Viacom, Inc. Class B (VIA.B) – Options on the global entertainment content company are active ahead of the release of the firm’s third-quarter earnings report before the opening bell tomorrow. Investors are establishing both bullish and bearish positions on Viacom using near-term put and call options. Viacom’s shares are currently up 0.15% at $38.09 with just fewer than thirty minutes remaining in the trading session. Traders fearing the price of the underlying stock could fall following earnings initiated bear put spreads. Put players picked up approximately 3,000 in-the-money puts at the November $38 strike for an average premium of $0.77 each, and sold about the same number of puts at the lower November $36 strike for an average premium of $0.14 a-pop. Average net premium required to purchase the spread amounts to $0.63 per contract. Thus, investors are prepared to profit, or realize downside protection, in the event that shares in Viacom fall 1.9% from the current price of $38.09 to breach the average breakeven point at $37.37 by expiration day. Maximum potential profits of $1.37 per contract are available if VIA’s shares plunge 5.5% lower to trade below $36.00 by November expiration. Meanwhile, investors taking bullish stances ahead of earnings looked to the November $39 strike to purchase approximately 1,600 calls for an average premium of $0.32 per contract. Call buyers profit if Viacom’s shares rally 3.2% to surpass the average breakeven price of $39.32 by expiration day.
BJ’s Wholesale Club, Inc. (BJ) – Reports that the warehouse club operator is considering hiring an advisor to review options including a potential sale to a leveraged-buyout firm in a deal that could net as much as $3 billion sent shares flying higher today and drew speculators to the options market. BJ’s shares are up 11.2% at $46.75 as of 2:00 pm in New York, after earlier rallying as much as 11.99% to an intraday high of $47.07. One investor expecting shares to continue higher ahead of December expiration initiated a three-legged bullish spread, selling put options to partially offset the cost of buying a call spread. The trader picked up 1,000 calls at the December $50 strike for an average premium of $1.05 each, sold the same number of calls at the higher December $55 strike at an average premium of $0.24 per contract, and sold 1,000 puts at the December $40 strike for an average premium of $0.29 apiece. Net premium paid to establish the three-legged spread amounts to $0.52 per contract, thus positioning the investor to make money should BJ’s shares surge 8.05% over the current price of $46.75 to surpass the average breakeven point at $50.52 by expiration day. The options player may walk away with maximum potential profits of $4.48 per contract if the price of the underlying stock jumps 17.6% to trade above $55.00 ahead of December expiration. Renewed LBO speculation and the rise in demand for options on BJ’s Wholesale Club lifted the stock’s overall reading of options implied volatility 7.8% to 39.11% by 2:10 pm this afternoon.
Merck & Co., Inc. (MRK) – A flurry of near-term bullish activity on the drug maker caught our eye this afternoon. It looks like some investors are acquiring in- and out-of-the-money call options in the November contract ahead of the impending release of results from an advanced trial of Merck’s drug to fight heart disease by increasing good cholesterol levels. Options traders are prepared to make money if positive results wind up sending Merck’s shares higher next week. Shares in Merck & Co., Inc. are currently flat on the day at $35.05 as of 12:30 pm. Investors itching for a rally picked up more than 5,400 now in-the-money calls at the November $35 strike for an average premium of $0.51 each. Call buyers at this strike profit if MRK’s shares rally 1.3% to surpass the average breakeven price of $35.51 by expiration day in November. Bullish sentiment spread to the higher November $36 strike where some 4,900 calls were coveted at an average premium of $0.18 a-pop. Traders holding these contracts make money if shares surge 3.2% to trade above the average breakeven price of $36.18 ahead of expiration. Finally, call activity at the November $37 strike was motivated by sellers. It appears that the majority of the more than 7,000 calls exchanged at that strike were sold 5,000 times for $0.05 apiece. Open interest is more than sufficient to cover volume today, and the sale of the calls may be a closing position. More than 38,670 option contracts have changed hands on the drug maker as of 12:50 pm.
iShares MSCI Emerging Markets Index ETF (EEM) – The failure of the dollar to continue the downward trajectory seen over the last couple of months has caused some emerging markets bulls to lock in profits and brace for stormier seas ahead. Shares of the EEM, an exchange-traded fund designed to track the performance of the MSCI Emerging Markets Index – an Index that measures equity market performance in the global emerging markets, had come up more than 23.6% since August 25 to reach a 52-week high of $48.62 yesterday. But, options activity on the fund today indicates one big player is prepared in case the majority of recent gains in the EEM evaporate over the next several months. Earlier in the session shares of the ETF fell, but have subsequently recovered this afternoon to stand 0.25% higher on the day at $47.80 as of 12:15 pm in New York. The put player was quick to act this morning, initiating a large-volume put spread within the first 15 minutes of the trading session. It looks like the trader purchased 21,700 puts at the March 2011 $46 strike for a premium of $2.46 each, and sold the same number of puts at the lower March 2011 $41 strike at a premium of $1.08 apiece. The net cost of the transaction amounts to $1.38 per contract. Thus, the investor is protected in case the price of the underlying fund falls 6.65% to trade below the effective breakeven point on the spread at $44.62 by March 2011 expiration. The parameters of the put strategy allow for a substantial 14.2% correction in the emerging markets fund’s shares to $41.00 by expiration day in March.
PetSmart, Inc. (PETM) – The provider of products and services for the lifetime needs of pets popped up on our ‘hot by options volume’ market scanner today after one investor dabbled in December contract call and put options. Shares in PetSmart are up 0.65% to stand at $38.78 just before 1:00 pm in New York. It looks like the trader initiated a long strangle in order to position for PETM’s shares to move significantly by expiration day next month. The transaction may be an earnings play ahead of the firm’s third-quarter report on November 17, 2010, after the final bell. The investor appears to have purchased 1,500 calls at the December $40 strike for a premium of $1.00 per contract, and 1,500 puts at the lower December $35 strike at a premium of $0.60 apiece. The net cost of the strangle play amounts to $1.60 per contract and positions the investor to make money as long as shares move sufficiently in either direction ahead of December expiration. The trader profits if shares in PetSmart rally 7.3% to surpass the upper breakeven price of $41.60, or should shares plunge 13.9% lower to breach the lower breakeven point at $33.40, by expiration day. PetSmart, Inc. was rated new ‘buy’ with a target share price of $50.00 at Nomura on Tuesday.
Citigroup, Inc. (C) – A large-volume calendar spread on Citigroup was initiated right out of the gate this morning by an investor who appears to be extending bullish sentiment on the stock using longer-dated call options. Citigroup’s shares are up 2.1% at $4.39 as of 1:08 pm this afternoon. It looks like the investor sold 100,000 calls at the January 2011 $4.5 strike for a premium of $0.21 each in order to buy the same number of calls at the March 2011 $4.5 strike at a premium of $0.32 apiece. The trader paid a net $0.11 per contract to execute the calendar spread and is prepared to make money should Citigroup’s shares rally 5.0% over the current price of $4.39 to exceed the effective breakeven point to the upside at $4.61 by March expiration. Open interest at the January 2011 $4.5 strike is sufficient to cover volume generated in the spread, but the 100,000 calls purchased out at the March 2011 $4.5 strike is more than 4.6 times greater than the 21,664 contracts representing open interest at that strike.