Thursday Options Update: RF, YHOO, ORLY, CTV, HNZ, STX, SMH & GT

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Includes: CTV, GT, KHC, ORLY, RF, SMH, STX, YHOO
by: Interactive Brokers

Regions Financial Corp. (NYSE:RF)Bears are piling into put options on Regions Financial Corp. today after Fitch Ratings cut Alabama’s biggest lender by two levels to –BBB, citing concerns the firm may post additional losses. Regions’ credit rating was also downgraded two notches to Ba3 from Ba1 at Moody’s yesterday. Shares have been hammered lower over the past four weeks, and today declined as much as 7.22% to touch an intraday- and new 52-week low of $5.14. Today’s low of $5.14 marks a 46.5% decline since October 21, 2010, when shares touched an intraday high of $7.53. Investors expecting shares to extend losses over the next several months purchased large numbers of put options on the stock. Bearish players picked up at least 9,000 puts at the December $5.0 strike for an average premium of $0.28 each and purchased approximately 10,000 puts at the lower December $4.0 strike at an average premium of $0.20 apiece. Lower-strike put buyers are positioned to profit should Regions’ shares slide another 26% below today’s intraday low point of $5.14 to breach the effective breakeven point on the downside at $3.80 by expiration day in December. Pessimism spread to the January 2011 $4.0 strike where another 3,800 put options were coveted at an average premium of $0.20 a-pop. The surge in demand for put options coupled with growing uncertainty regarding the fate of RF’s shares going forward helped lift the stock’s overall reading of options implied volatility 27.4% to 90.77% by 3:50 pm in New York.

Yahoo!, Inc. (NASDAQ:YHOO)Shares in Yahoo! are up 5.35% to $17.01 as of 2:40 pm in New York, but earlier rallied as much as 6.315% to hit an intraday high of $17.17. Call options on the stock are flying off the shelves this afternoon with investors exchanging more than 8.4 calls on the stock for each single put option in play thus far in the session. Calls at the December $19 and $21 strikes are by far the most heavily trafficked. The majority of the volume, some 40,950 calls at the Dec. $19 strike and about 34,490 calls at the Dec. $21 strike, was generated in one fell swoop by one bullish player establishing a debit call spread. It looks like the initial print of the spread involved the purchase of 21,000 calls at the Dec. $19 strike at a premium of $0.36 each, marked against the sale of the same number of calls up at the Dec. $21 strike for a premium of $0.12 apiece. The net cost of the spread amounts to $0.24 per contract and prepares the trader to make money should shares in Yahoo! surge 13.1% over the current price of $17.01 to trade above the effective breakeven price of $19.24 ahead of expiration day next month. Maximum potential profits of $1.76 per contract pad the investor’s wallet if the price of the underlying stock jumps 23.45% to exceed $21.00 by expiration in December. Options implied volatility on the search engine is up 21% at 44.71% in late afternoon trading.

O’Reilly Automotive, Inc. (NASDAQ:ORLY)The specialty retailer of automotive aftermarket parts, tools, supplies and accessories attracted bullish options traders during the session. Shares in O’Reilly rose as much as 2.00% earlier today to hit an intraday high of $60.00 after analysts at Nomura initiated the stock as ‘neutral’ with a share price target of $65.00. Investors hoping the auto parts seller extends gains throughout the rest of the trading week scooped up more than 2,150 calls at the November $60 strike for an average premium of $0.13 apiece. Call buyers make money if shares in O’Reilly Automotive exceed the average breakeven price of $60.13 by the time the contracts expire tomorrow. Approximately 3,200 calls changed hands at the November $60 strike, which is more than 5.75 times greater than the 555 lots representing previously existing open interest in calls at that strike. Optimism on O’Reilly follows the November new-vehicle retail sales report that showed sales exceed 10 million units for the second month running. The positive report is one sign that natural demand is starting to return to the marketplace. Options implied volatility on the auto parts company is down 10.9% at 22.08% this afternoon.

CommScope, Inc. (CTV)

Yesterday, the telecommunications equipment company that agreed to be taken private in a $3.9 billion acquisition by leveraged-buyout firm Carlyle Group back on October 27, was granted early termination of the waiting period in connection with the merger agreement. CommScope originally had until December 5, 2010, to shop around for a better offer. Shares in CTV are currently up 0.2% to stand at $32.00 as of 1:30 pm. CTV appeared on our scanners today after one investor booked profits by rolling a previously established long call position up to a higher strike price in the December contract. It looks like the trader purchased 10,000 calls at the November $31 strike for a premium of $0.55 each back on October 27, when news of the agreed upon LBO hit the stands. Shares at the time were trading around $31.33. The rise in the price of the underlying stock since the calls were purchased lifted premium on the now deep in-the-money calls, allowing the investor to sell all 10,000 lots for a premium of $1.00 per contract today. Net profits on the sale amount to $0.45 per contract. Next, the trader extended bullish sentiment on the stock by purchasing 10,000 fresh lots at the higher December $32 strike for a premium of $0.65 apiece. The investor may profit on the new position ahead of December expiration if CommScope’s shares rally another 2.00% to surpass the effective breakeven price of $32.65. CTV’s shares last traded up at a 52-week high of $34.95 back on April 30, 2010.

