Wednesday Options Update: TIVO, DDUP, VLO, CBS & XLI

TiVo, Inc. (TIVO) – Investors in the digital video recording company must be grinning uncontrollably amid the more than 46% rally in TiVo’s shares to $10.22 today. TIVO’s shares took off after a judge ruled that Dish Network Corp. and EchoStar Corp. must pay $192.7 million for infringing TiVo’s video-recorder patents. DISH’s shares have declined more than 8% following the ruling and the company faces further payments of approximately $100 million to TIVO for damages not included in yesterday’s court decision. Early bird investors looking to share in the bullishness surrounding TIVO looked to the June 10 strike price and bought more than 3,000 calls for a premium of 68 cents apiece. Traders who have entered the game in its later stages will find that the June 10 calls are now in-the-money and tote an asking price of 90 cents each. More optimistic individuals picked up more than 1,000 calls at the higher June 12.5 strike for approximately 10 cents per contract. TIVO has recorded a new 52-week high on today’s rally up to $10.25 that trumps the previous high of $9.07 attained back in September of 2008.

Data Domain, Inc. (DDUP) – The provider of storage products continues to rally today, currently up more than 2.5% to $32.50, as the bidding war for the Santa Clara, California-based firm rages on. Not to be outdone by EMC Corp’s $1.9 billion unsolicited bid extension reported yesterday, NetApp Inc. raised its original offer for DDUP to match that of EMC at $1.9 billion. Essentially, NetApp’s actions speak louder than words and might roughly translate to, “your move EMC.” Option traders hoping the buyout-battle has only just begun were observed positioning for additional upward movement in DDUP’s shares. One investor looked to the September contract and shed 4,500 puts at the September 30 strike price for a premium of 55 cents in order to finance the purchase of 4,500 calls at the higher September 35 strike at a cost of 45 cents per contract. The trader receives a net credit of 10 cents on the trade and will attain the right to exercise the calls in the event that shares rally higher by about 8%. Option implied volatility on the stock has risen slightly throughout the day from an opening reading of 23% to the current value of 27.5%.

Valero Energy Corp. (VLO) – Did energy bulls stampeded too hard toward the cliffs without looking who was following? Shares of the largest U.S. refiner, Valero have slumped 17% to stand at $18.57 today saying that weak market conditions for the second quarter would lead to an unexpected loss. The company temporarily shelved two expansion projects. And here we are under the impression that rising pump prices were due to strengthening demand! Valero’s options mapped the course pretty well with June 17 and 18 strike puts attracting special attention. Buyers tried to snap up protection by amounts roughly in line with established positions. Investors threw in the towel by selling upper strike calls in the expiration month.

CBS Corp. Class B (CBS) – Shares of the mass media company are higher by about 1% to $8.73 amid an upgrade to ‘market perform’ from ‘underperform’ by an analyst at Sanford C. Bernstein & Co. who has a price target of $9.00 on the stock. CBS edged onto our ‘hot by options volume’ market scanner as option investors got long of 10 strike-call options. The December 10 strike price had nearly 5,000 lots coveted for a premium of 1.30 apiece. Further along at the January 2010 10 strike more than 10,000 calls exchanged hands for an average premium of 1.39 per contract. Call buyers in the January contract are hoping for shares of CBS to rally by approximately 30% to the breakeven point at $11.39 in order to amass profits by expiration in seven months time.

Industrial Select Sector SPDR Fund (XLI) – The fact that the current price of the underlying shares of the industrials ETF is off by more than 1.5% to $23.14 today did not deter option traders from taking longer-term bullish positions on the fund. The largest trade observed on the XLI today also has the most time on its side. The January 2011 contract attracted one investor who purchased 43,000 calls at the 30 strike price for a premium of 1.05 apiece. Such a position indicates that the trader hopes to see a more than 34% rally in shares to the breakeven point at $31.05 by expiration at the beginning of 2011. Other optimists opted to pick up 10,000 calls at the nearer-term September 26 strike price at a price of 95 cents each. These investors have set their sights a bit lower with a breakeven point at $26.95 and have just four months in which shares must rally 16% before any profits are experienced on the trade. Additional bullishness was seen as high as the January 2010 27 strike price where some 3,500 calls were purchased for 80 cents per contract.