American International Group, Inc. (AIG) – Investors displayed what can only be described as options-mania today as more than 411,000 contracts (and rising) were traded on the stock by lunchtime. Shares have exploded upwards by more than 28% to stand at the current price of $48.46. Option implied volatility, or the measure of investor uncertainty, jumped up from 114% at the opening bell to the current reading of 150%. Near-term uber-bulls were observed purchasing more than 7,500 calls as high as the September 70 strike price for an average premium of 1.20 apiece. The call premium at that strike – the highest strike price listed for the stock – has nearly doubled during the trading session. Early-bird rewards were apparent as traders who acted first thing this morning (around 10:30 am EDT) were able to purchase the same calls for just 36 cents each. Another trade of note was a bullish reversal established in the November contract. An investor shed 7,500 puts at the November 27 strike price for a premium of 2.50 apiece in order to partially finance the purchase of 7,500 calls at the higher November 55 strike for 4.10 each. The net cost of purchasing the calls was reduced to 1.60. Thus, this individual will begin to realize profits if AIG continues higher by 17% to breach the breakeven point at $56.60 by expiration in November. –
Immunomedics, Inc. (IMMU) – The biopharmaceutical company’s shares have surged 60% higher to reach a new 52-week high of $6.82. Bullish movement in the stock was fueled by news regarding the firm’s experimental epratuzumab drug. Apparently, the drug showed a clinically “meaningful treatment effect” as compared with the placebo in patients with lupus. Option traders responded by positioning for continued upward momentum in IMMU. Call options were coveted at the near-term September 7.5 strike price more than 5,600 times for an average premium of 43 cents per contract. Investors holding the calls are hoping to see the stock rise 16% higher to surpass the breakeven point at $7.93 by expiration next month. Additional bullish action was observed at the November 5.0 strike price where traders shed 2,900 puts for 46 cents a-pop. Perhaps these individuals doubt that shares will slip beneath $5.00 by November’s expiration day. Thus, they are happy to receive the 46 cents premium in exchange for bearing the risk that shares of the underlying are put to them for an effective price of $4.54 apiece.
SPDR Homebuilders ETF (XHB) - Shares of the homebuilders exchange-traded fund have edged 1.5% lower to stand at $15.59. An investor hoping for a significant recovery in the fund by expiration in December took a bullish stance on the XHB today. It appears that this individual sold 5,000 puts short at the December 11 strike price for 22 cents premium in order to partially finance the purchase of a bull call spread. The spread involved the purchase of 2,500 calls at the December 18 strike for 57 cents apiece against the sale of 2,500 calls at the higher December 20 strike for 18 cents each. The investor receives a net credit of one nickel per contract on the combination play, which he will retain in full as long as shares remain higher than $11.00 through expiration. Additional profits will begin to amass if the ETF rallies 15% from the current price to top $18.00. Maximum potential profits of 2.05 are available to this investor if the XHB surpasses $20.00 by expiration day.
NCI Building Systems, Inc. (NCS) - The North American manufacturer of products for the construction industry appeared on our ‘hot by options volume’ market scanner this morning. The stock was ravaged early in the trading session and suffered massive declines to reach an intra-day low of about $2.17. Shares have recovered somewhat and are currently off by 25% to $2.62. Some option traders took bearish action on NCS and sold about 2,000 December 2.5 strike calls for 42 cents each in order to fund the purchase of 2,000 puts at the same strike for 1.27. The net cost of the pessimistic reversal play amounts to 85 cents per contract and begins to yield profits beneath the breakeven price of $1.65. Conversely, one contrarian trader hoping for a recovery by the start of next year looks to have established a covered call in the January 2010 contract. He appears to have purchased shares of the underlying in conjunction with the sale of 7,000 calls at the January 2.5 strike for a premium of 35 cents each. The investor has reduced the price of getting long the stock by the premium received for a net cost of approximately $1.97 apiece. The short call position provides an effective exit strategy for the trader in the event that shares rally higher than $2.50 by expiration. If this occurs, he will have banked gains of 27% by initiating the covered call today.