Friday Options Midday Update: BBY, DECK, LEN, AA, ESRX, JDSU, UNH

 |  Includes: AA, BBY, DECK, ESRX, LEN, UNH, VIAV
by: Interactive Brokers

Best Buy Co., Inc. (NYSE:BBY) – A three-legged bullish options combination took place on the retailer of consumer electronics today. The transaction was likely enacted by an investor expecting significant share price appreciation by expiration in April. Best Buy’s shares were up earlier in the session, but are down 0.50% to $36.69 as of midday on the East Coast. Perhaps shares rallied in morning trading because the firm was initiated as a new ‘buy’ with a 12-month target share price of $45.00 at BB&T Capital Markets today. The optimistic combo-trader appears to have sold put options in order to partially finance the purchase of a ratio call spread. The investor purchased 4,000 calls at the April $37 strike for a premium of $1.32 apiece and sold 8,000 calls at the higher April $40 strike for an average premium of $0.37 each. Finally, the trader sold 4,000 puts for a premium of $0.65 apiece at the April $34 strike. The transaction results in a net credit of $0.07 per contract to the investor, which he keeps if shares of the underlying stock trade above $34.00 through April expiration. Additional profits accumulate if Best Buy’s shares rally above $37.00. Maximum potential profits of $3.07 per contract, including the credit received today, are available to the trader if shares jump 9% from the current price to $40.00 by expiration day.

Deckers Outdoors Corp. (NASDAQ:DECK) – Friday’s GDP report revealed some degree of spending on the part of the consumer and weighed on share prices at several retailers today. However, a positive earnings report from Deckers, the maker of Ugg boots, caught sleepy investors on the hop and created demand for its share, which were last up by 12% at $118.80. Options activity appears to underscore today’s bullish movement judging by the volume in the March contract where the timing of two trades suggests an investor anticipates shares to remain above $115 during the approaching three weeks. The investor appeared to sell around 1,000 put options at the $115 strike at $3.40 and paid $1.80 for 1,600 puts at the $110 strike. The structure of the trade generates a credit to this bullish investor who stands ready to take delivery of shares should they decline to $115 by the time the options expire next month. However, the sale of the lower strike limits the risk on the trade in the meantime by allowing him to draw a line under losses at that point. Option implied volatility slumped in the aftermath of earnings from 46% to 33%.

Lennar Corp. (NYSE:LEN) – Miami, FL-based homebuilding company, Lennar Corp., received a new rating of ‘buy’ with a 12-month share price target of $21.00 at Ticonderoga Securities yesterday. Today shares are up slightly by about 0.25% to $16.31 as of 12:30 pm ET. Bullish traders dominated options activity on the stock during the current session. The most popular strategy employed on the home construction company was plain-vanilla put selling. It looks like roughly 7,000 puts were shed at the May $15 strike for an average premium of $0.95 apiece. Put-sellers at the May $15 strike expect shares of the underlying stock to trade above $15.00 through May expiration. If this occurs, they keep the full $0.95 premium received today. Bullish sentiment spread to the August $14 strike where 20,000 put options were sold for an average premium of $1.16 each. Investors short the puts are prepared to have shares put to them at $14.00 should the put options land in-the-money at expiration. However, put selling indicates option traders expect to keep the $1.16 premium per contract because they are optimistic that Lennar’s shares will trade above $14.00 through expiration day in August.

Alcoa, Inc. (NYSE:AA) – Optimistic investors picked up call options on the aluminum maker today despite the slight 0.15% decline in the price of the underlying shares to $13.29. It looks like approximately 28,900 calls were purchased at the July $15 strike for an average premium of $0.74 per contract. The investor or investors responsible for call buying action stand ready to amass profits if Alcoa’s shares rally at least 18% from the current value of the stock to surpass the breakeven point at $15.74 by expiration day in July. Shares last traded above $15.74 on January 14, 2010, when the stock closed at $15.81 and touched an intraday high of $16.10 each.

Express Scripts, Inc. (NASDAQ:ESRX) – One investor engaged in profit-taking activity on the provider of pharmacy benefit management services in the first hour of the trading day. The Express Scripts-bull originally sold approximately 12,000 puts short at March $75 strike for an average premium of $0.81 apiece back on January 20, 2010, when shares of the underlying stock were trading at $88.52. ESRX shares are currently trading up 0.60% to $95.78, adding to yesterday’s sharp 8.5% rally to $95.23. Express Scripts’ shares jumped during the previous session after reporting better-than-expected fourth-quarter profits. Analysts at UBS maintained their ‘buy’ rating on the stock and upped their price target for ESRX to $104.00 from $96.00. Recent gains in the value of ESRX shares allowed the put-seller to buy back the short position at a profit. Today the investor purchased-to-close the 12,000 puts at the March $75 strike for just $0.10 each. Thus, net profits for the trader amount to an average of $0.71 per contract for a rough total of $852,000.

JDS Uniphase Corp. (JDSU) – Call options on the maker of telecommunications equipment are in high demand this morning with shares of the underlying stock trading up 2.85% to a new 52-week high of $10.55. Bullish investors purchased 8,800 calls at the March $11 strike for an average premium of $0.25 per contract. Call-buyers are positioned to accumulate profits ahead of expiration next month if JDSU’s shares trade above the breakeven point at $11.25. The increase in investor demand for option contracts on the stock lifted options implied volatility approximately 13.1% to 45.41% in the first hour of the trading session.

UnitedHealth Group, Inc. (NYSE:UNH) – Option traders scooped up near-term downside protection on the provider of health care services to lock in the current 2.40% rally in shares of the underlying stock to $34.35 this morning. Investors picked up roughly 4,400 puts at the March $34 strike for a premium of $1.07 apiece. These put contracts yield protection to investors holding UNH shares in case the value of the stock declines ahead of March expiration. Downside protection kicks in if UnitedHealth’s share price slips beneath the effective breakeven point at $32.93.