Wednesday Options Update: FDO, SYMC, MON, MFA & TLB

Family Dollar Stores (FDO) – Option traders got off on the wrong foot after better results from the cheap-and-cheerful variety retailer reported better than expected earnings, blaming a late return to school for unexpected profits. Its shares surged to $29.69 after the opening bell, enticing eager sellers of bearish put options to write premium for 85 cents. The contracts would expire worthless if shares in Family Dollar are at or above the $30 strike price by expiration next weekend. During the morning, however, its shares have eased to stand just 1.1% better at $28.82 sending the best offer on these puts to 1.45. The most actively traded contract so far today is the 30 strike call expiring in October where 6,700 calls have traded and whose premium has decayed to 24 cents after closing yesterday at 65 cents. Option implied volatility has cratered by one-quarter to just 33.3% in today’s action.

Symantec Corp. (SYMC) – Less than twenty minutes of the trading session had elapsed this morning when one investor exchanged approximately 30,500 option contracts on Symantec Corp. A portion of the trade looks like a closing transaction while the remainder of the activity represents fresh bullish positioning. Shares of the software company are currently trading 0.5% higher to stand at $16.49. It appears the trader originally purchased some 12,000 calls at the October 16 strike for an average premium of 1.42 apiece, back on May 8, 2009, when shares of SYMC were at $15.00. Today, the investor sold the lots to close out the now in-the-money call position for just 65 cents each. The apparent 77 cent loss on the closing sale is likely due, in part, to the eroding extrinsic (or time) value of the option premium on the calls. The loss, however, did not deter the investor from taking a new options approach on the stock. It appears he initiated a bullish risk reversal in the November contract by selling 9,300 puts short at the November 15 strike for 40 cents each, spread against the purchase of 9,300 calls at the higher November 17 strike for 75 cents apiece. The net cost of the reversal amounts to 35 cents per contract. The investor will amass profits on the trade if shares of Symantec rally at least 5% to surpass the breakeven point at $17.35 by expiration in November.

Monsanto Co. (MON) – Shares of the world’s largest seed manufacturer have a slightly hang-dog look at $74.90 this morning after the company turned a small profit rather than a small loss. Notably its option implied volatility has dropped by 10% to 31% following the release, which unexpectedly reaffirmed its 2010 outlook, while some analysts had expected a less optimistic revision. Strong seed sales for corn and vegetable produce helped pad the bottom line despite the drag from restructuring costs as the company down sizes. The decline in uncertainty saw call and put option premium decay after the news. The at-the-money October straddle for example closed last night at 4.05 implying swings between now and expiration for Monsanto’s share price between $70.95 and $79.05. Today the volatility burst has the same combination reduced to just 3.0. On balance investors remained optimistic using its options given the weight of call buying at the October 75 and 80 strike calls where average premiums of 1.67 and 25 cents changed hands. One investor initiated a 500 lot covered call in which shares were purchased at $75.63 and 80 strike call options expiring in November were sold at a 1.49 premium. Effectively the investor gets long the stock at the share price minus the price received from the writing the calls.

MFA Financial Inc. (MFA) – Self-advised REIT business, MFA Inc. attracted a sizeable option trade during this morning. The share price of this company, which dabbles in hybrid and adjustable rate mortgages, is lower by 1.1% at $7.96 today. One investor made a 20,000 lot option play using in-the-money call options set to expire in 12 days time. We can see a large chunk of stock trading at the same time, but can’t tell what this investor’s motivation is. The calls changed hands at 45 cents and represent three-times the current open interest in all options on this company’s shares, just to give you a sense of the magnitude of today’s activity. We are left guessing that the investor behind today’s trade is a bull and looking to lock in to buying rights on this company in the expectation they will remain in-the-money when it comes to expiration.

The Talbots, Inc. (TLB) – Shares of women’s clothing retailer, Talbots, surged 17% to $11.22 at times during the trading session after the ‘outperform’ rating on the firm was reiterated at FBR Capital Markets. Bullish option traders expecting continued gains in the stock coveted 2,000 calls at the November 12.5 strike for an average premium of 76 cents apiece. TLB rose to its highest price in about one year when shares climbed to an intraday high of $11.37. However, investors long the November 12.5 strike calls will not profit unless shares rise 18% from the current price to breach the breakeven point at $13.26. We note that the stock has remained below the breakeven price of $13.26 since October 2, 2008.