Seeking Alpha
Profile| Send Message|
( followers)  

Quicksilver Resources, Inc. (NYSE:KWK) – The independent oil and natural gas company’s shares recovered late in the session, adding 0.50% to stand at $12.18 as of 3:07 pm (ET), after commencing the trading day in the red by 0.30% to touch an intraday low of $11.75. Options investors all but ignored Quicksilver until this afternoon when both puts and calls in the July contract started to change hands. Roughly 10,000 puts were exchanged at the July $11 strike for an average premium of $0.44 apiece. Simultaneously, investors traded about the same number of calls at the higher July $13 strike for an average premium of $0.79 each. It looks like some options strategists populating KWK are selling strangles on the stock because they expect shares to trade within a specified range through expiration. Strangle-sellers pocket an average gross premium of $1.23 per contract, and keep the full amount received as long Quicksilver’s shares trade within the $11.00 to $13.00 range through expiration day. Investors short the strangle face losses should shares rally above the upper breakeven price of $14.23, or if shares slip beneath the lower breakeven point at $9.77 ahead of expiration. Other options strategists may be utilizing the same strike prices in the July contract to enact bullish risk reversals. Investors employing the risk reversal likely sold the July $11 strike puts in order to offset the cost of buying the July $13 strike calls. Average net premium paid for the transaction amounts to $0.35 per contract and positions traders to make money as long as Quicksilver’s shares rally 9.60% to exceed the average breakeven price of $13.35 by October expiration.

Mediacom Communications Corp. (NASDAQ:MCCC) – Shares of the firm engaged in the development of cable systems serving smaller U.S. cities are flat on the day at $6.28 in late afternoon trading. MCCC popped onto our ‘hot by options volume’ market scanner earlier in the session after one options investor exchanged a chunk of 4,000 calls on the stock in the October contract. The calls traded to the middle of the market at the October $7.5 strike for a premium of $0.25 apiece. The investor may be buying the contracts, in which case he is bullish on Mediacom and expects shares to rally sharply ahead of expiration in five months time. A long call stance in this case prepares the trader to make money as long as shares of the underlying stock jump 23.4% from the current price to surpass the effective breakeven price of $7.75 by October expiration. However, if the calls were sold rather than purchased, the investor pockets the $0.25 premium and keeps the full amount received as long as Mediacom’s shares do not rally above $7.50 by expiration day. MCCC’s previously existing overall open interest reading is a paltry 868 contracts. Thus, if the investor maintains the position overnight, we would expect to see overall open interest on the stock jump to more than 4.6 times the current level. The spike in options activity on Mediacom Communications Corp. bumped up the overall reading of options implied volatility 16.2% to 47.60% as of 3:00 pm (ET).

iShares MSCI Brazil Index ETF (NYSEARCA:EWZ) – A three-legged options combination strategy implemented on the iShares MSCI Brazil Index Fund today implies one investor is taking a long-term bearish stance on the ETF. Shares of the EWZ, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of publicly traded securities in the aggregate in the Brazilian market, declined 2.30% to $62.66 just before 12:45 pm (ET). It appears the pessimistic player sold call options in order to offset the cost of buying a plain-vanilla debit put spread in the December contract. The investor purchased 10,000 now in-the-money puts at the December $63 strike for an average premium of $7.77 apiece, and sold the same number of puts at the lower December $53 strike for an average premium of $3.97 each. Finally, the third leg of the trade involved the sale of 10,000 calls at the December $73 strike for a premium of $3.00 a-pop. The net cost of establishing the pessimistic play is reduced to just $0.80 per contract. Thus, the investor is positioned to amass maximum potential profits of $9.20 per contract if shares of the EWZ plummet 15.4% from the current price of $62.66 to breach the $53.00-level by expiration in December. The trader starts to make money as long as shares trade below the average breakeven point to the downside at $62.20 by expiration. The short sale of the calls provide added financing for the investor, but also expose him to potentially devastating losses in the event that shares of the fund rebound sharply in the next several months. Losses accumulate if shares of the EWZ rally above $73.00 ahead of expiration day. The parameters of the trade and the risks involved in holding such a position suggest perhaps that the investor responsible for the transaction is long shares of the underlying stock. This would indicate the combo-play serves as immediate downside protection in a volatile market and suggests the investor is happy to have the shares called away at $73.00 each should the calls land in-the-money at expiration, which the trader apparently does not think is a likely outcome.

Norfolk Southern Corp. (NYSE:NSC) – Shares of the firm engaged in the rail transportation of raw materials, intermediate products as well as finished goods in the United States slumped 4.30% lower in afternoon trading to stand at $54.36 as of 12:35 pm (ET). The decline in the price of the underlying shares inspired near-term bearish options activity on the stock. Investors wary of continued share price erosion ahead of June expiration purchased 5,100 puts at the now in-the-money June $55 strike for a premium of $1.65 per contract. Put-buyers make money if Norfolk’s shares decline another 1.85% from the current price of $54.36 to breach the effective breakeven point to the downside at $53.35 by June expiration day. Options implied volatility on the stock is soaring 17.3% higher this afternoon to stand at 38.67% by 12:40 pm (ET).

