Monday Options Update: KMB, S, EEM, XLU, UAUA & ACOR

Kimberley-Clark Corporation (KMB) – The producer of Huggies diapers and Kleenex tissue has experienced a share price decline of more than 2% to $51.56 after the company was downgraded to ‘neutral’ from ‘buy’ by analysts at Goldman Sachs Group (GS). The downgrade by GS today did not deter one option trader from taking a bullish stance on KMB in the October contract. It appears that this individual has sold 5,000 puts at the October 45 strike price for a premium of 1.05 apiece in order to partially finance the purchase of 5,000 calls at the October 55 strike for 1.25 each. The net cost of the bullish reversal amounts to 20 cents and yields a breakeven point at $55.20. The investor will need a tissue to wipe away tears of joy if shares of KMB can rally 7% through the breakeven point by expiration in about four months.

Sprint Nextel Corporation (S) – Bullish option traders were attracted to the wireless communications provider today amid a rally in its shares of approximately 3.5% to $5.48. The July 6.0 strike price had more than 16,500 calls purchased for an average premium of 29 cents apiece. Investors long of these call options will begin to amass profits if shares can gain another 15% from the current price to breach the breakeven point at $6.29 by expiration next month. Bullish sentiment spread to the August 6.0 strike price where about 5,700 calls were purchased for 46 cents per contract. Traders targeting calls in the August contract are hoping to see shares climb higher than the breakeven point at $6.46 over the next two months. Sprint appeared on our ‘top option implied volatility % gainers’ market scanner this morning with volatility on the stock peaking at 85% up from Friday’s volatility reading of just 63%.

iShares MSCI Emerging Markets (EEM) – Shares are lower by 4% at $32.40. Last week we took note of chunky put spreads aimed at protecting against further downside. Today’s standout trade is noteworthy since we’re not 100% sure what it is. Some 6,500 calls and puts traded in the December contract simultaneously. The 24 strike puts and the 45 strike calls traded at premiums of 1.15 and 35 cents respectively marked down as spreads. There are two alternative scenarios here. In the first case we’d be looking at sales of both by the investor looking to bank premium from a short strangle in the hope that the stock would remain within the two strikes by expiration. In this case the total premium would be 1.50. However, the trade was not marked as a strangle and that raises the prospect that it was a reversal in which the calls were sold to help cheapen the cost of funding the lower strike puts. Instead of paying 1.15 for downside protection this investor is bringing the cost down to 80 cents and so raises the breakeven point to $23.20, which would still require an expiration-based decline in the share price of 28%.

Utilities Select Sector SPDR (XLU) – With markets melting around the globe possibly over fears that heated investor sentiment was at boiling point to the upside, even utility shares are on the wane today. Traditionally the sector makes for a good defense when the going gets tough. But not today as the select sector ETF share price has dropped 2.3% to $27.54. However, a block of 50,000 call options at the January 30 strike traded for a dollar apiece earlier on the ISE. That’s a sizeable order for this series and when you look at surrounding options volume it’s pretty thin – only 3,000 options outside of this single order are in play today. The block traded to the middle of the market, which means we can’t state unambiguously whether this is naked call selling in which the call writer would benefit from a decaying premium should shares weaken, or whether a longer term bull hopes to capitalize from a rally in the share price while retaining the premium from the calls – that would make this strategy a covered call. Finally, this could be pure outright bullishness put into play through place by the opening purchase of a chunk of calls. If so, shares will need to rally by 16% from present through expiration in seven months time.

UAL Corporation (UAUA) – Airlines continue to combat weak demand by slashing prices of their profitable business-class seats in an attempt to fill planes. The price-cuts may fill more seats but are a killer for airlines’ much needed incoming revenue. Shares of the Chicago-based owner and operator of United Airlines have declined dangerously close to the 52-week low on the stock of $2.80 attained nearly one year ago on July 15, 2008. Today the stock has slipped 3.5% to $3.69. In response to continued price erosion, one investor looked to the in-the-money September 4.0 strike price to purchase 8,500 puts for an average premium of 1.10 per contract. He will begin to garner profits on today’s trade in the event that shares decline beneath $2.90 by expiration in three months. This transaction indicates extreme bearishness on UAUA’s stock.

Acorda Therapeutics, Inc. (ACOR) – The commercial-stage biopharmaceutical company appeared on our ‘hot by options volume’ market scanner amid bullish call buying by some investors looking for upward price movement in the stock through June expiration. Shares of the firm have climbed higher today by 4% to $26.55. Option traders latched on to approximately 3,000 calls at the June 30 strike price for an average premium of 35 cents apiece. These calls will prove profitable if ACOR’s share price can rise 14% through the breakeven point at $30.35 by expiration. Option implied volatility on the stock surged up to 82% today from Friday’s volatility reading of 66%.