Wednesday Options Update: MU, REE, MEE, DAL, USB, VLTR & KR

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 |  Includes: DAL, KR, MEE, MU, REE, USB, VLTR
by: Interactive Brokers

Micron Technology, Inc. (NASDAQ:MU) Renewed rumors that the memory chip maker could be the target of a leveraged buyout by private equity investors looking to take the company private inspired an options feeding frenzy today. Micron’s shares responded to speculative musings by rising as much as 6.30% to an intraday high of $7.76. Just before 2:00 p.m. in New York trading, one big options market participant initiated a large-volume bullish spread in the April 2011 contract. The debit call spread serves to position the trader to benefit handsomely should buyout rumors wind up having some truth to them ahead of April expiration. The options strategist picked up 21,750 calls at the April 2011 $9.0 strike for a premium of $0.71 each, and sold the same number of calls at the higher April 2011 $11 strike at a premium of $0.27 a-pop. Net premium paid for the transaction amounts to $0.44 per contract. Thus, the investor is prepared to make money should Micron’s shares surge 21.65% over today’s high of $7.76 to exceed the effective breakeven point on the spread at $9.44 by expiration day next year. The trader may pocket maximum potential profits of $1.56 per contract if the chip maker’s shares jump 41.75% to trade above $11.00 by April expiration. Investors populating Micron options during the session exchanged more than 7.1 calls on the stock for each single put in play as of 3:25 p.m. in New York. A total of 146,615 option contracts have changed hands on Micron Technology with 35 minutes to go before the closing bell.

Rare Element Resources Ltd. (NYSEMKT:REE) Shares in Rare Element Resources Ltd., which has a 100% interest in the Bear Lodge property, rallied more than 19.2% today to secure a new 52-week high of $13.71. The Bear Lodge property contains one of the largest disseminated rare-earth deposits in North America and extensive gold occurrences, according to REE’s website. The sharp move in shares today attracted a number of options traders. Investors have exchanged 13,869 option contracts on the stock as of 3:30 p.m. in New York, which is a shade above the total level of existing open interest on REE of 13,690 contracts. REE’s shares have increased a staggering 391.4% since touching down at an intraday low of $2.79 back on August 19, 2010. The firm’s shares are up 649.1% since June 30, 2010, when shares traded at a 52-week low of $1.83. Investors expecting the firm’s shares to continue higher ahead of expiration day next month purchased approximately 1,500 now in-the-money calls at the November $12.5 strike – the highest strike price currently available on REE – for an average premium of $1.66 per contract. Call buyers are poised to profit should the price of the underlying stock rally another 3.3% over today’s high of $13.71 to surpass the average breakeven point to the upside at $14.16 by expiration. Other investors displayed an interest is November $12.5 strike put options where 1,900 lots were coveted for an average premium of $1.45 apiece. Perhaps these traders are attempting to lock in gains by purchasing downside protection. In this scenario, downside protection kicks in should Rare Element Resources’ shares decline 19.40% from today’s high to breach the average breakeven point on the puts at $11.05. Investors populating REE options during the session traded call and put options in roughly equal numbers.

Massey Energy Co. (NYSE:MEE) Shares of the coal producer increased as much as 6.83% today, extending Tuesday’s rally, to touch an intraday high of $39.88 on speculation the firm may put itself up for sale. Massey’s shares jumped yesterday after the Wall Street Journal reported the coal supplier could potentially be acquired by a rival company or private equity firm. One options strategist reacted to the takeover chatter by purchasing a bull call spread in the January 2011 contract. The trader picked up approximately 2,500 calls at the January 2011 $40 strike for an average premium of $3.24 apiece, and sold the same number of calls at the higher January 2011 $50 strike at an average premium of $0.65 a-pop. Net premium paid to establish the call spread amounts to $2.59 per contract. The bullish player is prepared to make money should Massey’s shares surge 6.795% over today’s high of $39.88 to surpass the effective breakeven point at $42.59 by expiration. The investor walks away with maximum potential profits of $7.41 per contract if the coal producer’s shares jump 25.4% and trade above $50.00 by January expiration day. Interestingly, one analyst at FBR Capital Markets said in a note to clients that Massey Energy could be sold for $50.00 a share in a buyout scenario. The call spreader will bank maximum potential profits if such a sale should occur by expiration day next year. MEE’s shares were trading up around $54.80 at the beginning of April before an explosion at the firm’s Upper Big Branch mines in West Virginia took the lives of 29 people.

