Monday Options Update: WYN, TBT, BAC, PCS & DE

Wyndham Worldwide Corp. (WYN) – A buy-write strategy initiated in the November contract this morning indicates near-term bullish sentiment on the hospitality company despite the 1.25% decline in shares today to $16.98. It appears the investor responsible for the trade established the covered call by selling approximately 11,000 calls at the November 17.5 strike for 1.23 apiece while simultaneously purchasing an equivalent number of shares of the underlying stock. The trader effectively reduced the cost of buying WYN shares from $16.98 to approximately $15.75 by selling the call options. If shares of Wyndham rally above $17.50 by expiration the investor will have the underlying shares called away. Should this scenario play out, the trader will walk away with profits of about 1.75 per contract, or gains of 11% on the rally in shares to $17.50.

ProShares Ultrashort Lehman 20+ Year Bond ETF (TBT) – It’s been over a month since treasury yields were last above 3.5% at the 10-year area of the yield curve. That means that shares in TBT have been lackluster given the inverse relationship between the yield on government bonds and the price of shares of the exchange traded fund. Today its share price is up, but given back earlier in the day gains to $48.06 and currently stands at $47.15. Option traders added to an outstanding reading of open interest of 8,847 contracts at the November expiration 50 strike calls, which augurs badly for yields into expiration next month. Bond investors are fixated with two negatives today. The market is preparing for a rebound in third quarter U.S. GDP later this week. Second, a Wall Street Journal article expects FOMC members to address the need to raise interest rates rather than leave the pause in monetary policy open-ended. The talk of interest rate increases itself is enough to send bond prices down ahead of next week’s meeting. Some 11,000 calls were traded at the November 50 strike making up around one quarter of today’s volume.

Bank of America (BAC) – January put options at the 14 strike were in significant demand right after the opening bell on Monday as investors bought 22,700 contracts within the first 15 minutes of trading. A premium of 64 cents secured one order for 16,000 contract at the time. Shares in the banker slipped almost 6% by noon to stand at $15.25 and pushing up the protective put premiums to 88 cents during the morning. A mid-morning turnaround in financial share prices turned the equity benchmark indices negative after a promising start. As we conclude this lunch-time round-up we note a block of 20,000 January calls spreads at the 16/17 strikes in BAC bought for a net 50 cents. The same spread on Friday was available at a net premium of 66 cents.

MetroPCS Communications, Inc. (PCS) – Shares of MetroPCS are up less than 0.5% to $6.66 today, but bullish options activity in the May contract suggests investors expect more significant gains in the stock by expiration. Investors taking an optimistic stance on PCS purchased approximately 18,500 call options at the May 10 strike for an average premium of 60 cents apiece. The plain-vanilla call-buying at this strike indicates traders hope to see shares rally about 59% from the current price to the breakeven point at $10.60 by expiration in May. Perhaps investors are positioning for the potential surge in shares that is likely to occur if PCS is acquired by larger rival firms.

Deere & Co. (DE) – The manufacturer of agricultural equipment and commercial vehicles attracted bullish option traders to invest in out-of-the-money call options. Shares of DE are trading approximately 1% higher to stand at $48.44. Near-term optimists picked up about 3,200 calls at the November 55 strike for an average premium of 29 cents each. Traders holding these contracts may accrue profits ahead of expiration next month if shares rally at least 14% to surpass the breakeven price of $55.29. Bullish sentiment spread to the December 55 strike where 4,100 calls were purchased for about 95 cents apiece. A 15.5% rally in the stock by December’s expiration will ensure call-buyers breakeven at a share price of $55.95. We note that for any of the call-buying investors to profit the stock must explode through the current 52-week high of $49.68 attained on October 21, 2009. Shares of DE last traded above $55.00 on September 26, 2008.