Thursday Options Update: GE, TYC, XLF & STLD

General Electric (GE) – The downgrade of its top-level AAA rating to AA+ from Standard & Poor’s today seems to have had little negative impact on GE, as its shares soar another 9% to $9.30. Option investors established bullish positions by purchasing some 33,000 calls at the March 10 strike price at 28 cents per contract. Similar optimism was seen at the 10 strike price in April where about 14,000 calls were bought for 77 cents each. Further along, at the June 12 strike, investors got even more bullish and scooped up 10,000 calls for 56 cents per contract. Shares would need rally 35% from today’s share price in order to reach the breakeven point at $12.56, at which point traders would begin to profit on the calls. Not all option traders took such sunny positions today as evidenced by a bearish put spread initiated in the April contract. One investor appears to have purchased 15,000 out-of-the-money puts at the April 8.0 strike price for 91 cents each, and sold 15,000 puts at the April 5.0 strike for a 17 cent premium. This strategy implies that this trader sees today’s turn of fortune falling by the wayside before expiration next month. The net cost of the spread amounts to 74 cents, and yields a maximum potential profit on the trade of 2.26 if shares fall all the way to $5 by the end of April. Given the current rally, shares would need to reverse downward by at least 21% in order to reach $7.26 – the breakeven point on the downside.

Tyco International Ltd (TYC) – Shares of the world’s largest maker of security systems have rallied nearly 3% to $19.01. Perhaps this is a sign of confidence in the decision reached by shareholders of the company today regarding the relocation of its place of incorporation from Bermuda to Switzerland’s Schaffhausen canton. TYC popped onto our ‘hot by options volume’ market scanner after one investor appears to have purchased nearly 10,000 calls at the March 20 strike price for 35 cents per contract. While the bulk of the calls were traded to the middle of the market, it is likely that they were bought because open interest at that strike was just 3,700. Shares will need to rally 7% to a breakeven price of $20.35 in order for this bullish investor to profit on today’s trade.

Financial Select Sector SPDR (XLF) – Option traders were seen looking for upside on the financials index as its share price continues to rally today by about 3% to $7.60. One investor initiated a bull call spread in the April contract by purchasing 25,000 calls at the April 8.0 strike price for 55 cents each, while selling 25,000 calls at the April 10 strike for a premium of 12 cents apiece. The net cost to the trader amounts to 43 cents for the spread and yields a maximum possible profit of 1.57 if shares can rally to $10 by expiration next Friday. This investor sees the XLF gaining in the next week, but does not expect it to rise above $10. Profits will begin to amass if shares surpass the breakeven share price of $8.43, rising to a maximum of 1.57 should shares reach the upper strike. Let’s not count chickens here, as the investor still needs to see a near-11% share price gain during expiration week before he can count a single black cent.

Steel Dynamics Ltd (STLD) – Faced with a drop off in demand for rolled-steel products, which has caused a halving of steel prices in recent months, Steel Dynamics forecast a first quarter loss. Shares in the country’s fifth largest steel-manufacturer by market capitalization responded with a 20% slide to $6.80. Options activity was actually less bearish than the story sounds as investors chose to sell put options expiring in April, which means they would need to take delivery of shares put to them at a fixed $5.00 share price. Of course that would mean that shares would need to fall by a further 26% and the prospects of that happening induced premium writers to take in the 35 cents available from anyone wanting to bet on weaker conditions yet. Other investors paid a similar premium on call options expiring next Friday at the 7.5 strike price, implying that today’s downdraft won’t last. At the May 10 strike call line, investors also paid a 50 cent premium to secure buying rights on the company.

Comments

[Arturo.Didonna:]

Hello, Andrew.
Many thanks for sharing your thought and findings on options. About Tyco International Ltd, I am not clear what you mean by saying "While the bulk of the calls were traded to the middle of the market, it is likely that they were bought because open interest at that strike was just 3,700". I thought that when you establish a new position, like in this case, the open interest would increase, so it would be now at least 10,000 or so.
Thanks for your consideration.
Mimmo

Mar 13 01:54 AM