Arch Coal Set to Rebound?

Today’s tickers: ACI, MHS & JPM

ACI – Arch Coal Inc. – We’re scratching our heads trying to fathom out why an investor is plundering deeply monied put options in Arch Coal on Friday. Shares in the mining behemoth have slumped recently and indeed today have filled a technical gap to the November high at $26.62. Buyers have resumed and the stock could easily land in the black today. Yesterday investors drove shares lower after the company announced the issuance of $1.3 billion worth of fresh stock to be partially used to finance the purchase of International Coal Group later in June. The secondary IPO was offered at a discount to an already weakening market cap to entice buyers and once swallowed, one investor appears to be banking on a recovery. A credit put spread was deployed earlier Friday with an investor taking in a net premium of $1.35 by writing the $30 puts and buying the less costly $28 puts. We can only assume that this bull expects a rebound to lift the stock back above $30 rendering both options worthless leaving him holding the cash.

MHS – Medco Health Solutions Inc. – A rally in healthcare company, Medco saw its shares surge from $51.80 in late-March to $64.92 in mid-May. This week it cratered back to $56.50 before steadying and today its shares stand at $58.27 having lost a contract to provide the Federal Employee Program (FEP) with mail-order and specialty pharmacy benefits. FEP awarded its 2012 contract to CVS Caremark instead and follows the loss of a key contract to provide Calpers employees with health services. A call option butterfly expiring in July has one bold option trader banking on a summer rebound to $65.00. The investor bought 12,000 calls at each of the $60 and $70 strikes and sold 24,000 calls at the July $65 strike for a total cost of 80 cents. The trade works to his maximum benefit should the share price settle at the central $65 strike price at expiration rewarding him with a gain of $4.20. Whether Medco manages to hold on to other contracts possibly under review remains to be seen but this investor appears to be content to spend a relatively small 80-cent premium to bank on it doing so.

JPM – JPMorgan Chase & Co. – Investors remain nervous following the slump only yesterday to a year-to-date low in investment banking behemoth JPMorgan. Yet the options trading patterns showed mixed emotions. Although JPM hasn’t traded below $40 per share since December 21, put buyers today targeted that strike price scooping up more than 2,500 contracts representing the right to sell by expiration on June 17. And put buyers also targeted the August $41 strike where more than 5,000 contracts changed hands at a weighted average premium of $1.72. But as the morning progressed shares rebounded from a $41.01 low to rally by more than a dollar and nicely in to the black. Call option buyers were equally noticed populating the nearby June 17 expiration using the $42 strike, which with volume of more than 6,000 lots was the single most popular venue for option buyers on Friday.