Wednesday Options Update: BRK.B, X, QCOM, MCO & APC

 |  Includes: APC, BRK.B, MCO, QCOM, X
by: Interactive Brokers

Berkshire Hathaway Inc. (NYSE:BRK.B) – Warren Buffett’s insurance and investment company’s shares jumped more than 7.5% to open the trading session at $73.28 after it was selected to join the Standard & Poor’s 500 Index. Shares tapered off slightly by the middle of the day to stand up a lesser 4.5% to $71.07. Bullish options trading took place in the September contract where 5,000 put options were sold at the September $64 strike for a premium of $2.55 apiece. Investors selling the put options keep the full $2.55 per contract received today as long as the underlying share price remains greater than $64.00 through expiration in eight months time. Several years ago Buffet employed the same type of strategy by effectively writing very long-dated put options to willing corporations agreeing to buy shares of S&P 500 components at expiration, possibly long after his own death. Little did he know at that time that Berkshire Hathaway would one day figure in the index.

United States Steel Corp. (NYSE:X) – Shares continue to hemorrhage at Pittsburgh, PA-based steel producer, United States Steel Corp., today and received another blow in the form of a downgrade to ‘neutral’ from ‘buy’ with a target share price of $55.00 at Goldman Sachs Group. The value of the underlying stock has fallen 18.20% thus far this week to a low of $46.61, which represents just a portion of the total 42% erosion in shares since January 11, 2010, when shares touched a high for the new year of $66.20. Some option traders reacted by initiating bearish plays on the stock, but it looks like one trader has taken a contrarian stance, as well. Pessimists meandered about the February contract buying put options as low as the February $40 strike where at least 2,000 lots were purchased for an average premium of $0.56 apiece. Other bears shed out-of-the-money call options. Roughly 1,300 calls were sold at the February $48 strike for a premium of $2.30 each, while 2,400 calls were let go at the higher February $50 strike for about $1.62 apiece. Call-sellers keep the premium received if the call options land at- or out-of-the-money at expiration. More interesting, however, is the large contrarian trade transacted in the February contract. It looks like one investor purchased 20,000 married put options at the February $45 strike for $2.00 apiece. A trade such as this implies the investor purchased an equivalent number of underlying shares in combination with put options, which serve as downside protection on the value of the underlying position through expiration in February. The undertaking of a long stock position suggests the trader is expecting U.S. Steel Corp’s shares to rebound at some point. The decision to get long the shares today could mean the trader believes the stock is nearing a low point. The put options protect the investor in case shares decline another 7.75% – from the low of $46.61 – and breach the breakeven price of $43.00 ahead of February expiration.

Qualcomm, Inc. (NASDAQ:QCOM) – Telecommunications equipment manufacturer, Qualcomm, is scheduled to release results for the first quarter following the closing bell this afternoon. Shares are down 0.50% to $46.65 and implied volatility is higher by about 6% to 31.04% ahead of the report. Option traders established protective stances using put options in the March contract, perhaps to hedge against the possibility of an earnings disappointment from the firm. Plain-vanilla put buying took place at the March $42 strike where 1,700 contracts were picked up for an average premium of $0.72 apiece. Another bearish strategy employed today was a ratio put spread. One trader appears to have purchased 5,000 puts at the now in-the-money March $47 strike for a premium of $2.25 each, marked against the sale of 10,000 puts at the lower March $43 strike for a premium of $0.90 apiece. The net cost of the transaction amounts to $0.45 per contract and yields downside protection beneath the effective breakeven price of $46.55 through March expiration. Qualcomm’s management provided quarter one earnings guidance of $0.54 to $0.58 per share during their previous earnings call.

Moody’s Corp. (NYSE:MCO) – Options implied volatility rose at the rating agency today following the dismissal of a lawsuit that gets Moody’s and fellow agencies off the hook for losses incurred by investors in mortgage backed securities. Moody’s shares’ rose to a six-month high at $29.18 before easing to $28.63, still leaving it with a lunchtime gain of 7.5% for the session. Volatility surrounding its options rose by about 10% to 44% as investors tried to figure out where its share price might go next. Options trading was mixed although it appears that in-the-money call volume at the February $27 strike might be the work of a seller closing an established position. The volume of calls traded at that strike surpassed 2,000 lots where the premium stood at $2.30 and 142% higher than yesterday. Call buyers expressing greater ambitions for Moody’s prospects established fresh bullish positions at the same expiration contract at the $30 strike price. Put volume was not absent, however, with notable volume at both February and March $28 strike puts along with volume of around 1,300 lots at the February $26 strike where the number of contracts exceeded an open interest reading of just above 1,000 lots.

Anadarko Petroleum Corp. (NYSE:APC) – Bloomberg reported earlier that Anadarko Petroleum, “declared a major oil discovery […] in the Gulf of Mexico”, which likely spurred the 1.25% rally in shares of the Texas-based firm to $64.71. APC’s shares opened the session higher at $65.94 on the news. Option traders reacted by purchasing 2,500 put options at the March $60 strike for a premium of $1.74 apiece. Put buyers are likely long the stock and securing downside protection to lock in recent gains in the underlying. Alternatively, put purchasers may hold no stock position. In such a case they are merely initiating bearish bets that the stock is set to fall sharply ahead of expiration in March.