Tuesday Options Update: SU, RL, GIGM & FCX

 |  Includes: FCX, GIGM, RL, SU
by: Interactive Brokers

Suncor Energy, Inc. (NYSE:SU) – Shares of Canada’s largest oil company are trading 2.75% lower to $31.84 today after the firm posted fourth-quarter profits of $0.21 per share, which came in below average analyst expectations of $0.39 a share. Investors enacted interesting options trades in the near-term February contract. Traders expecting Suncor’s shares to rebound ahead of expiration day sold straddles at the February $33 strike. It looks like 1,000 calls were sold at the February $33 strike for a premium of $0.46 each, in combination with the sale of 1,000 in-the-money puts at the same strike for $1.73 apiece. Straddle-sellers pocket a gross premium of $2.19 per contract on the trade, and keep the full premium if shares settle at $33.00 by February expiration. Investors short the straddle are exposed to losses, however, should shares swing above the upper breakeven price of $35.19, or if the stock falls below the lower breakeven point at $30.81 ahead of expiration day. Option implied volatility decreased by 8% post-earnings.

Polo Ralph Lauren Corp. (NYSE:RL) – – American athletes kicked off the opening ceremony for this year’s Winter Olympics in Vancouver decked out in stylish, yet patriotic, Ralph Lauren attire. The fashion company’s shares enjoyed a 2.20% move higher to $84.98 today, perhaps motivating the protective options transaction observed in the March contract. A ratio put spread was employed on RL today by an investor who is likely looking to protect recent gains in the value of the underlying stock. The trader purchased 2,000 puts at the in-the-money March $85 strike for a premium of $4.40 apiece, spread against the sale of 4,000 puts at the lower March $80 strike for $2.35 each. The investor pockets a net credit of $0.30 per contract on the trade, which he keeps in the event shares remain above the lower $80.00 strike at expiration. Below the upper $85.00 strike, the long leg of the put combination yields penny-for-penny profits to a maximum of $5.00. Erosion of those gains starts below $80.00. The 6,000 option contracts employed in the spread comprise nearly 25% of the stock’s total existing open interest of 24,552 lots. The trader benefits from a move higher in the price of the underlying, but is also protected in case shares shift lower in the next couple of months.

GigaMedia Limited (NASDAQ:GIGM) – Entertainment software development company, GigaMedia Limited, attracted a barrage of bullish options players today with shares up 6.90% at times during the session to an intraday high of $2.94. Investors positioning for continued upward momentum in the value of the underlying stock purchased more than 12,400 calls at the now in-the-money July $2.5 strike for an average premium of $0.68 per contract. GIGM call buyers stand ready to accumulate profits if shares rally 8.15% above the day’s high of $2.94 to surpass the average breakeven price of $3.18 by expiration day in July. Options investors exchanged 29,500 contracts on GigaMedia by noontime on the East Coast, which represent 53.50% of the stock’s total existing open interest of 55,057 lots. The sharp surge in demand for options on GIGM lifted options implied volatility 26.15% to 72.03%.

Freeport-McMoRan Copper & Gold, Inc. (NYSE:FCX) – Mining firm, Freeport-McMoRan, received a ‘buy’ recommendation with a target share price of $95.00 at Citigroup today. FCX shares are up 0.85% to $72.18 as of 12:15 pm (EDT). Despite the ‘buy’ rating options traders continue to utilize cautious strategies on the stock. Perhaps bearish sentiment pervades because the recent nose-dive in the price of the underlying remains fresh in investors’ minds. Plain-vanilla put buying took place at the March $70 strike where roughly 10,500 contracts were purchased for an average premium of $3.83 apiece. Put volume at the March $70 strike exceeds 17,600 lots, which trumps the existing open interest level at that strike of 6,996 contracts. Put buyers might be positioning to accrue profits to the downside should Freeport’s share price drop ahead of expiration. In such a scenario, traders start to see profits if shares trade beneath the effective breakeven price of $66.17. Investors might also be motivated to buy the put options if they are holding long positions in the underlying stock. In this case, put purchasers are building up downside protection to hedge against further declines in the price of FCX shares.