Health Net, Inc. (NYSE:HNT) – Bullish call buying commenced on the provider of managed health care services today with shares of the underlying stock trading 1.75% higher to $26.20 as of 12:30 pm (ET). Earlier shares rallied nearly 3.4% to touch an intraday high of $26.62, which is a scant $0.11 below Health Net’s current 52-week high of $26.73 attained back on January 20, 2010. Investors expecting shares to continue higher and reach a new 52-week high ahead of expiration day this month picked up approximately 1,300 calls at the June $27.5 strike for an average premium of $0.31 apiece. Call-buyers make money if Health Net’s shares surge 4.5% to surpass the average breakeven price of $27.81 by June expiration.

iShares EAFE Index ETF (NYSEARCA:EFA) – A large-volume bearish put play on the EFA, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the MSCI EAFE Index – an index that includes stocks from Europe, Australasia and the Far East, indicates one big options investor is bracing for continued erosion in the price of the underlying fund through July expiration. Shares of the ETF are currently down 3.30% to stand at $47.36 as of 12:20 pm (ET). It looks like one trader purchased 25,000 puts at the July $43 strike for a premium of $1.09 per contract. The massive size of the put purchase suggests perhaps that the trader responsible is long the stock and securing downside protection in case shares of the EFA do decline significantly by expiration next month. In such a scenario, shares of the fund must fall 11.50% from the current price to breach the effective breakeven point on the puts at $41.91 before downside protection to kicks in. Options implied volatility on the EFA is up 8.4% to 36.33% just before 12:30 pm (ET).

Johnson & Johnson (NYSE:JNJ)Shares of the world’s largest maker of health-care products are lower by 1.90% to $58.64 in morning trading. Put activity on the stock suggests one pessimistic player is bracing for further bearish movement in the price of the underlying shares ahead of June expiration. Perhaps pessimism on JNJ stems from the continuing – and now expanded – investigation into drug manufacturing at the firm following the “phantom recall” wherein, allegedly, Johnson & Johnson hired contractors to buy up defective Motrin tablets in stores rather than issue an immediate formal recall of the medication. JNJ officially recalled more than 40 children’s medications on April 30, 2010. Johnson & Johnson shares are down 10.25% since the April 30 recall. Regardless of the motivation for the bearish put activity, the put spread strategy implemented in the June contract this morning suggests shares could fall significantly lower in the next few weeks. The investor responsible for the trade purchased 1,000 puts at the June $57.5 strike for an average premium of $0.67 apiece and sold the same number of puts at the lower June $55 strike for a premium of $0.22 each. The net cost of the spread amounts to $0.45 per contract. Thus, the trader stands prepared to make maximum potential profits of $2.05 per contract if JNJ’s shares fall another 6.2% to breach $55.00 by expiration day. The overall reading of options implied volatility on the stock is up 10.1% to 21.54% as of 11:05 am (ET).

Goodyear Tire & Rubber Co. (NASDAQ:GT)The Ohio-based manufacturer of tires and other rubber products enticed bullish investors to the front month in morning trading despite the 0.33% decline in its share price to $12.02. Optimistic options players are positioning for a sharp rebound in GT’s shares by purchasing roughly 3,600 calls at the June $12.5 strike for an average premium of $0.29 per contract. Call-buyers make money if shares of the underlying stock rally 6.40% from the current price of $12.02 to surpass the average breakeven price of $12.79 by June expiration day. The jump in investor demand for calls on Goodyear bumped up the stock’s overall reading of options implied volatility 14% to 59.53% as of 11:10 am (ET).

Las Vegas Sands Corp. (NYSE:LVS)Earlier in the session the casino operator’s shares rallied more than 2.10% to an intraday high of $25.46, but as the morning progressed, Las Vegas Sands’ shares surrendered gains to stand 0.30% lower on the day at $24.85 as of 10:50 am (ET). Call buying observed on the stock during the past couple of trading days continued this morning with bullish investors positioning for share price appreciation and a new 52-week high for LVS ahead of June expiration. Options traders purchased at least 8,800 calls at the June $26 strike for an average premium of $0.86 apiece within the first 90 minutes of the session. Call-buyers make money if, by expiration, LVS’s shares rally 8% from the current value of $24.85 to surpass both the current 52-week high of $26.56, and the average breakeven price of $26.86.

Source: Friday Options Update: KWK, MCCC, EWZ, NSC, HNT, EFA, JNJ, GT, LVS