Bearish Play Points To Possible Post-Earnings Pullback In TiVo

Today’s tickers: TIVO, BHI, PBR & MU

TIVO – TiVo, Inc. – Large prints in TiVo call and put options indicate one big player is prepared for shares in the provider of home entertainment technologies to extend losses following the company’s second-quarter earnings report after the close. TiVo’s shares are down 3.3% at $7.98 as of 12:30 pm in New York. It looks like the investor responsible for nearly all of the volume generated in TiVo options thus far today sold out-of-the-money calls to partially finance the purchase of a bearish put spread in the front month. The trader may be hedging a long position in the underlying shares, or could be taking an outright bearish stance on the stock in the expectation that shares will drop in the next few weeks to September expiration. TiVo, Inc. was raised to ‘Above Average’ from ‘Average’ with a share price target of $11.00 by analysts at Caris & Co. this week.

The pre-earnings options combo play involved the sale of 7,000 calls at the September $10 strike for $0.19 apiece, spread against the purchase of the same number of puts at the lower September $8.0 strike for $0.60 each, as well as the sale of 7,000 puts at the September $7.0 strike at a premium of $0.19 a-pop. Net premium paid to initiate the three-legged transaction amounts to $0.22 per contract. The trader profits in the event that TiVo’s shares decline another 2.5% from the current price of $7.98 to breach the effective breakeven point on the downside at $7.78 by expiration next month. Maximum potential profits of $0.78 per contract pad the investor’s wallet if shares in TiVo plunge 12.3% to trade below $7.00 at expiration. The sale of the call options substantially reduces premium required to place a directional bet on the stock, but could hurt the trader in the event that the shares rally sharply post earnings. If the trader is long the stock, he is likely content with the tradeoff between reducing the cost of downside protection on the one hand, and having the stock called from him at $10.00 at expiration on the other. Alternatively, if the investor is naked short the calls, he’s confident enough that shares will fall, or at least fail to rally above $10.00 ahead of September expiration, to bear the risk of incurring potentially unlimited losses to the upside. TiVo’s overall reading of options implied volatility is slightly elevated in early-afternoon trade, standing 2.4% higher on the session at 83.63% as of 12:50 pm ET.

BHI – Baker Hughes, Inc. – Options in play on Baker Hughes today suggest bullish sentiment on the global supplier of products and services to the oil and natural gas industry is alive and well. Shares in BHI slipped 1.0% to $55.26 by 11:15 am ET, erasing modest gains enjoyed earlier in the session. Investors positioning for shares in Baker Hughes to rally sharply in the coming months initiated a number of bullish options strategies during the first 30 minutes of trade. One plain-vanilla call buyer targeted the October $57.5 strike where some 700 contracts were picked up at a premium of $3.75 apiece. The investor may profit at expiration if shares in BHI rally 10.8% to surpass the effective breakeven price of $61.25. Bullish sentiment spread to the higher October $60 strike where more than 1,000 calls changed hands against previously existing open interest of 378 contracts. Much of the volume traded to the middle of the market at an average premium of $2.64 apiece. Meanwhile, longer-term optimism on the Houston, TX-based company took another form. An investor expecting shares in BHI to be up big time by the start of 2012 established a debit call spread, buying around 8,000 calls at the Jan. 2012 $70 strike for an average premium of $1.89 each, and selling roughly the same number of calls up at the Jan. 2012 $75 strike at an average premium of $1.04 a-pop. Average net premium paid to initiate the spread amounts to $0.85 per contract, thus positioning the trader to profit should shares in Baker Hughes surge 28.2% in the next five months to exceed the average breakeven price of $70.85. The investor could walk away with maximum potential profits of $4.15 per contract if BHI’s shares jump 35.7% to trade above $75.00 at expiration next year. The price of the underlying shares last traded above $75.00 at the beginning of August.

PBR – Petrobras – Two weeks ago shares in Brazilian state-owned oil company, Petroleo Brasileiro SA, slipped to their lowest since March 2009 on the heels of a nearly 30% pullback since August 1. Options players populating PBR calls this morning seem to be suggesting the selloff has been too severe, and the stock is on course to rally in the next couple of months. Shares in the oil and gas company increased as much as 1.55% to trade at $28.20 in the first half of the session. The company said Wednesday it may reach oil at its offshore Franco well within weeks, according to a Bloomberg report citing PBR’s pre-salt production manager, Jose Formigli, speaking from an event in Rio de Janeiro. Strategists positioning for a rebound in the price of the underlying exchanged more than 29,000 calls at the October $29 strike this morning against previously existing open interest of just 4,046 contracts. It looks like most of the call options were purchased for an average premium of $1.34 each. Call buyers profit if shares in PBR increase 7.6% over an earlier high of $28.20 to surpass the average breakeven price of $30.34 by October expiration. Options implied volatility on the stock rose 5.1% to 44.50% by 11:45 pm on the East Coast.

MU – Micron Technology, Inc. – Shares in the manufacturer of semiconductor devices dropped 7.25% this afternoon to $5.25, paring more severe losses of 8.5% earlier in the day, which dragged the stock down to a new 52-week low of $5.18. Micron’s shares dropped during an analyst conference where company executives said demand for memory chips used in PCs is failing to meet expectations. Options on the Boise, Idaho-based company have been quite active thus far today, helping drive implied volatility on the stock up 19.9% to 87.29% by 1:00 pm ET. Activity in MU options is overwhelmingly focused in the calls, with around 6.4 call options on the stock changing hands for each single put contract. Trading traffic is heaviest at the September $6.0 strike where more than 27,900 calls traded against open interest of 8,311 contracts. It looks like most of the calls were purchased by investors for an average premium of $0.26 apiece. Call buyers profit if shares in Micron Technology bounce 20.8% off today’s low of $5.18 to exceed the average breakeven price of $6.26 by expiration in September. Investor appetite for the Sept. $6.0 strike call was evident ahead of the conference, as traders paid around $0.28 per contract for some 5,500 of the calls back on August 19. Continued gains in implied volatility or a rebound in the price of the underlying could potentially inflate premium on the calls and create opportunities for traders to sell the contracts at an advantageous price ahead of expiration.