Thursday Options Update: SMH, CMCSK, SUN, KO & MON

Semiconductor HOLDRs Trust (SMH) – Bearish activity on the semiconductors fund launched the SMH ticker symbol onto our ‘most active by options volume’ market scanner this morning. Shares are currently off slightly by less than 0.25% to stand at $26.10. Trading of options set to expire in October suggests that some investors do not expect the SMH to surpass the current 52-week high on the stock of $27.57, attained nearly one year ago on September 19, 2008. Such sentiment was indicated by a bearish risk reversal, which was established through the short sale of about 5,000 calls at the October 27 strike for 53 cents apiece. The calls were spread against the purchase of approximately 10,000 puts at the lower October 25 strike for 64 cents per contract. Selling the calls offset roughly half of the cost of picking up the protective put options. The transaction will result in profits if shares fall substantially below the $25.00-level by expiration. Perhaps investors employing the risk reversal strategy are long the underlying stock. If this is the case, the actions taken today have partially offset the cost of protecting a long stock position.

Comcast Corp. (CMCSK) – Options activity by one investor on CMCSK this morning points to medium-term pessimism on the provider of entertainment and communications services going forward. Shares of Comcast are currently trading 0.5% higher to $16.50. The trader appears to have established a bearish risk reversal in the January 2010 contract by shorting calls to finance the purchase of put options. He shed 5,000 calls at the January 16 strike for a premium of 1.57 each and simultaneously bought 5,000 puts at the same strike for 1.40 per contract. The investor receives a net credit on the transaction of 17 cents. Additional profits may accumulate if shares of CMCSK decline beneath $16.00 by expiration next year. The net credit received may act as a buffer against losses in the event that shares remain higher than $16.00. However, losses would begin to accrue for the trader if shares are higher than the breakeven point to the upside at $16.17 by expiration. We’re unsure whether this transaction involves the simultaneous purchase of stock meaning the option combination would act as insurance.

Sunoco, Inc. (SUN) – Shares of the petroleum refiner have added more than 2% during the trading session to stand at $26.74. Bullish option traders reacted by exchanging more than nine call options to each put option in play on the stock today. More than 3,400 calls appear to have been purchased at the September 27 strike for an average premium of 38 cents apiece. SUN’s shares must rally just 2% higher by expiration next Friday in order for investors to breakeven at a price of $27.38. More optimistic traders paid a dime per contract to get long of 1,000 calls at the higher September 29 strike. Investors holding these contracts would begin to garner profits if the stock were to surge 9% higher to surpass the breakeven point at $29.10. Finally, bullish sentiment spread to the October 27 strike where 1,500 calls were scooped up for 1.10 each. The October 29 strike price was also populated traders who purchased 1,100 calls for 45 cents premium. Option implied volatility readings on the stock today suggest investors are expecting greater fluctuations in the price of SUN shares. Volatility rose 7% during the day from an opening reading of 39% to the current value of nearly 43%.

Coca-Cola Company (KO) – Shares of the beverage company have edged 0.65% lower today to $50.30. However, the declines experienced by KO throughout the week seemed only to intensify investor demand for Coke-calls. It appears that traders targeting the September 50 strike calls today, which are currently in-the-money by just 30 cents, are expecting shares to remain higher than $50.00 by expiration. This scenario is likely because it seems approximately 20,000 calls were purchased for an average premium of 62 cents apiece at that strike. While the stock would need to rise through $50.62 for investors to breakeven by next Friday, shares of KO need only remain higher than $50.00 for call-buyers to exercise the options and take delivery of the underlying shares. We note that the 25,533 lots of open interest at the September 50 strike price exceeds the 23,437 calls traded during the session. But, upon investigation of trading patterns, it seems most likely that the calls were purchased outright rather than purchased to close out short positions. Coke-fiends seen coveting calls are hoping for volatility to remain low and for shares to stay above $50.00.

Monsanto Co. (MON) – News that seed and fertilizer producer Monsanto only expects to make between $6.1 and $6.7 billion in profits this year is behind a 5.7% decline in its share price to $78.70. Investors are likely weighing up the potential for analysts’ downgrades on the company who announced today that it is stepping up plans to cut costs by $250 million annually by boosting restructuring reserves to as high as $600 million. Competition from Chinese chemical manufacturers is hindering the pricing power of its herbicide, Roundup, where the company anticipates selling 250 million gallons next year at a discount to this year’s 200 million gallons. Apart from the competition, sales of seeds and fertilizers to corn farmers have suffered in both price and volume. Vastly improved corn yields this year have reduced both prices and the need to add chemical stimulants. Option traders were certainly more active on the bearish put side of the line today, but the September 75 strike for example saw good two-way action over and above the prevailing number of outstanding agreements on the shares. More than 13,000 contracts changed hands reserving selling rights at an average price of 52 cents. Put buyers would benefit should the share price settle at expiration beneath $74.48 while put sellers would have the stock put to them at any price beneath the strike but would effectively be getting it cheaper on account of the premium received. October 70 strike puts saw twice as many sellers as buyers where premiums averaged 1.06 while the 75 strike attracted more buyers. In the September 80 strike calls there was also good 2-way traffic indicating some expect a rebound from this commodity-sensitive stock, while we suspect others might be comfortable buying the discounted shares today and writing calls expiring next month.

Comments

[GeeDee:]

Is there some statistics on how often these "hot" option traders win?

Thanks

Sep 10 01:15 PM