Monday Options Update: SPLS, XCO, THC, FTO, YHOO, ERTS, LNC & GE

|
Includes: EA, FTO, GE, LNC, SPLS, THC, XCO, YHOO
by: Interactive Brokers

Staples, Inc. (NASDAQ:SPLS)The supplier of office products popped up on our ‘hot by options volume’ market scanner late in the trading session after one investor initiated a bearish spread in the December contract. Staples’ shares are currently down 0.80% at $20.64 as of 3:15 p.m. in New York. The pessimistic player established a ratio put spread, buying 2,500 in-the-money puts at the December $21 strike for an average premium of $1.185 each, and selling 5,000 puts at the lower December $19 strike at an average premium of $0.39 apiece. The average net cost of the transaction amounts to $0.405 per contract. Thus, the investor is prepared to make money if the price of the underlying stock slips beneath the effective breakeven point on the spread at $20.595 by expiration day in December. Maximum potential profits of $1.595 per contract are available to the ratio-spreader if the office products company’s shares fall 7.945% from the current price of $20.64 to settle at $19.00 at expiration. The investor is vulnerable to losses in the event that Staples’ shares plummet far lower than he expects they will in the next several months. Losses start to accumulate for the trader if shares drop 15.7% lower and trade below the lower breakeven point at $17.405 by expiration day. Staples, Inc. is slated to report third-quarter earnings ahead of the opening bell on November 18, 2010.

EXCO Resources, Inc. (NYSE:XCO) The oil and natural gas company was visited by one long-term bullish options investor in the second half of the trading session. It looks like the trader is expecting EXCO’s shares to rally significantly by expiration day in March of 2011. Shares of the Dallas, TX-based firm are up 2.05% at $15.53 with 30 minutes to go before the closing bell. The optimistic player appears to have sold put options and purchased a call spread. The investor shed 2,000 puts at the March 2011 $15 strike to pocket an average premium of $1.625 per contract. He keeps the full premium received on the sale as long as shares of the energy company exceed $15.00 through March expiration. The trader also initiated a debit call spread, buying 4,250 calls at the March 2011 $16 strike for a premium of $1.45 each, and selling 4,250 calls at the higher March 2011 $19 strike for an average premium of $0.475 apiece. Average net premium paid to establish the spread amounts to $0.975 per contract. Thus, the investor stands ready to make money if XCO shares jump 9.30% over the current price of $15.52 to surpass the effective breakeven point at $16.975 by expiration day. Maximum potential profits of 2.025 pad the investor’s wallet if the price of the underlying stock surges 22.3% to exceed $19.00 by March expiration. Risk exposure on the call spread is limited to $0.975 per contract paid for its purchase. However, the short position in put options implies the trader could have 200,000 shares of the underlying put to him at an effective price of $13.375 each if the puts land in-the-money by expiration day. The investor will start to absorb losses if shares trade below $13.375 ahead of expiration next year.

Tenet Healthcare Corp. (NYSE:THC) Shares of the health care services company were in the red this morning, but recovered by late afternoon to rally as much as 1.80% to an intraday high of $4.50. One options strategist took a near-term bullish stance on the stock by selling 13,000 puts at the November $4.0 strike to pocket premium of $0.05 per contract. The put seller keeps the full $0.05 premium received on the transaction as long as Tenet’s shares exceed $4.00 through expiration day. Tenet Healthcare reports third-quarter results before the market opens on November 2, 2010. The sale of the put options indicates the investor is willing to have 1.3 million shares of the underlying stock put to him at an effective price of $3.95 apiece in the event that the puts land in-the-money at expiration. Options implied volatility on Tenet collapsed 21.7% to 43.80% in late afternoon trading.

Frontier Oil Corp. (NYSE:FTO)Investors are buying up call options on the oil exploration and production company ahead of the firm’s third-quarter earnings report, scheduled for release ahead of the opening bell on November 4, 2010. Frontier Oil’s shares fell 2.115% to an intraday low of $13.42 earlier in the session, but have since recovered to stand 0.35% high on the day at $13.76 as of 1:15 p.m. in New York. Options traders taking a bullish stance on Frontier ahead of earnings purchased approximately 5,000 calls at the November $15 strike for an average premium of $0.23 per contract this morning. Call buyers are prepared to make money should shares of the oil company jump 10.7% over the current price of $13.76 to exceed the average breakeven price of $15.23 by November expiration. Options implied volatility is up 15.6% in early afternoon trading to arrive at 47.39%.

