Wednesday Options Brief: YHOO, SMH, LINTA, VALE, POT, LEN & RRGB

by: Interactive Brokers

Yahoo!, Inc. (NASDAQ:YHOO)Shares of the online media company are trading 0.05% lower at mid-session to $18.17, which is a scant $0.13 off the stock’s new 52-week high of $18.30 attained during the previous trading day. One big options player dabbled in both calls and puts in the July contract, taking profits on previously established positions, and finally initiating a fresh bullish stance on the stock. It looks like the trader originally put on a bullish spread wherein he sold approximately 17,500 puts at the July $15 strike for $0.50 each in order to buy the same number of calls at the higher July $17 strike for $0.55 per contract. The net cost of the original transaction was $0.05 per contract, but unraveling the trade today resulted in significant profits. The investor bought back the short puts for just $0.20 apiece today and sold the now deep in-the-money calls for a premium of $1.79 each, thus pocketing net profits of $1.54 per contract. The bullish trader next purchased roughly 17,500 fresh call options at the higher July $19 strike for an average premium of $0.78 per contract in order to position for continued upward momentum in the price of the underlying shares through July expiration. Profits accumulate on the new call position if Yahoo’s shares rally above the average breakeven point on the calls at $19.78 by expiration day.

Semiconductor HOLDRS Trust (NYSEARCA:SMH) Shares of the Semiconductor HOLDRS Trust, which issues depository receipts that represent ownership in the U.S.-traded common stock of firms that develop, manufacture and market semiconductors, jumped 3.45% in the first half of the trading session to secure a new 52-week high of $29.98. The SMH’s shares are up perhaps on tech-sector strength following better-than-expected first-quarter earnings from chip-giant, Intel Corp. Options players populating the Semiconductor HOLDRS today displayed mixed sentiment on the fund in the August contract. Some investors established bearish positions by purchasing 3,700 puts at the August $29 strike for an average premium of $1.50 apiece, and then selling the same number of puts at the lower August $24 strike for $0.33 each. The put activity here suggests traders are prepared in case shares of the underlying slip ahead of August expiration. Conversely, optimistic players purchased 5,000 calls at the August $35 strike for a premium of $0.20 each. Call-buyers at this strike price make money if shares surge 17.4% over the current value of the stock to surpass the effective breakeven point on the calls at $35.20 by expiration day in August.

Liberty Media Corp. (LINTA)Options activity on the broadcasting and entertainment company implies one investor anticipates significant appreciation in the price of LINTA’s underlying shares by October expiration. Liberty Media’s shares are up 0.75% to $16.50 as of 12:15 pm (NYSE:ET). The optimistic options player initiated a short straddle play by shedding 3,700 calls at the October $17.5 strike for a premium of $1.05 each, in combination with the sale of 3,700 in-the-money puts at the same strike for $1.95 apiece. Gross premium pocketed on the transaction amounts to $3.00 per contract. The investor keeps the full amount of premium received today if LINTA’s shares rally 6% over the current price to settle at $17.50 at expiration. The nature of the short straddle strategy is such that reductions in implied volatility on the stock are also beneficial for the investor. This is because falling options implied volatility drags down premium on both call and put options, which may allow the trader to buy back the short straddle for less than the gross premium received today, and thus exit the position with a portion of available profits.

Vale S.A. (NYSE:VALE) The Brazilian metals and mining company’s shares are up 1.2% today, trading at a new 52-week high of $34.38. Some options investors, however, are engaging near-term bearish transactions on the stock. Pessimistic individuals anticipating a pullback in the price of the underlying shares by expiration day next month purchased approximately 9,000 put options at the May $30 strike for an average premium of $0.32 apiece. Put-buyers make money if Vale’s shares slip beneath the effective breakeven share price of $29.68 ahead of May expiration. We note that the buying interest in put options at this strike may be the work of traders holding long underlying stock positions, which indicates cautious behavior rather than outright bearish bets that shares are set to decline in the next few weeks.

Potash Corporation of Saskatchewan, Inc. (NYSE:POT)Shares of the fertilizer and feed products firm are down 3.10% to $108.74 this morning after analysts at Goldman Sachs Group slashed their rating on POT to ‘neutral’, removing the stock from their Conviction Buy List, and lowered their 12-month target share price on Potash to $123.69 from $131.00. One long-term bearish options player reacted to the ratings downgrade on the potash producer by purchasing put options in the September contract. The investor picked up 4,700 puts at the September $100 strike for an average premium of $6.60 apiece. POT’s share price must plummet 14.1% from the current price of $108.74 in order for the pessimistic player to make money beneath the effective breakeven share price of $93.40. Potash Corp.’s shares last traded below $93.40 back on November 3, 2009, when the stock reached an intraday low of $90.46.

Lennar Corp. (NYSE:LEN) Call options on the homebuilding company are in high demand this morning with shares of Lennar Corp. trading higher by 4.75% to $18.10 as of 10:45 am (ET). Near-term bullish investors coveted 4,200 now in-the-money call contracts at the April $18 strike for an average premium of $0.20 apiece. Optimistic individuals long the calls stand prepared to profit if Lennar’s shares rally through the average breakeven share price of $18.20 ahead of expiration day on Friday. Bullish sentiment spread to the higher May $19 strike where 2,900 call options were picked up for an average premium of $0.45 per contract. Lennar’s shares must increase at least 7.45% over the current value of $18.10 in order for investors to make money above the average breakeven share price of $19.45. Finally, uber-bullish individuals purchased 1,300 calls at the May $20 strike for an average premium of $0.25 each. Investors long the May $20 strike calls profit if the homebuilding firm’s shares rally 11.9% to exceed the breakeven point on the calls at $20.25 by May expiration day. The surge in demand for call options on Lennar Corp. boosted the stock’s overall reading of options implied volatility 9.8% to 45.89% in the early hours of the trading session.

Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB)An upgrade to ‘buy’ from ‘sell’ with a 12-month target share price of $33.00 at Sterne, Agee & Lynch this week perhaps helped boost the price per share of the casual dining restaurant chain 4.6% this morning to an intraday high of $28.48. Bullish investors skipped the all-you-can-eat steak fries this morning and went straight for call options in the June contract. Optimistic options players seized some 7,000 calls at the June $30 strike for a premium of $1.10 apiece. It looks like one trader may be banking profits by selling 2,000 in-the-money calls at the June $25 strike for an average premium of $3.55 each in order to purchase the higher June $30 strike call options. Rolling up to a higher strike price in this case positions the investor to profit should RRGB experience continued bullish movement in the price of its underlying shares through June expiration. Options implied volatility on the gourmet burger maker is up 5.4% to 40.22% as of 11:10 am (ET).