Wednesday Options Update: S, WFC, LAMR, MGM, AMR, CASY & AIG

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Includes: AAL, AIG, CASY, LAMR, MGM, S, WFC
by: Interactive Brokers

Sprint Nextel Corp. (NYSE:S)A sizeable long-term bullish transaction involving 30,000 option contracts on Sprint Nextel Corp. indicates one optimistic player expects shares in the telecommunications company to rebound ahead of February 2011 expiration. Since reporting third-quarter earnings the morning of October 27, 2010, Sprint’s shares have fallen as much as 20.4% from a high of $4.85 on October 26 to today’s lowest value of $3.86. It looks like the 20% correction in the price of the underlying stock has made conditions favorable enough for this contrarian strategist to establish a relatively cheap bullish stance on Sprint. The trader enacted a three-legged bullish position, selling a chunk of put options in order to partially finance the purchase of a debit call spread. Sprint’s shares have recovered off their intraday low of $3.86 and are currently down 2.2% to stance at $4.01 as of 2:55 pm. The investor sold 10,000 puts at the February 2011 $3.5 strike for a premium of $0.21 each, purchased 10,000 now in-the-money calls at the February 2011 $4.0 strike at a premium of $0.43 per contract, and sold 10,000 calls at the February 2011 $5.0 strike for a premium of $0.16 apiece. Net premium paid to initiate the three-legged spread amounts to $0.06 per contract. The investor responsible for the transaction makes money if Sprint’s shares rally 1.25% over the current price of $4.01 to surpass the effective breakeven point at $4.06 by expiration day in February. The bullish trader will walk away with maximum potential profits of $0.94 per contract if Sprint’s shares surge 24.7% and trade above $5.00 ahead of expiration next year. The short stance in Feb. 2011 $3.5 strike puts implies the investor sees shares trading above $3.50, but also indicates his willingness to have 1 million shares of the underlying put to him at that price if the puts should land in-the-money by expiration. Interestingly, Sprint is scheduled to report fourth-quarter earnings ahead of the opening bell on February 10, 2010, which is eight calendar days before the February contract call and put options expire.

Wells Fargo & Co. (NYSE:WFC) Bullish traders snapped up in- and out-of-the-money calls on Wells Fargo today, which may indicate that some options market participants are gearing up for a sharp rally in the price of the underlying shares. Shares in Wells Fargo & Co. climbed 2.2% in late afternoon trading to secure an intraday high of $26.50. Investors expecting the rally to continue purchased more than 4,200 in-the-money calls at the November $26 strike for an average premium of $0.78 apiece. Call buyers at this strike are poised to profit should shares rally above the average breakeven price of $26.78 by November expiration. More than 20,355 call options were picked up at the November $29 strike for an average premium of $0.05 each versus previously existing open interest of 9,403 contracts at that strike. Investors holding these contracts make money if Wells Fargo’s shares jump 9.6% to trade above the average breakeven price of $29.05 by expiration day this month. Of course, call buyers paying $0.05 apiece could take profits ahead of expiration regardless of whether or not the calls land in-the-money if premium on the calls continues to appreciate. Bulls also looked to the December $29 strike where another 1,800 call options were purchased for an average premium of $0.24 a-pop. WFC’s shares last traded above $29.24 back on June 3, 2010.

Lamar Advertising Co. (NASDAQ:LAMR)The outdoor advertising company that sells advertising space on billboards, buses, shelters, benches and logo plates popped up on our ‘hot by options volume’ market scanner due to put activity in the November contract. It looks like investors are picking up bear put spreads ahead of Lamar’s third-quarter earnings report, which hits the airwaves before the market opens tomorrow morning. Lamar’s shares rallied more than 2.00% in the first half of the session to touch an intraday high of $34.70, but have since pared earlier gains to stand 0.60% lower on the day at $33.81 as of 2:30 pm in New York. Put players populating Lamar Advertising purchased roughly 1,000 now in-the-money puts at the November $34 strike for an average premium of $1.44 each, and sold about the same number of puts at the lower November $31 strike at an average premium of $0.43 apiece. Net premium paid to establish the bearish spread amounts to an average of $1.01 per contract. Thus, investors are poised to profit should LAMR’s shares fall another 2.4% from the current price of $33.81 to slip beneath the average breakeven point on the downside at $32.99 by November expiration. Maximum potential profits of $1.99 per contract are available to put spreaders in the event that Lamar’s shares plunge 8.3% lower to trade below $31.00 by expiration day in a few weeks time.

