Monday Options Update: XRX, ALL, AMAT, MU, CMCSA

Xerox Corp. (XRX) – News that Xerox agreed to purchase Affiliated Computer Services Inc. (ACS) for $6.4 billion sent shares of XRX nearly 17% lower this morning to $7.46. Sales declines for the past three quarters likely inspired XRX to shift the focus of its operations in a new direction. The acquisition of ACS should help Xerox expand into the computer services sector. Investors demanding call options on the stock fueled a more than 33% surge in option implied volatility from a low of 42% to an intra-day high of 56%. We observed bullish call buying at the October 8.0 strike where approximately 3,500 calls were scooped up for an average premium of 25 cents each. Call-buyers are likely expecting shares to rebound up to the breakeven point at $8.25 by expiration. In contrast, some traders shed calls at the April 8.0 strike for 89 cents per contract. These investors are probably volatility sellers pocketing the rich call premiums available today. Finally, we noticed straddle sellers populating the April 2010 contract. Investors sold 1,800 calls at the April 10 strike for 28 cents each and sold 1,800 deep in-the-money puts at the same strike for 2.68 apiece. The gross premium enjoyed on the transaction amounts to 2.96. Straddle-sellers will retain the full premium of 2.96 if shares settle at $10.00 by expiration next year.

The Allstate Corp. (ALL) – Shares of the insurer are higher by more than 5% to $30.68. Today’s rally is likely due to news that some firms in the U.S. property and casualty insurance industry, including Allstate, experienced their best quarterly results since 2007. Allstate and Travelers Cos., for example, reportedly received more on premiums than they shelled out in expenses and claims. Options activity of note involved the sale of 4,250 calls at the out-of-the-money November 33 strike for 75 cents premium per contract. Perhaps the sale of the calls was initiated by an investor who holds a long position in the underlying stock. If this is the case, he may be taking in extra income on the sale of the contracts because he does not expect shares of the insurer to exceed $33.00 by expiration in November. We note that even if shares do rally 8% to $33.00, the trader would simply bank gains on the bullish move in the stock, and have the shares called from him by expiration day in November. Otherwise, it could be the case that the call-seller is short the stock and does not expect ALL to rally 8% over the next couple of months. If this is the case, the trader receives the 75 cent premium in exchange for bearing the risk that the stock rallies through $33.75, or the breakeven point at which losses begin to accumulate to the upside.

Applied Materials Inc. (AMAT) – A broker upgrade from ‘hold’ to ‘buy’ on this maker of equipment used throughout the semiconductor fabrication process saw its shares rise 3.5% to $13.56. It also announced that it had one a significant servicing agreement from Fijuitsu Microelectronics. A hardy option investor bullish on the company appears to have rolled an 11,000 contract position from the October contract to the November contract in an effort to buy more time for the trade to come good. The sale of calls at the 14 strike at 25 cents at what appears to be a loss compared to when the calls were bought in September, still helps offset the cost of the purchase of the same amount at the November 14 strike price at 65 cents. The investor clearly believes that a further rally is on the horizon before the winter.

Micron Technology (MU) – An investor seems to have banked a decent gain today semi-producer, Micron whose shares rallied almost 5% to stand at $8.50 in Monday’s early trading. It appears to us that the investor has banked gains on calls purchased earlier in the summer for around 1.10 each as the shares were trading at around $5.00. These calls appear to have been sold out today at 3.50 in order to raise the bar to the 7.50 strike price. The investor is lightening the yolk somewhat but clearly wants to remain on board this issue as opposed to buying the out-of-the-money calls at the next available 9.0 series.

Comcast Corp. (CMCSA) – The provider of entertainment and communications services edged onto our ‘hot by options volume’ market scanner following bullish options trading in the January 2010 contract. Shares of CMCSA are trading 1.5% higher today to stand at $16.95. One investor established a bullish risk reversal by selling 10,000 puts at the January 16 strike for 95 cents each, and by purchasing 10,000 calls at the higher January 17.5 strike for 1.05 apiece. The net cost of the transaction amounts to 10 cents per contract. The investor will profit on the reversal if shares of CMCSA rally 4% higher to surpass the breakeven point at $17.60 by expiration in January.