Bullish Player Rigs Up Call Spread on Oil Services HOLDRS Trust

Today’s tickers: OIH, AFFY, CAT, EBAY, IYT & RIG

OIH – Oil Services HOLDRS Trust – Shares in the Oil Services HOLDRS Trust are up 0.50% in the final hour of trading to secure an intraday- and new 52-week high of $147.34. One options player expecting shares to continue to hit new highs through February expiration initiated a debit call spread. Shares in the OIH, an issuer of depository receipts known as Oil Service HOLDRS that represent ownership in the common stock of companies engaged in drilling, well-site management and other services for the oil service industry, are up 5.25% year-to-date, and have surged 57.75% since touching down at a six-month low of $93.36 on July 1, 2010. The optimistic options trader looked to out-of-the-money calls expiring next month, buying 3,600 calls at the February $155 strike for a premium of $1.48 each, and selling the same number of calls up at the February $160 strike at a premium of $0.58 apiece. Net premium paid to initiate the spread amounts to $0.90 per contract. Thus, the investor is prepared to make money should the price of the underlying shares rally another 5.8% over today’s high of $147.34 to surpass the effective breakeven price of $155.90 by expiration day in February. Maximum potential profits of $4.10 per contract are available to the call-spreader should shares in the OIH jump 8.6% to trade above $160.00 before the contracts expire. Options implied volatility inched up 3.2% to 26.42% by 3:55pm in New York.

AFFY – Affymetrix, Inc. – Investors are buying call options on the biotechnology company today with shares in the Santa Clara, CA-based firm rising as much as 7.6% during the session to an intraday- and 6-month high of $5.67. Bullish players expecting shares in Affymetrix to continue to rally picked up large numbers of in-the-money call options in the May and August contracts. The maker of products used in genetic analysis reports fourth-quarter earnings after the closing bell on February 3, 2011. Options traders purchased more than 1,700 in-the-money calls at the May $5.0 strike for an average premium of $0.90 per contract. Call buyers at this strike make money if shares in AFFX increase another 4.05% to exceed the average breakeven price of $5.90 ahead of May expiration day. Bullish sentiment spread to the August $5.0 strike where another 1,760 call options were purchased for an average premium of $1.10 each. Investors holding these contracts are poised to profit should the price of the underlying stock surge 7.6% over today’s high of $5.67 to surpass the average breakeven price of $6.10 before the calls expire in August. More than 4,730 options have changed hands on Affymetrix thus far in the session on total previously existing open interest of 10,072 contracts on the stock. Options implied volatility on the biotech company is down 7.7% at 52.06% in the final 30 minutes of the trading day.

CAT – Caterpillar, Inc. – Caterpillar call options are in high demand this afternoon with shares of the machinery maker rising nearly 3.00% during the first half of the session to hit an intraday- and new all-time high of $96.35. Shares are currently up 2.5% to stand at $95.92 as of 12:45pm in New York. Investors are buying in- and out-of-the-money calls on CAT, purchased just fewer than 3,000 in-the-money contracts at the January $95 strike for an average premium of $1.27 each. Bulls hoping to see the stock breach $100.00 by February expiration picked up roughly 2,000 calls up at the February $100 strike for an average premium of $1.30 a-pop. Call buyers at this strike are prepared to profit should CAT’s shares rally 5.6% over the current price of $95.92 to surpass the average breakeven point on the upside at $101.30 before the contracts expire next month. Options expiring in February will have plenty of life left in them when Caterpillar reports fourth-quarter earnings before the market opens on January 27, 2011. Longer-term optimists looked to the May $110 strike to buy some 1,180 calls at an average premium of $1.26 apiece. Investors holding these contracts will break even on the trade if Caterpillar’s shares soar 16.0% higher to trade above the average breakeven price of $111.26 by expiration day in May. Options implied volatility on the manufacturer of excavators and backhoes is up 10.2% to arrive at 28.25% as of 12:55pm.

EBAY – eBay, Inc. – Put options on the operator of online marketplaces continue to garner investor interest yet again this morning with eBay’s fourth-quarter earnings report close at hand. Shares in eBay, Inc. are currently up 0.65% to stand at $29.37 just before 12:15pm. One pessimistic player picked up 15,000 puts at the July $26 strike for a premium of $1.32 apiece today. Last week a total of 35,000 puts were purchased at the same strike for an average premium of $1.58 per contract. Put buyers attacking the July $26 strike appear to be initiating outright bearish bets on the stock, but it is also possible that they are picking up the contracts to hedge a long position in the underlying shares. The investor buying the chunk of 15,000 lots today is prepared to make money should shares in EBAY plunge 16.0% from the current price of $29.37 to breach the effective breakeven point on the downside at $24.68 ahead of July expiration. eBay’s shares last traded below $24.68 back on October 20, 2010. The online-commerce company reports fourth-quarter earnings after the market closes on Wednesday.

IYT – iShares Dow Jones Transportation Average Index ETF – Investors are piling into put options on the IYT, an exchange-traded fund designed to track the performance of the Dow Jones Transportation Average Index, with shares in the fund trading 0.50% lower on the session at $93.84 as of 1:00pm. Shares of the transportation ETF earlier increased 0.60% to touch an intraday high of $94.89, the highest traded price since September 2008. Approximately 10,500 puts have changed hands at the March $90 strike on open interest of just 228 contracts. It looks like the majority of the puts, more than 8,000 contracts, were purchased by investors paying an average premium of $2.28 per contract. Put buyers are poised to profit should the price of the underlying fund fall another 6.5% from the current price of $93.84 to breach the average breakeven point to the downside at $87.72 ahead of March expiration. Shares in the IYT last dipped below $87.72 back on November 30, 2010. The surge in demand for put options helped lift the overall reading of options implied volatility on the IYT 6.2% to 22.79% by 1:10pm in New York.

RIG – Transocean, Ltd. – Options strategists dabbled in both calls and puts on the provider of offshore contract drilling services this morning with shares in the name trading 2.40% higher on the session at $80.87 by 11:50am in New York. It looks like one trader is taking profits on a previously established long call position, as well as rolling the contracts to a higher strike price in order to extend bullish sentiment on the stock through February expiration. The investor sold roughly 2,000 calls at the February $75 strike for an average premium of $6.43 a-pop, and purchased around the same number of calls up at the February $80 strike at an average premium of $1.45 each. Open interest patterns in the February $75 strike calls suggest the calls may have been originally purchased for an average premium of $2.04 each on January 5, 2011, when RIG’s shares were trading around $71.73. The subsequent surge in the price of the underlying shares lifted premium on the now deep in-the-money call options. Average net profits on the sale of the call options amount to $4.39 per contract when using the parameters in the scenario described above. The fresh chunk of calls purchased at the February $80 strike position the investor to make money should shares in Transocean rally above the average breakeven price of $81.45 ahead of expiration day next month. Meanwhile, activity in deep out-of-the-money put options caught our eye. It looks like the May $45/$55 put spread was purchased 4,000 times for a net premium of $0.39 per contract. Open interest at both strikes is sufficient to cover volume generated during the session thus far. Today’s transaction may be the work of an investor closing out a spread constructed during trading on November 10-17, 2010. Transocean will report earnings for the fourth quarter before the opening bell on February 16, 2011.