Thursday Options Update: AMAG, BID, ERIC, BAX, NVDA, VIT, BVF, ETFC

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 |  Includes: AMAG, BAX, BID, BVF, ERIC, ETFC, NVDA, VIT
by: Interactive Brokers

AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) – Safety concerns surrounding AMAG’s Feraheme, the biopharmaceutical firm’s intravenous iron-replacement therapy for patients with chronic kidney disease and its lead product, continue to drive shares to new lows. Shares are down 4.00% at $18.15 as of 3:20 pm ET, but earlier plunged 11.6% to touch down at an intraday- and 4-year low of $16.70. Today’s low of $16.70 put shares down 68.2% since January 12, 2010, when the stock was trading up at its 52-week high of $52.49. Erosion in the price of AMAG’s shares accelerated at the end of August when the FDA added Feraheme to a list of products touting serious risks and connected the drug to unspecified serious cardiac disorders. One options investor appears to be positioning for shares to continue to decline by enacting a ratio put spread in the October contract. The trader purchased approximately 2,500 puts at the October $18 strike for premium of $1.98 each, and sold roughly 5,000 puts at the lower October $16 strike at a premium of $0.84 apiece. Average net premium paid to establish the spread amounts to $0.30 per contract. Thus, the strategist stands ready to profit if AMAG’s shares slip beneath the effective breakeven price of $17.70 by expiration. Maximum potential profits of $1.70 per contract are available to the trader if AMAG shares fall 11.85% from the current price of $18.15 to settle at $16.00 at expiration. The ratio of twice as much sold puts as long puts held by the investor expose him to losses should shares collapse below the effective lower breakeven price of $14.30 by expiration day next month.

Sotheby’s, Inc. (NYSE:BID) – Shares of the auctioneer fine art, antiques and other collectibles rallied as much as 7.65% this afternoon to touch an intraday high of $35.86. One options investor bought call options back in August and was well positioned to book profits on today’s rally. It looks like the trader originally purchased some 1,000 calls at the October $35 strike at an average premium of $0.90 each back on August 11, 2010, when BID’s shares were trading at a volume-weighted average price of $29.41. Shares have since increased significantly, boosting premium on the October $35 strike calls. Thus, the bullish player was able to sell all 1,000 lots at that strike for a premium of $1.95 each today. Net profits on the transaction amount to $1.05 per contract. Next, the trader extended bullish sentiment on the auctioneer house by purchasing 1,000 fresh calls at the higher October $40 strike for premium of $0.35 apiece. Profits start to accumulate on the new position if BID’s shares jump 12.5% over today’s high of $35.86 to exceed the effective breakeven point to the upside at $40.35 by October expiration. The rise in demand for options on the stock helped lift BID’s overall reading of options implied volatility 5.9% to 53.02% by 3:05 pm ET.

Ericsson Telephone Co. (NASDAQ:ERIC) – Bearish transactions dominated trading in Ericsson Telephone Co. options this afternoon despite the upward move in the price of the underlying shares today. Ericsson’s shares gained 1.20% to trade at $10.84 with just over 50 minutes to go before the closing bell ends the trading week in New York. Options investors scooped up roughly 13,200 in-the-money puts at the November $11 strike for an average premium of $0.77 per contract. Traders may be initiating outright bearish bets that ERIC’s shares are set to decline ahead of November expiration. Alternatively, investors may cautiously optimistic, long the stock and buying up put options to serve as downside protection. In an outright bearish scenario, traders are poised to profit should ERIC’s shares fall 5.6% from the current price to breach the effective breakeven price of $10.23 ahead of expiration. More than 17,000 puts changed hands at the November $11 strike versus zero previously existing open interest at that strike.

Baxter International, Inc. (NYSE:BAX) – Medical supplies company, Baxter International, Inc., attracted one long-term bullish options investor during the first half of the trading session. The trader initiated a three-legged bullish options combination play in order to position for shares to climb higher by expiration day in January 2012. Baxter’s shares are currently up 2.95% to stand at $49.04 as of 12:45 pm ET. It looks like the investor paid a net premium of $0.35 per contract for the spread, in which he purchased 1,000 in-the-money calls at the January 2012 $47.5 strike, sold 1,000 calls at the January 2012 $60 strike, and shed 1,000 puts at the January 2012 $40 strike. The transaction positions the trader to make money if BAX shares exceed the effective breakeven price of $47.85 through expiration day. Maximum potential profits of $12.15 per contract are available to the investor should the price of the underlying stock surge 22.35% over the current price of $49.04 to trade above $60.00 by expiration. Baxter’s shares last traded above $60.00 back on January 21, 2010.

NVidia Corp. (NASDAQ: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. (NYSE: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. (NASDAQ: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.