Friday Options Update: TPX, CHK, NWA, DAL, JBL, EMR, TSRA

by: Interactive Brokers

Rebecca Engmann Darst contributed to this report.

Tempur-Pedic Intl. (TPX) – While most investors have spent many restless nights during the past month at least, the same can’t be said for the option investor who used put options to mitigate volatility since mid-September. The company is a well-known foam pillow and mattress maker. Our option scanners picked up option volume this morning accounting for almost one-in-five of Tempur-Pedic’s options open interest. When the share price stood at $10.38 in the middle of September, an investor bought in-the-money October 12.5 and 15 strike puts: The motive is unknown and might be to hedge a long position in the underlying allowing the investor to sleep easy, or it may have been a speculative play on downside in the share price. Today both those positions were closed at a gain. The 12.5 puts rose during the time from 3.0 to 4.63, while the 15 puts increased in value from 5.05 to 7.13. Just as well for this investor since within one week of making the bearish bets the shares had both rallied to $15.50 and slumped to $8.41. In the December contract today, there was additional activity whereby the 10 strike puts were bought at a premium of 3.20. With implied volatility so high at 133% and with shares at $8.18 today, the expiration based break even on this trade is at $6.80.

Chesapeake Energy (NYSE:CHK) – Shares built on Thursday’s rebound following the announcement that the company had secured a $430 million line of credit through 2013 and that if more banks participated it be $750 million. Optimism showed up in the options market adding to a 13% gain in its shares to $20.78 when traders bought November call options at strikes ranging from 20 to 30. Implied volatility continued to subside having reached 200% last week with the share price having slipped from $75.00 earlier in the summer. Today implied volatility stands at 139%.

Northwest Airlines (NWA) From time to time we see large blocks of airline company options in play. They tend to come together and today is another one of those days. The December 7.5 strike calls traded on hefty volume of 48,000 contracts with shares trading at $10.23 today (down 4.5%). The options traded to the mid-price today and so we can’t tell if this was a closing trade. What we do know is that the current open interest of more than 57,000 contracts was largely bought back in June when NWA was trading at $6.19. At the time the premium on the calls was 1.85. It would make sense to us at least if the investor was taking a healthy profit at 4.20 premium today now that the price of crude oil has halved from its summer peak.

Delta Airlines (NYSE:DAL)– Shares are 4% lower at $8.49 and we’re seeing more of that options volume in the December contract where the 7.5 and 12.5 calls have seen combined volume of 54,000 lots. Once again, since these calls have substantial existing open interest it’s hard to know whether the investors is closing or adding these calls or whether a bullish call spread has been initiated. Since the price of oil took a tumble, implied volatility on this airline has come crashing back down to earth declining from 191% to 107% in the space of a week.

Jabil Circuits (NYSE:JBL) – Another hot contract today is found at chip-maker Jabil, where 14,000 calls are in play, which compares to overall open interest of 134,817 contracts. The activity is at the December 12.5 strike, which happens to be the most populated contract by open interest and so once again we’re unclear at this time as to whether this is an opening or closing transaction. Calls changed hands at 28 cents premium and shares are lower at $7.25 today.

Emerson Electric Co. (EMR) – Before the summer meltdown shares of Emerson Electric were perfectly happy in a $45-$60 price range. Since then they have headed to $30 and today an option investor appears to have implemented a rebound play in the shape of a good old fashioned call spread in the January contract. It appears that the 40.0 strike was bought at the expense of the 50.0 strike for a net premium of 1.85, which means that if the stock can make its way back above $41.85 by expiration from today’s $34.76 the investor will break even. The play makes its full potential of 8.15 at expiration if the share price reaches at least $50.00. Given the elevated 80% reading of implied volatility, the investor is possibly better off in this position than through a simple long call where vega or volatility erosion would chip away at the premium in the event that the share price rose.

Tessera Technologies Inc. (NASDAQ:TSRA) – It looks like a similar strategy was played at Tessera today where shares are suffering from a 4.4% decline to $14.50. The overall option volume of 10,116 contracts at noon represents 20% of current interest on the shares. Around half of today’s volume appears to involve a bull call spread at the 17.5 and 20.0 strikes in the December contract, which would have a payoff of 1.50 per contract if shares breach the upper strike at expiration, which compares to a trade cost of 1.0 premium.