Monday Options Update: CHK, XEL, OSK, LLL

Includes: CHK, LLL, OSK, XEL
by: Interactive Brokers

Chesapeake Energy Corp. (NYSE:CHK) – The news of Exxon’s bid for XTO this morning helped send shares at fellow oil and natural gas explorer, Chesapeake jumping 6.8% to $24.58. The fact that Exxon sees value at XTO helps spur other M&A enthusiasts into seeking out the next and perhaps imminent victim, which accounts for Monday’s interest at CHK. Option activists put 60,000 options contracts into play with a definite skew for bullish call options where almost four times the number of calls traded in comparison to put options. With oil prices fading fast last week, shares at Chesapeake fell to the lowest point in three months, leaving a swollen pocket full of 31,000 options to buy the stock at a fixed $25 before expiration this weekend, look painfully optimistic. That’s where investors targeted their efforts today as 12,740 calls traded hands at around 25 cents apiece in the hopes that the bullish updraft will continue. Elsewhere in the January expiration investors focused at the same strike but also got their optimism up leading them to pay an 18-cent premium for calls at the 29 strike.

Xcel Energy, Inc. (NYSE:XEL) – Shares of the energy company reached a new 52-week high today on a more than 0.5% rally to $21.55. Call activity in the January 2010 contract indicates investors expect shares to continue higher in the next month. Approximately 10,000 calls were purchased at the now in-the-money January 20 strike for an average premium of 1.70 apiece. Call-buyers profit if shares of Xcel Energy appreciate through the breakeven price of $21.70 by expiration in January. Option implied volatility on the stock contracted 29.52% down to a two-year low of 14.86%.

Oshkosh Corp. (NYSE:OSK) – It’s all well and good wining government procurement contracts, but it’s not much fun when your competitors stand up and claim they smell a rat. That’s precisely what BAE Systems and Navistar International did when they protested a $3 billion bid awarded to rival Oshkosh – the company that makes military trucks. Today the GAO announced in its review of the record that the Army’s evaluation of what Oshkosh was offering and its treatment of Navistar’s past performance didn’t meet standards they should, and so told the Army to look again. The potential loss of $3 billion in business sent its share price down by 14.4% by lunchtime to stand at $35.06 and spawned plenty of option activity. The soon-to-expire December contract attracted selling at what are now out-of-the-money strikes. Investors expecting a turnaround at the speed of a Sherman tank sold call options at the 40 and 45 strikes for 36 and 15 cents premiums and traded them in for put options at the 30 and 35 strikes for 29 cents and 1.25 respectively. However, as slow as a turnaround might be, investors determined that the selling wouldn’t penetrate the armor-plated support at the $30 strike price and they wrote put options some 3,600 times for average premiums of 81 cents. That line in the sand held at the start of November and sellers bear the risk of downside losses below a share price of $29.19 thanks to the premium they took in today. Options implied volatility remained constant at 55%.

L-3 Communications Holdings, Inc. (NYSE:LLL) – Bullish options activity on the defense company suggests shares may rally higher by expiration in January 2010. LLL’s shares rose 1.5% during the session to a new 52-week high of $84.82. One investor banked profits on a previously established long call position and reestablished a new bullish stance on the stock today. It appears the trader originally bought 7,500 calls at the January 85 strike for 1.37 apiece back on December 8, 2009. Today the investor sold the call options at that strike for 2.55 each in order to secure net profits of 1.18 per contract. The bullish investor next purchased a new chunk of 7,500 calls at the higher January 90 strike for 84 cents premium apiece. Profits on the new position accumulate if shares of L-3 Communications jump 7% over the current price to surpass the breakeven point at $90.84 by expiration.