Tuesday Options Brief: FTR, OMX & JPM

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Includes: FTR, JPM, OMX
by: Interactive Brokers

Frontier Communications Corp. (NYSE:FTR) Two large-volume bearish debit put spreads were purchased on Stamford, CT-based Frontier Communications Corp., a firm that provides internet, television and other services to rural areas and small to medium-sized towns and cities, in the first 15 minutes of the trading session. Shares of the communications company are currently lower on the day by 1.40% to stand at $7.75 as of 10:45 am (NYSE:ET). According to a Bloomberg article this morning, FTR sued Google Inc. for infringement of a new patent for enhanced telephone services. Perhaps the bearish activity observed on Frontier this morning is the work of investors fearing FTR’s shares may continue lower in the next couple of months. The puts spreads are identical in size and utilize the same strike prices in the July and August contracts. The nearer-term spread involved the purchase of 20,000 puts at the July $7.5 strike for a premium of $0.22 each, marked against the sale of the same number of puts at the lower July $5.0 strike for $0.02 apiece. The net cost of the transaction amounts to $0.20 per contract. Thus, the spread positions the trader to accumulate maximum potential profits of $2.30 per contract if Frontier Communications’ shares plunge 35.5% to trade at or below $5.00 by July expiration day. The investor starts to make money if shares slip beneath the effective breakeven price of $7.30 ahead of expiration. The 20,000-lot August $5.0/$7.5 debit put spread cost a net $0.40 per contract and yields maximum potential profits of $2.10 per contract if FTR’s shares fall to $5.00 by expiration day in August. The two spreads utilized a total of 80,000 put options, which is 2.4 times greater than the number of contracts of total existing open interest on Frontier of 33,223 contracts. The jump in demand for options on Frontier Communications Corp. bumped up the stock’s overall reading of options implied volatility 25.7% to 37.01% as of 11:00 am (ET).

OfficeMax, Inc. (NYSE:OMX) Shares of the office supplies retailer rallied nearly 6.7% to briefly touch an intraday high of $16.76 this morning. However, OMX was unable to hold onto earlier gains, and shares are currently up just 0.25% to stand at $15.75 as of 11:07 am (ET). The initial surge in the price of the underlying stock inspired bullish options strategists to take action. Investors anticipating continued appreciation in the retailer’s shares purchased approximately 1,400 in-the-money calls at the July $15 strike for an average premium of $1.65 apiece. Call buyers at this strike price are prepared to profit should shares trade above the average breakeven price of $16.65 ahead of July expiration. Optimism spread to the higher July $17.5 strike where 1,500 call options were purchased at an average premium of $0.61 each. Investors long these contracts make money if OfficeMax’s shares jump 15% from the current price of $15.75 to surpass the effective breakeven price of $18.11 by expiration day next month.

JPMorgan Chase & Co. (NYSE:JPM)Near-term bullish activity on JPMorgan this morning suggests some options investors are positioning for a rally in the price of the underlying shares by July expiration. JPM’s shares are up 0.45% at $39.05 as of 11:15 am (ET). Optimistic traders picked up at least 6,350 now in-the-money calls at the July $39 strike for an average premium of $1.31 apiece. Investors holding the calls are prepared to accumulate profits if JPM’s shares rally another 3.2% to trade above the average breakeven point to the upside at $40.31 by expiration day in July.