Tuesday Options Update: LXK, AVP, WERN, ISRG & CHK

Lexmark International, Inc. (LXK) – Shares have plummeted nearly 20% today to $15.16 for the printing and imaging solutions provider after reporting second-quarter earnings per share of 55 cents which failed to meet consensus estimates of 60 cents. Option traders who had initially taken long-term bullish stances on the stock threw in the towel today by shedding calls in the January 2010 contract. Investors sold 7,300 calls at the January 17.5 strike price for 1.02 apiece and surrendered another 5,000 calls at the higher January 20 strike to capture 35 cents option premium. Long-term bearish sentiment on LXK was confirmed with the purchase of 1,000 puts at the January 15 strike price for 1.75 per contract. Investors long the put options will begin to realize profits beneath the breakeven point at $13.25.

Avon Products, Inc. (AVP) – The global manufacturer and marketer of beauty products received an upgrade to ‘outperform’ at BMO Capital Markets today, boosting shares up by more than 2.5% to $29.17. Analysts at BMO Markets also assigned the stock a price target of $40.00. Bullish option traders were seen selling put options in the near-term August contract. Approximately 1,500 put options were sold at the now out-of-the-money August 29 strike price for an average premium of 95 cents apiece. Investors will retain the full 95 cent premium as long as the puts land out-of-the-money by expiration. Otherwise, traders may have shares of the underlying put to them for an effective price of $28.05 each in the event that the stock is trading beneath $29.00 before the third Friday of the month. Additional bullishness was seen at the August 30 strike price where about 1,000 calls were coveted for an average price of 95 cents per contract. Shares must rally higher by about 6% before investors begin to amass profits beginning at the breakeven point of $30.95.

Werner Enterprises, Inc. (WERN) – Shares of the trucking and logistics company have tumbled 9% today to $17.56 after the firm reported second-quarter profits have slumped 30% on continued weakness in demand for shipping. WERN edged onto our ‘hot by options volume’ market scanner after one option trader established a sold strangle in the December contract. The investor shed 2,500 puts at the December 12.5 strike price for a premium of 42 cents apiece in conjunction with the sale of 2,500 calls at the December 22.5 strike for 52 cents each. The gross premium received for the transaction amounts to 94 cents. If shares remain ‘strangled’ within the strike prices described through expiration, the trader will retain the full 94 cent premium. This individual does not seem to believe that shares are likely to slip beneath the 52-week low for the stock of $12.59 attained back on March 9, 2009. We note that the premium from the trade run out of juice below a share price of $11.56 and above an upside prce of $23.44.

Intuitive Surgical, Inc. (ISRG) – The maker of a robotics system for assisting minimally invasive surgery has experienced a rally in shares of more than 1.5% to $167.15. The firm received an upgrade to ‘outperform’ yesterday by analysts at William Blair & Co., perhaps encouraging the bullish activity observed on ISRG today. Investors positioning for significant upward movement in the price of the stock, looked to the August 190 strike price to purchase 1,800 calls for an average premium of 4.16 apiece. Other traders picked up approximately 1,100 calls at the higher August 195 strike for 3.15 each. Shares of ISRG must surge 16% to $194.16 for traders long the August 190 strike calls to breakeven, versus a jump of about 19% in the stock to $198.15 for call-buyers at the August 195 strike price to begin to amass profits.

Chesapeake Energy Corp. (CHK) – Shares of the natural gas and oil exploration and production company are higher by more than 1.5% today to stand at $20.72. Investors piled into both calls and puts at the August 21 strike price. Perhaps some traders are protecting recent gains on the stock while others are positioning for continued near-term bullish movement. Some 7,200 call options were purchased at the August 21 strike for 1.00 apiece. Investors will realize profits if shares can jump at least 6% to breach the breakeven point at $22.00 by expiration. Put-buyers coveted about 9,000 lots at the same strike price for 1.20 per contract. If traders happen to be long the stock, downside protection provided by the put options would kick in beneath the breakeven share price of $19.80.