Herbalife, Ltd. (HLF) – It looks like one cautiously optimistic options trader initiated a delta neutral hedge on the maker of weight management, nutritional supplement and personal care products this afternoon ahead of the firm’s third-quarter earnings announcement scheduled for release after the close on November 1, 2010. Herbalife’s shares are currently down 1.25% to stand at $63.20 as of 3:45 p.m. in New York trading. The investor appears to have picked up 58,000 Herbalife shares at a price of $63.76 each as well as 2,000 calls on a 0.29 delta for a premium of $1.45 per contract. The long stance taken in HLF shares suggests the trader is bullish on the stock and expecting shares to climb higher. But, the put options serve as downside protection in case the investor’s inclinations fail to align with the performance of the stock going forward. The put options will be well worth the added premium if earnings are disappointing and shares head lower ahead of November expiration day.
Rare Element Resources, Ltd. (REE) – The Canada-based company that was the target of bullish options trading just 24 hours ago has transformed into a hub of bearish activity. Shares in Rare Element Resources, which own the Bear Lodge mine in Wyoming, fell as much as 27.05% from yesterday’s high of $13.71 to an intraday low of $10.00. Despite the substantial decline today the current price of the stock is still up roughly 260% since August 20, 2010, when shares were around $2.80 each. Pessimistic players took to the options field on REE to place bearish bets on the stock. Investors expecting shares to continue lower picked up put options and sold call options in the November and December contracts. Traders picked up approximately 2,500 puts at the November $10 strike at an average premium of $1.12 each, and purchased another 1,500 puts at the lower November $7.5 strike for an average premium of $0.37 apiece. Put buyers make money if REE’s shares slip beneath the average breakeven points at $8.88 and $7.13, respectively, by November expiration. Other traders sold 1,200 calls at the November $12.5 strike to receive an average premium of $1.07 per contract. Call sellers at this strike are indicating they do not expect Rare Element Resources’ shares to recover above $12.50 before the contracts expire next month. Investors short the calls keep the full premium pocketed on the transaction as long as the calls expire worthless. Pessimism spread to the December $10 strike where bearish investors scooped up 1,800 puts for an average premium of $1.42 a-pop. Put buyers make money if, by December expiration, the price of the underlying stock falls another 14.2% to breach the average breakeven point to the downside at $8.58. Options implied volatility on REE jumped 27.6% to 129.42% in late-afternoon trading.
Materials Select Sector SPDR ETF (XLB) – The purchase of a plain-vanilla debit put spread on the XLB, an exchange-traded fund designed to correspond to the price and yield performance of the Materials Select Sector of the S&P 500 Index, indicates one option strategist is prepared for the price of the underlying fund to slip ahead of December expiration. Shares of the fund are currently up slightly by 0.05% to stand at $34.57 with 30 minutes remaining in the session. The investor appears to have purchased 10,000 puts at the December $32 strike at a premium of $0.56 each, and sold the same number of puts at the lower December $31 strike for premium of $0.38 apiece. Net premium paid for the transaction amounts to $0.18 per contract. Thus, the trader is prepared to make money – or realize limited downside protection – should shares of the XLB trade below the effective breakeven price of $31.82 ahead of expiration day. The investor is poised to amass maximum potential profits of $0.82 per contract should shares of the ETF plunge 10.3% from the current price of $34.57 to trade below $31.00 by December expiration.
Baidu, Inc. (BIDU) – Shares of China’s largest Internet search engine are up 1.55% in early afternoon trading to stand at $101.56, but earlier in the session the stock surged more than 2.75% to touch an intraday high of $102.78. A number of investors appear to be positioning for Baidu’s shares to continue higher ahead of the firm’s third-quarter earnings announcement after the closing bell this evening. Options traders populating the stock are trading more than 2.1 call options on BIDU for each single put option in play thus far today. Yesterday Kaufman Bros. raised their share price target and third-quarter revenue estimate on Baidu. Analysts at Kaufman upped the BIDU’s target price to $115 from $85 and maintained a ‘buy’ rating on the stock and said they anticipate the firm will exceed a Q3 revenue forecast of $333 million by as much as 3 percent. Some bullish players are employing debit call spreads in the November contract ahead of earnings. More than 5,000 calls changed hands at the November $110 and November $120 strikes. It looks like a good portion of those calls were utilized to construct call spreads that cost investors an average net premium of $2.32 per contract to establish. Traders long the bull call spread make money if BIDU’s shares jump 9.3% over today’s high of $102.78 to surpass the average breakeven price of $112.32 by November expiration. Maximum potential profits of $7.68 per contract are available to call spreaders should BIDU’s shares surge 16.75% to exceed $120.00 by expiration day next month.
Delta Air Lines, Inc. (DAL) – The U.S. carrier’s shares are adding to yesterday’s post-earning rally, and are currently up 3.10% to stand at $13.37 as of 11:50 a.m. in New York. It looks like one bullish investor expecting Delta’s shares to at least hold on to the majority of recently realized gains initiated a three-legged credit put spread in the January 2011 contract. The trader sold 8,000 puts at the January 2011 $12.5 strike for premium of $0.93 each, picked up 4,000 puts at the lower January 2011 $10 strike for $0.25 in premium apiece, and purchased another 4,000 puts at the January 2011 $9.0 strike at a premium of $0.14 a-pop. The investor pockets a net credit of $0.54 per contract on the trade and keeps the full amount of premium received as long as Delta’s shares exceed $12.50 through January expiration. The investor responsible for the credit spread could wind up having shares of the underlying stock put to him at an effective price of $11.96 apiece if the January 2011 $12.5 strike puts land in-the-money by expiration.
RadioShack Corp. (RSH) – The retailer of consumer electronics goods popped up on our scanners this morning after investors initiated bullish plays in the November contract. RadioShack’s shares are up 2.50% at $22.89 as of midday. Options traders may be positioning for shares to climb higher following the release of the firm’s third-quarter earnings report before the market opens on October 25, 2010. Investors exchanged more than 2,610 calls at the November $26 strike versus previously existing open interest of just 1 contract at that strike. It looks like approximately 1,200 of those calls were purchased for an average premium of $0.26 apiece. Call buyers are poised to profit should RadioShack’s shares surge 14.7% over the current price of $22.89 to surpass the average breakeven point at $26.26 by November expiration. The November $25 strike calls were also popular with traders today as more than 1,500 lots changed hands at that strike versus existing open interest of 164 contracts.
Motorola, Inc. (MOT) – A large buy-write or covered call strategy enacted on the wireless communications company in the January 2011 contract caught our eye this morning. Motorola’s shares are currently down 2.00% as of 12:40 p.m. to stand at $7.80. The mobile device maker reports results for the third quarter before the market opens next Thursday. It looks like the options trader responsible for the buy-write sold 21,000 in-the-money calls at the January 2011 $7.5 strike at a premium of $0.65 per contract, and purchased 2.1 million shares of MOT stock at a price of $7.81 each. The hefty premium received for writing the calls effectively reduces the purchase price of the underlying shares to $7.16 each. Thus, the investor is positioned to amass maximum potential gains of 4.75% on the “rise” in shares from $7.16 to $7.50 if the large underlying position is called from him at $7.50 a share by expiration day.