Butterfly Spread Calls For Target Rally

    Today’s tickers: TGT, ALTR, BCSI & SHW

TGT – Target Corp. – Post-earnings options trading on Target this morning appears to be littered with profit-taking and fresh bullish positioning, among other strategies. Shares in the Minneapolis, MN-based retailer jumped 5.85% to an intraday high of $52.26 after the company posted better-than-expected second-quarter profits. The sharp rally in TGT shares has cooled somewhat, but the stock still stands 2.65% higher on the day at $50.68 as of 11:50 am in New York. In- and out-of-the-money call selling in the front month may be the work of traders taking profits off the table. It looks like investors sold more than 2,400 now in-the-money calls at the August $50 strike for an average premium of $1.94 this morning, and shed another 3,700 calls at an average premium of $0.34 each up at the August $52.5 strike. Substantial open interest in excess of 14,500 calls at each strike indicates traders could be selling-to-close positions. Alternatively, investors may be engaging other strategies such as covered call selling, or outright call selling ahead of expiration on the view that the options will expire worthless or nearly worthless on Friday as time erosion accelerates.

Longer-term activity in Target options suggests one strategist sees shares in the second-largest U.S. discount retailer soaring ahead of January 2012 expiration. It appears the bullish player purchased a call butterfly spread, buying 1,700 calls at the Jan. 2012 $57.5 strike, selling 3,400 calls at the $60 strike, and purchasing 1,700 calls up at the $62.5 strike, all at a net premium of $0.27 per contract. The butterfly spread positions the trader to make money should Target’s shares surge 14.0% in the next six months to surpass the effective breakeven price of $57.77 by January expiration day. Maximum potential profits of $2.23 per contract pad the investor’s wallet in the event that shares jump 18.4% over the current price of $50.68 to settle at $60.00 at expiration next year. The strategy selected greatly reduces premium required to take a bullish stance on the retailer and limits potential losses on the position to $0.27 per contract. Shares in TGT last traded at $60.00 back in January 2010 when the stock was up at its highest point of the past three years. Target’s overall reading of options implied volatility stands 11.4% lower this afternoon at 30.12% post earnings.

ALTR – Altera Corp. – Activity in Altera Corp. call and put options this morning suggests some traders are bullish on the semiconductor company, at least through the end of this week, while others are positioning for shares in the name to pull back ahead of expiration next month. Shares in Altera increased 1.9% to $37.49 at the start of the session, but are currently well off their highest point of the morning, trading 0.35% higher on the day at $36.91 as of 11:10 am ET. Investors exchanged more than 1,600 calls at the August $37 strike against previously existing open interest of 303 contracts. It looks like nearly all of the call options were purchased at an average premium of $0.52 a-pop by strategists anticipating an ALTR-rally before the week is out. Call buyers profit at expiration on Friday if shares in Altera increase 1.65% over the current price of $36.91 to surpass the average breakeven point at $37.52. Meanwhile, fresh positioning in put options granting buyers the right to sell shares in Altera at $37.00 each by September expiration suggests other traders are prepared for the price of the underlying to decline. Investors traded some 5,400 in-the-money puts at the September $37 strike against open interest of 1,091 positions. More than 4,100 of the puts appear to have been purchased at an average premium of $1.74 per contract. Put buyers stand prepared to profit should shares in Altera drop 4.5% to breach the average breakeven point on the downside at $35.26 by expiration day next month. ALTR’s shares dropped down to $33.43 last Tuesday, the lowest traded price since November 2010, on the heels of a six-week slide. Traders long the puts could see the value of their positions climb in the weeks ahead should the stock extend recent losses.

BCSI – Blue Coat Systems, Inc. – Buyers of Blue Coat calls on Tuesday may be wishing they hadn’t on Wednesday, with shares in the company losing a quarter of their value overnight to trade at a new two-year low of $13.11. Investors purged their portfolios of shares in the Sunnyvale, CA-based provider of Web security and WAN optimization solutions after the company reported disappointing first-quarter earnings. Blue Coat shares were hammered lower after the company missed top-line estimates in the first quarter, forecast second-quarter net income below that of analysts, and announced the exit of its President and CEO, Michael Borman. Fresh put buying in the front month suggests the pain may persist through the end of the week, while call selling casts doubt that shares will rebound with any conviction during the next two sessions. Traders positioning for Blue Coat’s shares to extend losses purchased some 930 in-the-money puts at the August $14 strike for an average premium of $0.46 per contract. Put buyers profit if shares in Blue Coat trade beneath the average breakeven price of $13.64 at expiration on Friday. Traders throwing in the towel on a near-term Blue Coat rally sold around 300 calls at the August $14 strike for $0.50 each, and sold another 280 calls up at the August $15 strike at $0.23 in premium per contract. Call sellers keep the full amount of premium received as long as the contracts expire worthless at expiration.

Yesterday we noted the pre-earnings report spike in demand for call options on the stock. By the end of the day on Tuesday, it looked as though investors had purchased around 1,700 calls at the August $19 strike for $0.31 apiece, and picked up another 1,900 calls at the August $20 strike for an average premium of $0.16 each. Delta on the contracts currently points to a less than 1% chance the options will land in-the-money, which is consistent with the collapse in the value of the contracts to mere pennies today. While call buyers suffered in the aftermath of BCSI earnings, it appears put buyers hit it out of the park. The sale of some 750 now deep in-the-money puts at the August $17 strike for a premium of $2.35 each this morning may be profit taking by one or more traders who, by the looks of open interest, had purchased around 1,300 of the options at an average premium of $0.38 a-pop back on August 3. Of course, put selling at that strike today is not necessarily related to buyers of the contracts at the start of the month. But, it seems traders who got long the puts at an average premium of $0.38 per contract are now holding options worth at least nine times that amount.

SHW – Sherwin-Williams Co. – The manufacturer of paint and related products popped up on our ‘hot by options volume’ market scanner today due to heavier-than-usual traffic in its puts. Shares in Sherwin-Williams fell 0.80% to $73.84 in early-afternoon trade. The paint maker’s shares had lost as much as 13.5% between July 20 and August 9 when the stock claimed a six-month low of $69.78. Shares recovered somewhat over the past week, and it looks like some options traders are betting the price of the underlying will likely hold up well over the next four weeks. Traders exchanged more than 2,200 puts at the September $70 strike against open interest of just 168 contracts, and it looks like nearly all of the puts traded sold at a premium of $1.00 apiece. Put sellers walk away with the full amount of premium at expiration in September as long as shares in Sherwin-Williams exceed $70.00. Investors short the puts could wind up having shares of the underlying put to them at an effective price of $69.00 each should the options land in-the-money at expiration day. Options implied volatility on SHW is down 8.9% to stand at 26.59% just before 12:50 pm ET.