MGM Resorts International (NYSE:MGM)The biggest casino operator on the Las Vegas Strip attracted a number of options traders today after the firm posted a third-quarter loss of $0.72 a share ahead of the opening bell this morning, which was consistent with MGM’s preliminary earnings report released last month. Shares of the operator of casino resorts jumped 7.5% in the first half of the trading session to secure an intraday high of $11.99. Investors are heavily favoring call options on the stock, with the majority of trading traffic occurring in the November and December expiries. Near-term optimists picked up more than 5,800 now in-the-money calls at the November $11 strike for an average premium of $0.90 each, and purchased another 5,800 lots at the higher November $12 strike at an average premium of $0.39 apiece. More than 8,700 call options were scooped up at the November $13 strike at an average premium of $0.15 a-pop. Investors holding the November $13 strike calls profit if MGM’s shares surge 9.7% over today’s high of $11.99 to surpass the average breakeven price of $13.15 by expiration day. Bulls also looked up to the November $15 strike to take ownership of more than 1,300 deep-out-of-the-money calls for an average premium of $0.035 per contract. Volume is heaviest at the December $14 strike where more than 43,000 calls changed hands by 12:30 pm. It looks like options players purchased at least 29,500 or those calls for an average premium of $0.26 each. Investors buying up these contracts stand ready to profit in the event that the casino operator’s shares jump 18.9% to trade above the average breakeven price of $14.26 by December expiration. Bullish call buying at this strike is not an entirely novel strategy, as the majority of the 14,661 calls representing open interest at the December $14 strike appear to have been purchased for an average premium of $0.16 apiece back on September 22, 2010. Investors are currently exchanging more than 4.6 call options on MGM Resorts International for each single put option in play thus far in the session.

AMR Corp. (AMR) Options investors employed a number of bullish trading strategies on the parent company of American Airlines this morning after a JPMorgan Chase & Co. analyst named AMR Corp. his top pick among U.S. carriers. AMR’s shares increased as much as 6.75% today to touch a four-month high of $8.38. A number of optimistic individuals engaged in plain-vanilla call buying in order to position for continued near-term appreciation in the price of the underlying stock. Traders picked up approximately 5,100 now in-the-money calls at the November $8.0 strike for an average premium of $0.52 apiece. Call buyers at this strike make money if AMR’s shares trade above the average breakeven price of $8.52 by November expiration. Bullish sentiment spread to the higher November $9.0 strike where another 2,200 call options were purchased for an average premium of $0.12 a-pop. Options traders holding these contracts are poised to profit in the event that AMR Corp.’s shares surge 8.8% in the next few weeks to surpass the effective breakeven price of $9.12 by expiration day. Meanwhile, another bullish player sold roughly 10,000 puts at the December $7.0 strike to take in premium of $0.18 per contract. The put seller keeps the full premium received on the transaction as long as AMR’s shares exceed $7.00 through expiration day in December. The investor could wind up having approximately 1 million shares of the underlying put to him at an effective price of $6.82 each should the December $7.0 strike puts land in-the-money at expiration. Increased demand for options on AMR Corp. lifted the stock’s overall reading of options implied volatility 10.8% to 56.02% by 12:15 pm in New York trading.

Casey’s General Stores, Inc. (NASDAQ:CASY)Shares of the Iowa-based operator of convenience stores in The Heartland fell as much as 7.7% at the start of the trading session to hit an intraday low of $38.25 after takeover talks between Casey’s and 7-Eleven Inc. fell apart when the two companies were unable to agree on a price. 7-Eleven, the biggest convenience store chain in the U.S., upped its offer to $43.00 a share in cash from $40.00, but Casey’s said the new offer does not reflect the value of the company or its potential for growth. CASY’s shares are currently down 4.2% to stand at $39.71 as of 11:20 am in New York. Casey’s General Stores popped up on our ‘hot by options volume’ market scanner this morning after one bearish player purchased a put spread in the November contract. It looks like the trader picked up 2,500 now in-the-money puts at the November $40 strike for a premium of $1.05 each, and sold the same number of puts at the lower November $37.5 strike at a premium of $0.10 apiece. The net cost of the transaction amounts to $0.95 per contract thus positioning the investor to make money should CASY’s shares slip beneath the effective breakeven price of $39.05 ahead of November expiration. Maximum potential profits of $1.55 per contract are available to the put spreader if shares fall 5.6% from the current price of $39.71 to trade below $37.50 by expiration day. CASY’s overall reading of options implied volatility jumped more than 28.5% to 24.59% in early morning trade, but is currently up a lesser 17.3% to arrive at 22.44% as of 11:30 am, now that the market has started to digest news of the failed takeover talks.

American International Group, Inc. (NYSE:AIG)It looks like options players are initiating bullish bets on the insurer ahead of the firm’s third-quarter earnings report, which is scheduled for release before the market opens on Friday. AIG’s shares are currently up 2.8% at $43.30 just before 12:40 pm after earlier rising as much as 4.7% to reach an intraday high of $44.10. Near-term out-of-the-money call options are popular today, with the November $46 strike attracting the most volume by midday. Traders coveted roughly 1,000 calls at the November $44 strike for an average premium of $1.30 apiece, and picked up some 1,400 calls at the higher November $45 strike at an average premium of $0.89 a-pop. More than 5,490 calls changed hands at the November $46 strike and the majority of the contracts were purchased for an average premium of $0.59 each. Call buyers at this strike make money if AIG’s shares jump 7.6% over the current price of $43.30 to trade above the average breakeven point at $46.59 by November expiration day. The November $50 strike calls were also well trafficked and enticed bullish players to pick up some 2,300 lots at an average premium of $0.27 apiece. Options implied volatility on AIG is up 6.1% at 39.46% on increased demand for option contracts today and ahead of earnings. Investors have exchanged 48,900 options on American International Group, Inc. as of 12:45 pm in New York trading.