Delta Air Lines, Inc. (NYSE:DAL) Shares of the leading U.S. carrier to Asia rallied as much as 9.40% this morning to touch an intraday high of $12.80 after the firm posted better-than-expected earnings for the third quarter. Delta recorded an 18% increase in revenue to $8.95 billion, beating average expectations of $8.82 billion in revenue. Excluding one-time items, the Atlanta-based company earned $1.10 a share in the third quarter, which exceeded average analyst forecasts of $0.94 a share. Bullish options traders displayed their delight with Delta Air Lines’ earnings report by scooping up out-of-the-money call options and shedding puts. Investors expecting Delta’s shares to soar to new heights by expiration in the final month of 2010 purchased approximately 10,200 calls at the December $15 strike for an average premium of $0.23 a-pop. Call buyers make money if Delta’s shares surge 19.0% over today’s high of $12.80 to surpass the average breakeven point to the upside at $15.23 by expiration day. Other optimistic options traders sold roughly 1,400 puts at the December $12 strike to take in premium of $0.59 per contract. Investors selling the put options keep the full premium received on the transaction as long as Delta’s shares exceed $12.00 through December expiration. Put sellers appear to be ready and willing to have shares of the underlying stock put to them at an effective price of $11.41 each in the event that the puts land in-the-money by expiration day. Options implied volatility on the U.S. carrier is down 10.3% to stand at 42.22% as of 11:35 a.m. in New York.

U.S. Bancorp (NYSE:USB) The financial services holding company reported better-than-expected third-quarter net income of $0.45 a share this morning versus the average estimate of $0.43 in profits per share. Despite the positive earnings report shares of the fifth-largest U.S. commercial bank by deposits turned negative by 11:40 a.m. after having risen modestly earlier in the session. USB’s shares are currently down 0.20% to stand at $22.76. One options strategist anticipating continued erosion in the value of U.S. Bancorp’s shares purchased a put spread in the January 2011 contract. The trader picked up approximately 5,000 puts at the December $22 strike for an average premium of $0.74 each, and sold the same number of puts at the December $19 strike at an average premium of $0.18 apiece. Net premium paid to establish the bearish spread amounts to $0.56 per contract. Thus, the put player is poised to profit should USB’s shares fall 5.80% from the current price of $22.76 to breach the average breakeven point to the downside at $21.44 by December expiration. Maximum potential profits of $2.44 per contract are available to the investor should the financial services firm’s shares plunge 16.5% lower to trade under $19.00 by expiration day. Options implied volatility on U.S. Bancorp is down 11.4% at 27.19% following the release of third-quarter earnings this morning.

Volterra Semiconductor Corp. (NASDAQ:VLTR) Shares of the maker of semiconductors for computing, storage, networking and consumer markets fell 3.40% to $18.98 in early afternoon trading. One bearish investor expecting the price of the underlying shares to head lower by November expiration established a put spread this morning. The trader purchased approximately 3,650 in-the-money puts at the November $20 strike for an average premium of $1.72 each, and sold about the same number of puts at the lower November $17.5 strike for a premium of $0.47 apiece. The net cost of the transaction amounts to $1.25 per contract. Profits are available to the put player if Volterra’s shares slip beneath the average breakeven price of $18.75 ahead of expiration day next month. Maximum potential profits of $1.25 per contract are available to the investor should shares of the semiconductor company plunge 7.80% to trade below $17.50 by November expiration. The spread may represent a hedge by an investor holding VLTR stock ahead of the firm’s earnings report or an outright bearish bet on the near-term performance of the stock. Volterra is scheduled to reveal its performance for the third quarter after the closing bell on October 25, 2010.

Kroger Co. (NYSE:KR) Options investors are augmenting near-term bullish positions on the operator of retail food and drug stores today with the price of the underlying shares rising as much as 1.45% to an intraday high of $21.73 as of 11:55 a.m. in New York. Kroger popped up on our scanners in the first half of the session after bullish players sold 5,000 puts at the November $21 strike for an average premium of $0.25 apiece. Put sellers keep the full $0.25 premium per contract received today as long as Kroger’s shares exceed $21.00 through November expiration. Analyzing put open interest at the November $21 strike reveals that like-minded bulls shed roughly 5,000 puts at that strike on Monday for an average premium of $0.15 each. Adding to short interest in put options indicates these traders expect shares to exceed $21.00 through expiration next month. Investors are also indicating that the premium of $0.15 to $0.25 per contract pocketed on the sale is sufficient compensation for bearing the risk that the puts land in-the-money at expiration, and the shares are put to them at an average price of between $20.85 and $20.75 each.