Monday Options Brief: RCL, NOC, PMI & NFLX

 |  Includes: NFLX, NOC, PMIR, RCL
by: Interactive Brokers

Royal Caribbean Cruises Ltd. (NYSE:RCL) Investors trading options on cruise operator, Royal Caribbean Cruises, today honed in on put contracts in the June and September contracts. It looks like the large-volume put transactions observed today are the work of traders rolling up protective stances on RCL to hedge long underlying stock positions through the next several months. RCL shares are currently trading 3.1% higher on the day, securing a new 52-week high of $37.36. One trader appears to have sold 20,000 puts at the June $25 strike for a premium of $0.10 per contract in order to purchase the same number of contracts at the higher June $33 strike for $1.05 apiece. Existing open interest of roughly 21,000 contracts at the June $25 strike price indicate the trader may have initially purchased the put contracts back on March 5, 2010, perhaps as part of a delta neutral trade tied to RCL stock. The rolling up of the protective put options in this case costs the investor a net premium of $0.95 per contract. Downside protection kicks in should shares of the underlying stock fall 14.2% to breach the effective breakeven point to the downside at $32.05 ahead of June expiration. A similar trade was seen in the September contract where an investor paid an average net premium of $1.49 per contract, selling 15,000 puts at the September $23 strike price, and buying the same number of puts at the higher September $32 strike. Options implied volatility on Royal Caribbean is up 5.3% to 43.69% as of 12:40 pm (NYSE:ET).

Northrop Grumman Corp. (NYSE:NOC)Shares of the provider of technologically advanced, innovative products, services, and integrated solutions in information and services, aerospace, electronics and shipbuilding to clients around the world, are up slightly by 0.10% as of 12:15 pm (ET) to stand at $69.05, which is just two pennies shy of the stock’s current 52-week high of $69.07. The familiar pattern of a debit call spread transacted on Northrop Grumman in the first half of the trading session indicates one options player is anticipating a significant rally in the price of the underlying shares by November expiration. The bullish trader purchased 7,000 calls at the November $70 strike for a premium of $3.80 per contract, and sold the same number of calls at the higher November $80 strike for $0.80 each. Net premium paid for the spread amounts to $3.00 per contract. Therefore, the investor stands ready to accrue maximum potential profits of $7.00 per contract should NOC shares surge 15.85% over the current price to surpass $80.00 by expiration day. The call-spreader starts to make money as long as Northrop Grumman’s shares rally at least 5.7% to exceed the effective breakeven point on the spread at $73.00 by expiration.

PMI Group, Inc. (PMI) Shares of the mortgage insurer have recovered somewhat since plummeting 10.7% at the start of the trading day to an intraday low of $5.92. PMI’s shares are currently trading 4.5% lower on the day at $6.33 each as of 12:45 pm (ET). PMI Group’s shares slipped after the firm announced plans to offer common stock and convertible senior notes, news that followed PMI’s first-quarter report of a loss of $1.64 per share, which is more than twice the $0.82 per share deficit forecast by analysts polled by Bloomberg. Option trading on the stock, however, was not completely dominated by bearish players despite the earnings disappointment. One investor’s December contract put transaction implies an all out collapse for the mortgage insurer is unlikely in the remaining months of 2010. The trader sold 10,000 put options at the December $2.5 strike for an average premium of $0.225 apiece. The full premium pocketed on the put sale is safe in the investor’s piggy bank as long as PMI’s shares trade above $2.50 through expiration day in December. Naked put selling in this case indicates the trader is happy to have shares of the underlying stock put to him at an effective price of $2.275 each in the event that the put contracts land in-the-money at expiration. Some bearish investors made their mark in the June contract by purchasing 2,500 puts at the June $5.0 strike for an average premium of $0.42 per contract. Put-buyers make money if PMI’s shares fall more than 27% to breach the average breakeven price on the puts at $4.58 ahead of June expiration.

Netflix, Inc. (NASDAQ:NFLX) Shares of the DVD rental-by-mail services provider surged 10% during the first half of the trading session to an intraday- and new 52-week high of $109.70. The rapid share price appreciation experienced thus far today inspired bullish options trading activity on the stock. Investors anticipating continued upward movement in the NFLX’s share price purchased at least 1,400 calls at the May $110 strike for an average premium of $3.20 apiece. Buying interest spread to the higher May $115 strike where approximately 1,000 call contracts were coveted for an average premium of $2.03 each. Higher-strike call buyers are prepared to make money should Netflix shares increase another 6.7% to exceed the average breakeven price of $117.03 ahead of May expiration day. Options implied volatility is 31.5% higher to 49.83% as of 1:05 pm (ET).