Friday Options Update: T, DE, SIRI, JPM, FCX

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Includes: DE, FCX, JPM, SIRI, T
by: Interactive Brokers

AT&T, Inc. (NYSE:T) – Shares of the telecommunication services company are down 0.20% to $25.49 today, perhaps inspiring the long-term protective transaction employed in the January 2011 contract on the stock. One wary options trader, who is likely long shares of the underlying, purchased a put spread on AT&T. The investor bought 7,500 puts at the January 2011 $25 strike for a premium of $2.90 each, and sold 7,500 puts at the lower January 2011 $20 strike for an average premium of $1.05 apiece. The net cost of the transaction amounts to $1.85 per contract. Assuming the investor is in fact long shares of the stock, the spread serves to protect the value of the underlying position in case shares decline beneath the breakeven price of $23.15 ahead of expiration next January. We note that while the spread described appears to be a new trade, open interest levels at both strikes exceed put volume employed in the spread. Thus, it is possible the investor is closing out a previously established trade.

Deere & Co. (NYSE:DE) – Shares of agricultural equipment maker Deere & Co. are trading 1.80% higher to stand at $52.03 in the first half of the trading day. Notable options activity appeared in the January 2011 contract where one investor initiated a long-term protective play using put options. The trader established a put spread by purchasing 10,000 puts at the January 2011 $50 strike for a premium of $6.50 apiece, marked against the sale of the same number of puts at the lower January $40 strike for a $2.72 each. The net cost of the transaction amounts to $3.78 per contract. The responsible party is likely holding a long position in the underlying stock, thus buying the debit put spread to establish downside protection in case Deere’s share price declines beneath the effective breakeven point of $46.22 in the next year to expiration.

Sirius XM Radio, Inc. (NASDAQ:SIRI) – Subscription-based satellite radio company Sirius XM Radio attracted bullish call buyers to the February contract today. Plain-vanilla call buying is a continuation of similar activity observed during yesterday’s trading session. Sirius’s shares are trading 5.35% higher to $0.86 each as of 11:45 am ET. The stock is up nearly 41% since the first trading day of 2010 when shares stood at $0.61 apiece. Investors purchased at least 1,400 calls at the February $1.0 strike for an average premium of $0.05 per contract. Optimistic traders scooping up the call options profit if SIRI shares increase another 22% from the current price to exceed the value of the breakeven point at $1.05 by expiration next month. Option volume of 3,125 call contracts at the February $1.0 strike price exceeds existing open interest at that strike of 1,447 lots.

JPMorgan Chase & Co. (NYSE:JPM) – Long-term protective positioning on JPMorgan appeared in the January 2011 contract, although shares of the underlying stock are trading slightly higher by 0.30% to $39.60. The stock rebounded higher in earlier trading, reaching an intraday high of $39.68. A number of news sources reported the firm plans to unveil a global business, which will sell commercial banking services and loans to multinational companies. JPM will purportedly target rapidly growing economies such as China, India and Brazil with the unit. New endeavors aside, however, January 2011 contract options activity suggests one investor is building up downside protection on JPM to last throughout the year. The trader purchased 13,000 puts at the January 2011 $40 strike for a premium of $5.90 apiece, and sold the same number of puts at the lower January 2011 $30 strike for about $2.15 each. The put spread cost a net $3.75 per contract. The investor is most likely utilizing the puts to protect the value of an underlying stock position, and if this is the case, is insured against losses to the downside should JPMorgan’s shares decline beneath the effective breakeven price of $36.25 in the next year to expiration.

Freeport-McMoRan Copper & Gold, Inc. (NYSE:FCX) – Shares of the metals and mining company rallied earlier in the session up to $71.06, but are currently trading flat at around $68.80 each by 12:08 pm ET. In line with the earlier rebound in share price, a bullish options trader employed the use of a call spread to position for resurgence in the value of the underlying stock by expiration in March. The investor purchased 9,000 calls at the March $75 strike for a premium of $3.20 apiece, and sold the same number of calls at the higher March $85 strike for approximately $0.83 each. The spread cost the investor a net $2.37 per contract. With the bullish strategy in place, the trader stands ready to accumulate maximum potential profits of $7.63 per contract if FCX shares surge to $85.00 by expiration day. Shares must trade 23.5% higher than the current price in order to reach the $85.00-level or point at which the trader enjoys maximum available benefits. A more modest, but still significant, rally of 12.45% is required for the investor to breakeven on the transaction at a share price of $77.37.