Yahoo!, Inc. (NASDAQ:YHOO)A number of near-term bullish transactions in Yahoo! options this morning indicate traders are positioning for the price of the underlying shares to rise ahead of November expiration. Shares of the online media company are down 2.50% at $15.84 as of 11:55 a.m. Last week Yahoo’s shares surged on speculation that AOL and several private-equity firms may be exploring the possibility of buying Yahoo. Although shares are lower this morning, it looks like some investors are using options to position for a sharp rally by expiration day next month. Some traders purchased call spreads, buying up roughly 3,000 calls at the November $16 strike for an average premium of $0.93 each, and selling about the same number of calls at the higher November $20 strike at an average premium of $0.12 apiece. The average net cost of initiating the spread amounts to $0.81 per contract. Thus, bulls are poised to profit should Yahoo’s shares reverse course and rally 6.1% over the current price of $15.84 to surpass the average breakeven point at $16.81 by expiration. Maximum potential profits of $3.19 per contract are available to call spreaders should shares surge 26.25% to trade above $20.00. A 1,100-lot December $16/$19 call spread was picked up this morning by a like-minded bullish investor positioning for shares to rise.

Electronic Arts, Inc. (ERTS) Options traders expecting the video game maker’s shares to decline initiated near-term bearish plays on the stock right out of the gate this morning. Electronic Arts’ shares are currently down 0.45% to stand at $15.89 as of 11:40 a.m. in New York. It looks like one investor may have enacted a bearish credit call spread in the November contract. The pessimistic player appears to have sold 3,500 calls at the November $16 strike for a premium of $0.75 each in order to buy the same number of calls at the higher November $17 strike at an average premium of $0.42 a-pop. The investor pockets a net credit of $0.33 per contract on the trade and keeps the full amount of premium as long as ERTS shares fail to rally above $16.00 through November expiration. The credit spreader is vulnerable to losses, however, if shares rally above the effective breakeven price of $16.33 ahead of expiration day. The investor will absorb maximum potential losses of $0.67 per contract if the video game company’s shares exceed $17.00 at expiration in November. We note that call open interest at the November $17 strike is sufficient to cover the 3,500 lots traded there this morning. The investor may be closing out a previously established short stance in calls in order to take profits off the table and subsequently roll the short position to the November $16 strike. In this scenario, the trader’s loss potential is uncapped should ERTS shares fly upward ahead of expiration day. Electronic Arts is scheduled to report second-quarter earnings after the market closes on November 8, 2010.

Lincoln National Corp. (NYSE:LNC)Options activity on Lincoln National Corp. today suggests a number of investors are positioning for a substantial near-term rally in the price of the underlying stock. Shares of the operator of insurance and retirement businesses are presently up 1.80% in early afternoon trading to arrive at $25.54 as of 12:50 p.m. Investors populating LNC today have all but ignored put options for the time being, focusing their attention instead on bullish call options. Trading traffic in calls is heaviest in the November contract and is likely the work of investors taking bullish stances on the Lincoln National Corp. ahead of the firm’s third-quarter earnings report after the closing bell on November 2, 2010. Options traders picked up approximately 1,700 calls at the November $26 strike for an average premium of $1.20. Another 1,600 calls were coveted at the higher November $27 strike at an average premium of $0.80 each. These investors make money if Lincoln’s shares exceed the breakeven prices of $27.20 and $27.80, respectively, by expiration day next month. Bullish players also purchased another 2,400 calls at the November $28 strike for an average premium of $0.51 a-pop. Investors holding these contracts are prepared to make money should the price of the underlying shares surge 11.6% over the current price of $25.52 to exceed the average breakeven price of $28.51 by November expiration.

General Electric Co. (NYSE:GE) Within the first 15 minutes of the trading session one big options market participant sold approximately 105,000 call options on General Electric. It looks like the investor is throwing in the towel on GE today, selling-to-close a previously established bullish stance on the stock. Shares of the firm are currently down 0.80% to stand at $16.17 by 12:20 p.m. in New York trading. GE’s shares fell 5% on Friday following earnings. While the company reported better-than-expected profits and saw orders for industrial goods and services rise for the first time in two years, the soft current sales reported for industrial equipment disappointed the Street and sent shares lower. The enormous transaction in calls today appears to be the work of an investor who originally purchased the contracts at the November $19 strike for an average premium of $0.11 apiece back on October 11, when the stock was trading around $17.05. Today, selling 105,000 calls at that strike yields an average premium of just $0.01 apiece. Unraveling the massive bullish bet today indicates the responsible party no longer sees GE’s shares soaring above $19.00 by November expiration.