Friday Options Brief: LNC, BHI, ONNN, HPQ

Includes: BHI, HPQ, LNC, ON
by: Interactive Brokers

Lincoln National Corp. (NYSE:LNC) – Rumors that Manulife Financial submitted a $32.00 per share offer to buy Lincoln National Corp. fueled a 7.8% rally in LNC’s shares to an intraday high of $23.20 as of 12:50 pm ET. The stock’s overall reading of options implied volatility increased as much as 25.2% on the takeover chatter to reach an intraday peak of 57.68%. Investors established near-term bullish positions on the operator of insurance and retirement businesses by scooping up call options I n the September and October contracts. Traders picked up 2,000 now in-the-money calls at the September $23 strike for an average premium of $0.65 each, and purchased another 3,000 calls at the higher September $24 strike at an average premium of $0.40 a-pop. Bulls coveted more than 5,500 call options at the September $26 strike by shelling out an average premium of $0.19 per contract. Investors long the September $26 strike calls are prepared to profit in the event the takeover rumors have legs to stand on, and shares rally at least 12.9% over today’s intraday high of $23.20 to exceed the average breakeven price of $26.19 by September expiration. A different strategy was employed at the October $27 strike where it looks like one trader sold 11,000 calls to receive $0.61 in premium per contract. Perhaps the call seller either doubts the rumors are credible, or otherwise sees a takeover of LNC as unlikely to occur in the next couple of months. If the sale of the calls is uncovered by a long position in the underlying stock, the trader is vulnerable to potentially devastating losses should Lincoln’s shares surge 19.00% to exceed $27.61 by expiration day in October. The investor could simply be taking advantage of the richness in premium on the calls given the stock’s massive run up in implied volatility and sharp rally in share price. If volatility collapses or takeover rumors abate, the trader could buy back the short position at an advantageous price to exit with profits in hand. Another possibility is the trader is long the stock and more than happy to pocket the $0.61 premium today with the knowledge that he may have to walk away with gains of 19.00% on the run up in shares from $23.20 to $27.00 if the shares are called from him at $27.00 each at expiration. Finally, other bulls buying into the rally picked up some 1,200 calls at the October $28 strike for an average premium of $0.23 per contract.

Baker Hughes, Inc. (NYSE:BHI) – Options traders employed two different bullish trading tactics on the supplier of oil equipment and services today. One strategist purchased a debit call spread, while another trader engaged in plain-vanilla call buying in the January 2011 contract. Baker Hughes’ shares rallied as much as 2.2% during the first half of the session to touch an intraday high of $38.41. The stock took a severe beating during the month of August, falling roughly 27.20% from $50.50 on August 2, 2010, down to today’s intraday low of $36.76. But, it looks like options investors populating BHI today are expecting shares to continue to rebound in the second half of the year. One long-term bull purchased 2,500 calls outright at the January 2011 $48 strike for an average premium of $1.09 apiece. The call buyer is poised to profit should BHI shares surge 27.8% to trade above the average breakeven price of $49.09 by expiration. Another optimistic strategist reduced the cost of taking a bullish stance on the stock by buying a call spread. The trader picked up 5,000 calls at the January 2011 $48 strike at an average premium of $1.12 each, and sold the same number of calls at the January 2011 $50 strike for premium of $0.78 apiece. The net cost of the trade amounts to $0.34 per contract. Shares of the underlying stock must rally 25.85% to reach the effective breakeven point on the spread at $48.34. The spread trader stands ready to accumulate maximum potential profits of $1.66 per contract if shares jump 30.15% to settle above $50.00 by expiration next year. While implementing the spread reduces the investor’s net cost today, it also limits profits to the upside if the stock winds up blowing straight past the $50.00 level. The plain-vanilla call buyer’s profits are not capped in this way, but he does face a higher price at which the trade breaks even.

ON Semiconductor Corp. (ONNN) – Shares of the global supplier of semiconductor components jumped more than 4.8% this afternoon to an intraday high of $6.52. Investors expecting the stock’s performance to improve over the next year and a half initiated bullish risk reversals in the January 2012 contract this morning. A total of 5,000 puts were sold at the January 2012 $5.0 strike at an average premium of $0.72 apiece, and spread against the purchase of the same number of calls at the higher January 2012 $7.5 strike at an average premium of $1.02 each. The average net cost incurred by risk reversal players amounts to $0.30 per contract. Thus, investors stand ready to make money if ONNN’s shares gain another 19.6% to exceed the average breakeven price of $7.80 by expiration day in 2012.

Hewlett-Packard Co. (NYSE:HPQ) – Bullish trading in HPQ LEAPs this morning indicates some options strategists are painting a rosy picture of where the tech giant’s shares will be trading by expiration in January 2012. HPQ’s shares are currently down more than 1.05% at $37.81 as of 11:30 am ET. The company did its part to continue the bidding war over 3Par, Inc., increasing its offer to $30.00 a share for the data-storage provider, topping Dell’s most recent bid of $27.00 a share. Options traders enacted three-legged bullish spreads, buying approximately 5,000 calls at the January 2012 $40 strike for an average premium of $5.42 each, selling about the same number of calls at the higher January 2012 $50 strike for premium of $2.15 apiece, and finally shedding some 5,000 puts at the January 2012 $30 strike at an average premium of $2.68 a-pop. The average net cost of putting on the transaction is reduced to just $0.59 per contract. Investors employing the bullish strategy are well positioned to make money if Hewlett-Packard’s shares head higher by expiration day. Profits start to accumulate if HPQ’s shares rally 7.35% over the current price of $37.81 to surpass the average breakeven point to the upside at $40.59. Maximum potential profits of $9.41 per contract are available to traders should shares of the world’s largest PC maker jump 32.2% to trade above $50.00 by expiration day in January of 2012. HPQ’s shares last exceeded $50.00 back on May 10, 2010.