volatility on Monsanto is higher by 6.1% to arrive at 30.30% just before 1:00pm.

EBAY – eBay, Inc. – A near-term bullish transaction combining stock and options on eBay caught our eye this morning. Shares of the operator of online marketplaces are up 0.80% in early afternoon trade to stand at $28.58. EBAY is slated to report earnings for the fourth quarter after the market closes on January 19. The options strategist enacted a delta neutral position by selling a strangle and buying shares of the underlying stock. It looks like the investor purchased 180,000 shares at around $28.67 each, sold 6,000 calls at the January $32 strike for a premium of $0.10 per contract, and sold 6,000 puts at the January $28 strike for a premium of $0.69 apiece, on a 0.30 delta. The expiration-based risk profile of this transaction suggests the trader will make money given limited bullish movement in EBAY’s shares ahead of January expiration. The short strangle, in isolation, signals that this investor sees the stock trading within the range of the strike prices outlined. The long stock position is beneficial as long as shares continue to climb, but the short calls, which represent a substantial obligation to deliver 600,000 shares at $32.00 in the event that the contracts are exercised at expiration, are a risk this investor is apparently willing to take. Selling the strangle suggests the investor expects shares to trade above $28.00 but below $32.00 through expiration next week. The firm’s earnings report could move shares substantially in either direction and create adverse circumstances for the trader should he maintain the position through the release, but it will also likely result in declines in the reading of options implied volatility on the stock which would work in his favor. Meanwhile, another trader initiated huge prints in put options on the stock. It looks like the investor sold 20,000 January $29 strike puts for a premium of $1.23 each in order to put the same number of July $26 strike puts at a premium of $1.54 apiece. The transaction was tied to $28.45 stock.

ELX – Emulex Corp. – Call options on the provider of network convergence solutions are in high demand today with shares in the name rallying as much as 5.5% to secure an intraday high of $12.82. Investors appear to be initiating bullish positions on Emulex ahead of the firm’s second-quarter earnings report, which is slated for release after the market closes on January 20, 2011. Options traders purchased at least 2,700 calls at the February $13 strike for an average premium of $0.45 each. More than 4,500 calls changed hands at the February $13 strike on open interest of just 89 contracts. Call buyers at this strike are prepared to make money should shares in Emulex increase another 4.9% over today’s high of $12.82 to surpass the average breakeven price of $13.45 by February expiration. Optimism spread to the April $13 strike where 2,000 calls were picked up at an average premium of $0.70 apiece. Traders hoping to see Emulex shares rally to a new 52-week high purchased more than 2,500 calls at the higher April $14 strike for an average premium of $0.41 a-pop. Investors long the higher strike call options are poised to profit should shares jump 12.4% in the next few months to surpass the average breakeven price of $14.41 by April expiration day. Call buying was also initiated in July $13 strike calls where some 2,000 contracts were purchased for a premium of $1.25 each. The surge in demand for call options on Emulex Corp. helped lift the stock’s overall reading of options implied volatility 10.3% to 40.18% by 12:30pm in New York.

PMCS – PMC-Sierra, Inc. – The 2.15% increase in the price of PMC-Sierra’s shares to an intraday high of $9.00 spurred demand for call options on the stock today. Near-term bulls bought approximately 2,000 call options at the January $9.0 strike for an average premium of $0.20 each. Call buyers at this strike make money if PMCS shares rally another 2.2% to surpass the average breakeven point on the upside at $9.20 by expiration day next week. Bullish sentiment on PMC-Sierra spread to the higher January $10 strike where some 1,600 call options were picked up at an average premium of $0.05 a-pop. Traders holding these contracts profit if shares surge 11.7% to first break through the current 52-week high of $9.73, and ultimately trade above the average breakeven price of $10.05 by January expiration. Options implied volatility on the stock jumped 9.3% this afternoon to 40.54% by 1:45pm in New York.