Friday Options Update: TLT, SNY, NKE, TIBX, VALE, ROST

iShares Barclays 20+ Year Treasury Bond Fund (TLT) – Following a week of successful note auctions by the U.S. government in which overseas central banks stepped up the pace, yields declined dramatically across the curve. The yield on the benchmark 10-year note for example, which recently poked its nose up at 4% yields shrank to 3.5% on Thursday. Bond prices are quiet today, yet one sizeable option trade occurred on the call side involving a sizeable number of 20,000 contracts. The iShares TLT tracks the price of the bond and the fact that these calls were sold today implies to us that these investors are either buying shares of TLT and taking in premium, or more likely simply taking the view that it will be hard for yields to decline much further during the next three weeks. Investors stepped in to sell around 20,000 calls at the July 96 strike for average premiums of 90 cents, implying a breakeven at 96.90.

Sanofi-Aventis (SNY) – The global pharmaceutical firm’s shares have taken a major hit today, dropping more than 5% to $28.61. SNY’s third-largest-selling drug, Lantus, used in the treatment of diabetes, has been cited in medical journals that highlight the potential increased risk of cancer in those treated with the drug. Analysts at Morgan Stanley and JPMorgan reacted to the findings by lowering the stock to ‘neutral’ from ‘overweight’. A flurry of options activity launched the SNY ticker symbol onto our ‘most active by options volume’ market scanner. Investors were seen getting long of put options in both the July and August contracts. The near-term July 27.5 strike had 1,000 put options picked up for 71 cents each while the higher, deep-in-the-money July 32.5 strike price appears to have had 2,000 puts purchased for 3.75 apiece. Interestingly, a few contrarian traders were seen buying 2,500 calls at the July 30 strike for 73 cents each and another 1,000 calls at the August 30 strike for 1.42 per contract. Finally, bearishness spread to the August 27.5 strike price where another 1,000 put options were scooped up for 1.39 a-pop. Increased investor uncertainty was reflected by the rise in option implied volatility today to 44%.

Nike, Inc. (NKE) – Recent downward movement in the price of the athletic apparel designer’s shares has incited one option trader to initiate a near-term bullish reversal on the stock amid a share price decline of approximately 1% to $50.80. Perhaps anticipating further declines, the investor responsible for the reversal was seen selling 6,000 calls at the July 50 strike price for a premium of 2.21 apiece in order to fund the purchase of 6,000 puts at the same strike for 1.22 each. This individual enjoys a credit of 99 cents per contract on the trade. Further profits would amass if Nike shares were to slip below $50.00 by expiration next month. The short call position leaves this trader vulnerable to losses in the event that shares rally higher than the 99 cent buffer provided by the credit received today. He faces potentially unlimited losses above a share price of $50.99, but we’re assuming no associated stock position here. The purpose of the play might indeed be to protect against further losses to an underlying position in Nike.

TIBCO Software, Inc. (TIBX) – The business software company’s shares have surged higher by more than 9% today to $7.42 after the firm reported second-quarter profits which exceeded analyst expectations. TIBX appeared on our ‘hot by options volume’ market scanner following bullish activity by investors in the August contract. Optimistic option traders targeted the August 7.5 strike price where it appears that approximately 4,000 call options were coveted for an average premium of 50 cents apiece. Shares would need to climb 8% to $8.00 in order for TIBX-bulls to breakeven by expiration. Option implied volatility on the stock came off significantly following the earnings announcement to the current reading of 53% from yesterday’s closing value of 67%.

Vale S.A. (VALE) – Shares of the Brazilian metals and mining company have returned some of yesterday’s gains and are currently off by approximately 1.25% to $17.85. We observed a bullish mix of options activity on the stock today by investors hoping for a recovery in Vale. The near-term July 16 strike price saw one trader buy 3,000 put options for a premium of 3.75 apiece. While such action would normally be considered bearish, the transaction appears to be linked to the purchase of an equivalent number of shares of the underlying. Perhaps wary of potential near-term declines in shares, this trader chose to pay the put premium in exchange for downside protection on the stock position. The more obvious bullish trade seen on Vale occurred at the August 19 strike, where 2,000 calls look to have been bought for an average premium of 1.05 per contract. Iron-ore optimists will begin to amass profits by expiration in August if shares rally higher by about 12% to breach the breakeven point at $20.05.

Ross Stores (ROST) – With shares at the retailer finding copious amounts of support at just under $38 it would appear that one option trader is writing put premium in the expectation that he can either have shares put to him at a discount to today’s price of $38.45 or simply retain the premium. Two trades appear to have gone through that piqued our interest in early trading. The first pair of trades appear to us to be naked sales of August expiration puts at the 35 and 32.5 strikes. The seller retains the respective premiums of 40 cents and 95 cents per contract on volume of 3,000 lots. Ross’s shares dipped momentarily beneath $35 in mid-May making these look like relatively safe plays, assuming the investor likes the stock at a 9% discount to today’s price. Even then the premium at the 35 strike boosts the discount by a further 1.5%. Elsewhere we saw another 3,000 August puts at the 37.5 strike linked to 1,000 call options traded as a spread using the 40 strike. We think this investor is possibly selling puts to buy calls in the expectation of a near-term run higher on the stock. If that’s the case today, the call premium turned to a net 30 cent credit given the higher premium received on the sale of puts.