Tuesday Options Update: MTB, TGT, MTW & HURN

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Includes: HURN, MTB, MTW, TGT
by: Interactive Brokers

M&T Bank Corp. (NYSE:MTB) – Shares of the bank holding company have enjoyed a 0.5% increase today to $58.00 after the firm received a new rating of ‘neutral’ and a price target of $60.00 per share at FTN Equity Capital Markets Corp. Despite the bullish move in the stock, one contrarian option trader established a bearish put spread in the October contract. The transaction involved the purchase of 10,000 puts at the October 45 strike price for a premium of 1.04 apiece spread against the sale of 10,000 puts at the lower October 40 strike for 44 cents each. The net cost of the trade amounts to 60 cents and yields maximum potential profits of 4.40 per contract in the event that shares plummet 31% to $40.00 by expiration. The 20,000-lot put spread enacted today represents a whopping 43% of the total existing open interest on the stock of 46,406 contracts.

Target Corp. (NYSE:TGT) – Better-than-expected earnings from retailer Target today has one option investor looking for more upside from the company on top of today’s 7.7% gain to $44.39. The investor swapped out a long straddle for a short straddle using the October contract in a trade involving 20,000 contracts. The investor bought the same volume of calls and puts at the 40 strike in exchange for the reverse position at the higher 45 strike. Although this investor has a poor risk/reward potential on this trade, he does have the hindsight of earnings now that they have been delivered. Getting long a deep in-the-money call generates profits at any point above $43.00 in this case and owing to the short opposing call, he faces a maximum gain of $4.0 per contract at any point above $45.00. As noted above the risk of the trade is larger than the reward leading to maximum downside losses of $6.0 per contract from $40.00 and below. This is a confident play post-earnings that says risk/reward doesn’t matter if this stock is going higher.

Manitowoc Company Inc. (NYSE:MTW) – Wisconsin-based Manitowoc Company recently boosted revenues from the acquisition of Enodis to its food services segment, but still turned in a loss. The company produces cranes as a mainstay. Its shares are curiously almost 10% higher today at $6.79 and it would appear that there is a big fan of the company lurking out there somewhere. We see little news driving the recovery in the stock today, but we can see call option purchases totaling 30,000 contracts at the 15 strike with an expiration date of January 2011. We immediately wondered if this volume might be related to a covered call, but as noted above the options appear to have been bought at the asking price. Option implied volatility remained static today and stands at 76%. About one year ago the company’s share price reached $26.01. This rather large trade looks like a longer-term recovery play on this company. At the end of July the company showed that it had reduced its debt burden to $161 million and reaffirmed its full-year debt reduction target to $450 million according to Reuters news.

Huron Consulting Group Inc. (NASDAQ:HURN) – The provider of financial and operational consulting services surged nearly 40% to $19.11 at times during the trading session after reporting growth in revenue and profits for the second quarter. Profits jumped to 47 cents for the quarter, up from earnings of just 6 cents per share in the previous year. Bullish traders eyed near-term call options on the stock, purchasing approximately 3,300 lots at the August 20 strike price for an average premium of 80 cents apiece. Investors hoping to see continued significant gains in the stock by expiration on Friday bought about 1,500 calls at the higher August 22.5 strike for 37 cents each. Shares of the consulting firm would need to rise another 20% for these traders to begin to amass profits above the breakeven price of $22.87. One individual was apparently prepared for today’s bullish move. It appears that he originally purchased about 7,600 calls at the December 15 strike price back on August 6, 2009, for an average premium of 3.22 per contract. Today he sold the calls for 5.90 and rolled his position to the higher, albeit still in-the-money, December 17.5 strike price for 4.80 apiece. Thus, the trader banked gains of 2.68 per contract on the original call position for a total of $2,036,800. He paid 4.80 to reestablish the long calls at a higher strike and will begin to realize profits on the new position if HURN surpasses the effective breakeven point at $22.30 by expiration in December.