Aetna, Inc. (AET) – A large-volume protective put play in the April contract on health benefits company, Aetna, Inc., caught our eye in the first half of the trading session. Aetna’s shares are trading 1.50% lower to $29.50 today and perhaps partly inspired the bearish put spread transacted on the stock. It looks like one investor purchased 20,000 in-the-money puts at the April $30 strike for an average premium of $2.16 apiece, spread against the sale of 20,000 puts at the lower April $20 strike for about $0.55 each. The spread cost the trader a net $1.61 per contract, thus providing downside protection should shares decline beneath the effective breakeven price of $28.39 ahead of April expiration. We note that the size of the transaction suggests the investor responsible for the trade is likely utilizing the spread to insure the value of a long underlying stock position through expiration in three months.
Exxon Mobil Corp. (XOM) – Shares of the largest company in the United States rallied more than 2.50% today to $66.14 after the Texas-based firm revealed a smaller-than-expected decline in fourth-quarter profits. XOM posted earnings of $1.27 per share in the fourth quarter, which exceeded average analyst estimates by about 8 pennies a share. Bullish options activity on Exxon Mobil in the January 2011 contract today seems to be a repeat performance of long-term optimistic trading we observed recently. A bull call spread was purchased by an investor positioning for a move up in XOM’s share price by expiration next January. The trader picked up 14,500 calls at the now in-the-money January 2011 $65 strike for a premium of $6.15 each, marked against the sale of 14,500 calls at the higher January 2011 $75 strike for approximately $2.35 apiece. The net cost of the spread amounts to $3.80 per contract. Maximum potential profits of $6.20 per contract accumulate for the trader if Exxon Mobil’s share price increases 13.40% over the current value to $75.00 by expiration day. Option implied volatility on the stock is down roughly 9% to 20.98% following earnings.
Louisiana-Pacific Corp. (LPX) – It looks like a couple of different options trading strategies were employed on the manufacturer of building products today. A large short straddle enacted in earlier trading suggests one individual expects decreased volatility in the price of the underlying going forward, while plain-vanilla call buying indicates bullish sentiment by another investor. Louisiana-Pacific’s shares are currently up more than 2% to $7.26. All notable options trading activity on LPX took place at the January 2011 $7.5 strike. One investor sold 10,000 calls at the January 2011 $7.5 strike for a premium of $1.25 each in combination with the sale of 10,000 in-the-money put options at the same strike for an average premium of $1.60 apiece. The gross premium pocketed by the straddle-seller amounts to $2.85 per contract. The investor keeps the full premium if LPX’s shares settle at $7.50 by expiration next January. As always, short straddle players are exposed to potentially devastating losses outside of the effective breakeven points, throughout the life of the option contracts. In this case, the trader experiences losses if shares of the underlying rally above the upper breakeven price of $10.35, or if shares decline beneath the lower breakeven point at $4.65 in the next eleven months. Finally, traders looking for further upside movement in the price of the underlying stock purchased 2,000 calls at the January 2011 $7.5 strike for a premium of $1.40 per contract. Investors long the calls stand ready to accrue profits if shares of LPX increase above the breakeven price of $8.90 ahead of expiration. Option volume of 22,055 contracts generated during the session exceeds total existing open interest on the stock of 17,297 lots.
Cisco Systems, Inc. (CSCO) – The manufacturer of switches and routers was upgraded to ‘buy’ from ‘hold’ at Signal Hill today and its share price improved 0.40% to $22.56. Perhaps still feeling sore from last week’s pullback in technology stocks, one investor initiated a put spread in the July contract today. The trader purchased 5,000 puts at the now in-the-money July $23 strike for a premium of $2.04 each, marked against the sale of 5,000 puts at the lower July $19 strike for $0.70 apiece. The net cost of the bearish spread amounts to $1.34 per contract. Therefore, downside protection provided by the transaction kicks in if Cisco’s shares fall back down through the breakeven price of $21.66 ahead of expiration in July.