Monday Options Update: POT, MON, LO & DRYS

Potash Corp. of Saskatchewan (POT) – With stock indices raging ever-higher, our trading screens are largely showing call buying supportive of the rally today. However, one of the contenders for heavy option volume is Canada’s potash and fertilizer producer, but the option volume is on the other side of the tape. While its shares are nearly 4% higher at $120.43 the heavy option volume is found in the July puts at the 85 strike where an investor has sold around 22,250 lots today at a 90 cent per contract premium. Essentially this investor is equally as bullish as the rest of the market, but is happy to confirm the upwards trajectory for this commodity-sensitive manufacturer by writing premium. The investor stands to keep the approximate $2 million in premium by selling puts, but his obligation is to have shares put to him in the event that Potash’s share price slips beneath the strike before options expire on July 17. A good deal? Hard to say, but we do know that shares left that strike price behind on April 29 and haven’t looked back since. Today, shares are at precisely half of the company’s 52-week high, which has allowed implied volatility to seep into the ground by around one-third since April.

Monsanto Co. (MON) – Shares in seed-producer, Monsanto are higher – but only just 0.5% at $82.61. Just over a week ago they were trading through $92.50 on prospects for rising commodity prices. However, the company last week noted that tougher competition in the herbicide business would push results to the weaker end of street expectations. That revision created a loss of confidence and must have seen investors ditch their stake with shares losing more than 16% off the recent peak. Over the weekend Barron’s reports that the selling was overdone and that shares offer value citing one bullish analyst who feels that $115 is a good target even including management’s sober take. But option investors were in no mood for a rally today, with the most active contract found at the July 80 line where 12,250 lots changed hands at an average price of 3.60. Clearly some investors still feel cautious about the prospects for Monsanto and seek protection below a breakeven price of $76.40. Option implied volatility rose around 14% in light of today’s heavier protective demand.

Lorillard, Inc. (LO) – The manufacturer of cigarettes appeared on our ‘most active by options volume’ market scanner early in the trading day after one investor was seen getting bullish on the stock. Shares of the firm have lifted slightly by less than 1% to $68.58. The trader received a net credit for rolling a long call position forward to a higher strike price in the December contract. The sale of 10,000 calls at the September 75 strike price for 2.40 apiece was utilized to fund the purchase of 10,000 calls at the December 80 strike for 2.20 each. Thus, the investor has pocketed 20 cents and positioned himself for significant bullish movement in the stock over the next seven months. The December calls will land in-the-money by expiration if shares rally higher by approximately 17% from the current price.

DryShips, Inc. (DRYS) – The dry-bulk haulage company, along with a number of other dry-bulk ship owners, has benefited from a rise in transport rates for the month of May, which were lifted by rising demand for China-bound commodities. Shares of DRYS were rallying higher this morning but have since tapered off to a loss of about 3% to $7.96. Looking past the near-term contracts to September’s expiration, one option trader is evidently hoping for a significant recovery as he initiated a bull call spread on the stock. The purchase of 10,000 calls at the September 10 strike for 1.45 each was spread against the sale of 10,000 calls at the higher September 15 strike for an average premium of 50 cents per contract. The net cost of the bullish position amounts to 95 cents and yields maximum potential profits to the trader of 4.05 if shares can climb up to $15.00 by expiration. The stock would need to rise approximately 38% to the breakeven point at $10.95 before the trader begins to amass profits on today’s trade.

Comments

[User 422955:]

To call Monsanto a "seed producer" is a fundamental misunderstanding of the company. Disclosure: No position at present but I'm looking to buy on a further pullback.

Jun 02 08:50 PM