Tuesday Options Update: WAG, CVS, PSS, RYL & TCB

Walgreen Co. (WAG) – The second-largest drugstore chain in the U.S. exceeded analysts’ expectations by posting fourth-quarter profits of 44 cents per share. Shares burst through the 52-week high on the stock of $34.81 this morning, rising 10.5% to $37.83. Option traders took to the October contract to initiate bullish stances. Call-buyers targeted the October 38 strike where nearly 2,000 contracts were picked up for an average premium of 92 cents apiece. We observed other WAG optimists selling puts short 6,000 times at the October 35 strike for approximately 8 pennies each. Put-sellers retain the 8 cents as long as shares of the drugstore chain remain higher than $35.00 through expiration next month. Finally, plain-vanilla put purchases took place at the October 37 strike 1,000 times for a premium of 53 cents per contract. Perhaps these investors are locking in gains in case shares erode beneath the breakeven point at $36.47 by expiration day. Option implied volatility imploded 36% following earnings, descending from yesterday’s closing value of 31% to an intraday low of 23%.

CVS Caremark Corp. (CVS) – Shares of the largest drugstore chain in the U.S. rose 3% during the session to $35.88. Perhaps the bullish move in the stock was partially fueled by Walgreen’s positive fourth-quarter earnings news. News this morning also revealed CVS aims to expand its partnership with Microsoft HealthVault to CVS Pharmacy clients. Apparently, the partnership will allow CVS Pharmacy users to download prescription histories in order to obtain Microsoft HealthVault records. We noticed heavy call volume at the October 36 strike, and initially assumed the contracts must have been bought by bullish investors. However, upon further inspection, the calls appear to have been sold nearly 12,000 times for an average premium of 80 cents apiece. Perhaps the short calls are held by an investor holding a long position in the stock. If this is the case, the trader is covered in the event that shares of CVS continue through $36.00 by expiration. We note that earlier in the trading session the calls were in-the-money briefly when shares of CVS traded 3.5% higher to $36.12.

Collective Brands, Inc. (PSS) – The holding company of Payless ShoeSource and Stride Rite experienced a 1% rally in shares to $18.11 during the trading session. Bullish options activity on the stock indicates at least one investor expects PSS to experience continued upward movement through expiration in November. A bullish reversal strategy employed in the November contract involved the sale of 2,500 puts at the November 15 strike for 30 cents apiece. The sale of the puts partially funded the purchase of 2,500 calls at the higher November 20 strike for 60 cents per contract. The net cost of the transaction amounts to 30 cents each, and positions the trader to accumulate profits if the stock continues higher by expiration. Profits are available to the investor if shares rally 12% from the current price to breach the breakeven point at $20.30. We note that shares of Collective Brands have not traded through the breakeven point since October 12, 2007, when the stock was at $20.82.

The Ryland Group, Inc. (RYL) – The homebuilder and mortgage-finance company’s shares are trading up nearly 1% to $21.97 after the release of the S&P Case/Schiller Home Price Index report for July. Ryland popped up on our ‘hot by options volume’ market scanner after a ratio put spread was established by one investor in the January 2012 contract. The trader may be long the underlying stock, and thus seeking long-term downside protection in case shares erode over the next couple of years. The ratio spread involved the purchase of 2,000 puts at the January 2012 20 strike for a premium of 6.30 each, against the sale of 4,000 puts at the lower January 2012 15 strike for 3.40 apiece. The transaction results in a net credit to the trader of 50 cents per contract. Retention of the 50 cent credit is ensured as long as shares remain higher than $20.00 through expiration. Downside protection from the put options kicks in if shares of RYL decline through $20.00 at any point during the life of the contracts.

TCB Financial Corp. (TCB) – An analyst’s downgrade yesterday seems to be still delivering its impact on consumer banker, TCB whose shares are down 4.6% to stand at $13.25. just last week its shares were trading at $15.36 and today the draw is towards support at the summer lows at around $13.00. One option investor appears to have rolled a previously established bearish play on the stock from the October puts to the same 12.5 strike expiring in November. The 10,000 lot trade could be protection against a long position in the stock, but the likelihood is that a bear has his claws out for the prospects for the Arizona-based lender. Recently, ratings agent Fitch maintained a negative outlook after it downgraded individual ratings on TCF Financial Corp. and its principal subsidiary TCF National Bank. The put options bought today expiring in November buy more time for a share price decline that would be needed to see this investor breakeven at $11.60. Option implied volatility of 57% infers a 36% chance of the 12.5 puts landing in-the-money.

Comments

[User 461994:]

"...Retention of the 50 cent credit is ensured as long as shares remain higher than $20.00 through expiration. ..."
-I would guess that RYL trader will keep the $.50 credit as long as RYL > $15.00 on expiration.

SG

Sep 30 01:46 AM