NVidia Corp. (NVDA) – The chip maker’s designation as a potential takeover target for software giant, Oracle Corp., sent NVDA’s shares higher and inspired one options player to position for significant bullish movement in the price of the underlying stock going forward. NVIDIA’s shares jumped 3.90% to an intraday high of $12.07 as of 12:15 pm ET, rallying on news that Oracle CEO, Larry Ellison, said the company will be “buying chip companies” during its annual meeting on Thursday. It looks like the investor employed roughly 70,000 call options in order to take a long-term bullish stance on NVIDIA Corp. The options strategist essentially initiated two large-volume calendar spreads, buying the nearer-term contracts and selling the longer-dated ones. He purchased approximately 17,800 calls at the January 2011 $14 strike for a premium of $0.51 each, and picked up another 15,400 calls at the March 2011 $15 strike at a premium of $0.53 apiece. The long call positions were matched against the sale of nearly identical amount of calls at two January 2012 strikes: $20 and $22.5. The sale of options with a greater shelf-life helped reduce the net premium paid by the investor to approximately $0.16 per contract. The trader is therefore happy to buy NVDA shares at $14.00 each and $15.00 each if the calls land in-the-money by the time the contracts expire. He is also willing to then have those shares called from him at $20.00 and $22.50 should shares exceed those values by expiration day in January 2012. If successful, the two strategies could bag maximum net profits of up to $8.34 on one spread and $5.00 per contract on the other in the event of a surge in Nvidia’s share price. The strategy appears to rest upon the assumption that the company would become a victim of a takeover battle. For the upper strike price to be breached would require a surge of 86.4% in Nvidia’s shares from today’s current price. The potential risk of loss facing the investor is certainly substantial in a strategy such as this one. If NVDA’s shares fail to rally above $14.00 by Jan. 2011 expiration, and do not exceed $15.00 by Mar. 2011 expiration, those options will expire worthless, but the investor will still be on the hook to deliver roughly 3,300,000 shares at $20.00/$22.50 if the calls of which he is short ultimately land in-the-money by January 2012 expiration day.
VanceInfo Technologies Inc. (VIT) – The outright purchase of a put spread on the Beijing, China-based IT service provider indicates one options strategist is prepared in case the price of the underlying stock declines ahead of November expiration. The bearish put spread may be a hedge against potentially disappointing third-quarter earnings from the company when they report ahead of the opening bell on November 16, 2010. The large size of the spread may mean the trader is long shares of the underlying and aiming to lock in downside protection on a day when the rise in shares is helpful in cheapening put premiums. VanceInfo’s shares are currently up 2.00% to stand at $32.23 as of 11:45 am ET, but earlier the stock surged as much as 4.3% to touch an intraday- and new 52-week high of $32.97. The investor picked up 10,000 puts at the November $30 strike at a premium of $1.40 each, and sold the same number of puts at the lower November $25 strike for a premium of $0.25 apiece. The net cost of the transaction amounts to $1.15 per contract. Thus, the trader is prepared to make money – or realize downside protection – should VIT’s shares fall 10.5% from the current price of $32.23 to breach the effective breakeven point on the spread at $28.85 by November expiration day. Maximum potential profits of $3.85 per contract are available to the put player if the price of the underlying stock plunges 22.4% to trade below $25.00 by expiration. The 20,000 contracts utilized in the transaction represent volume that’s more than twice the 8,977 contracts of overall existing open interest on the stock. Increased demand for puts on VIT this morning helped lift the stock’s overall reading of options implied volatility 7.3% to 46.53% as of 11:55 am ET.
Biovail Corp. International (BVF) – Call options on the specialty pharmaceuticals company are flying off the shelves this morning with the price of the firm’s shares currently up 3.70% as of 11:40 am in New York trading to arrive at a new 52-week high of $27.74. It looks like some 7,000 calls changed hands at the January 2011 $29 strike with one investor generating the majority of the volume by purchasing 5,000 calls for a premium of $1.40 each. The call buyer stands ready to make money if Biovail’s shares continue to reach new highs by January 2011 expiration. Profits start to accumulate for the investor if BVF shares rally 9.60% over today’s high of $27.74 to exceed the effective breakeven price of $30.40 by expiration day.
E*Trade Financial Corp. (ETFC) – The online brokerage and financial services firm popped up on our scanners at the start of the session due to bullish trading in near-term call options. E*Trade’s shares increased as much as 4.8% this morning to secure an intraday high of $15.25 and was rated new ‘market perform’ by an analyst at JMP Securities. Earlier this week, some analysts speculated the online brokerage firm could be purchased for upwards of $6 billion, while others said an acquisition is not likely for at least one year. Bullish players picked up at least 2,700 calls at the October $16 strike for an average premium of $0.27 apiece. Call buyers are poised to profit should ETFC’s shares surge 6.7% to exceed the average breakeven price of $16.27 ahead of October expiration day.