H.J. Heinz Co. (HNZ)The ketchup maker popped up on our ‘hot by options volume’ market scanner today after one investor took a long-term bullish stance on the stock. Heinz’s shares are up 0.95% at $48.20 in early afternoon trading ahead of the firm’s second-quarter earnings report, scheduled for release before the market opens tomorrow morning. Analysts at Morgan Stanley upped their share price target on Heinz to $52.00 from $49.00 and maintained an overweight rating on the stock today. The packaged food and condiments provider reportedly ranked first in the American Customer Satisfaction Index as the food industry leader for the 11th year in a row this week. The long-term bullish options strategist appears to have sold 3,000 puts at the June 2011 $40 strike for a premium of $0.55 apiece in order to offset the cost of buying 1,000 calls at the June 2011 $50 strike at a premium of $1.45 each. The investor responsible for the transaction pockets a net credit of $0.20 per contract on the trade, and keeps the full amount of premium received as long as HNZ shares exceed $40.00 through June expiration. Additional profits are available to the trader should shares in H.J. Heinz rally another 3.7% over the current price of $48.20 to surpass the effective breakeven price of $50.00 by expiration day in June. The ketchup maker’s shares last traded above $50.00 back in October of 2008.

Seagate Technology PLC (NASDAQ:STX)A three-legged bullish spread initiated on the manufacturer of disc drives at the start of the trading session this morning indicates one options strategist hopes to see Seagate’s shares rally significantly in the next couple of months. Shares in Seagate Technology are currently up 2.1% as of 10:55 am to stand at $14.24. The bullish player sold 2,500 puts at the January 2011 $12.5 strike for a premium of $0.61 each, purchased the same number of calls at the January 2011 $15 strike at a premium of $0.99 per contract, and sold 2,500 calls up at the January 2011 $17.5 strike for a premium of $0.23 apiece. The net cost of putting on the spread reduces down to $0.15 per contract and positions the trader to profit should Seagate’s shares rally another 6.4% over the current price of $14.24 to surpass the effective breakeven point to the upside at $15.15 by January expiration. Maximum potential profits of $2.35 per contract are available to the investor if the price of the underlying stock jumps 22.9% to trade above $17.50 by expiration day. Selling the put options greatly reduced the overall cost of the trade, but is not a riskless move. The investor could wind up having 250,000 shares of the underlying stock put to him at $12.50 each if shares nosedive ahead of expiration and the put options land in-the-money. But, this is clearly a risk the trader is willing to bear given the lower breakeven price at which he will start to profit should shares rise as he expects they will by January expiration day.

Semiconductor HOLDRS Trust (NYSEARCA:SMH) A sizeable bearish put spread purchased on the Semiconductor HOLDRS Trust within the first 6 minutes of the session today may be the work of a cautiously optimistic investor hedging exposure to the semiconductor sector. Shares of the SMH, which issues depository receipts that represent ownership in U.S.-traded common stock of companies that develop, manufacture and market semiconductors, are up 1.50% at $30.56 as of 12:05 pm in New York. Yesterday, shares in a number of companies that make semiconductors for solar power products fell on analyst downgrades, concerns of global oversupply and weaker-than-expected earnings reports from a few solar companies. But, shares in other big semiconductor companies are on the rise today. The options investor responsible for the put play picked up 10,000 contracts at the January 2011 $30 strike for a premium of $1.16 apiece, and sold the same number of puts at the lower January 2011 $26 strike at a premium of $0.23 each. The net cost of the spread amounts to $0.93 per contract. The spread may have been tied to the purchase of some 100,000 shares at $30.45 each that traded within seconds of the put options. The trader responsible for the trade might, in this scenario, be bullish on the semiconductor sector but unwilling to get behind the wheel without insurance. The put spread serves to protect his position in case shares reverse course ahead of January 2011 expiration. Of course, the put spread could just as easily be an outright bearish bet on the SMH, in which case the trader stands ready to make money if shares slip beneath the effective breakeven price of $29.07 ahead of expiration day. Maximum potential profits of $3.07 per contract are available to the investor in this case should shares plunge 14.9% lower and trade below $26.00 ahead of expiration in January.

Goodyear Tire & Rubber Co. (NYSE:GT)Call options are a hot commodity at Goodyear Tire & Rubber Co. this morning, with shares of the Akron, OH-based company trading higher by 4.75% to $10.17 as of 11:10 am in New York. Investors hoping to see Goodyear extend gains through the end of the trading week picked up more than 3,400 now in-the-money calls at the November $10 strike for an average premium of $0.21 apiece. Call buyers at this strike are poised to profit should GT’s shares exceed the average breakeven price of $10.21 by the time the contracts expire on Friday. Bullish players with a slightly longer time horizon scooped up another 2,300 in-the-money calls at the December $10 strike for an average premium of $0.55 a-pop. Investors holding these contracts make money if Goodyear’s shares rally another 3.7% over the current price of $10.17 to exceed the average breakeven point on the calls at $10.55 by December expiration. Optimistic sentiment on the tire maker spread to the higher December $11 strike where another 2,300 call options were coveted for an average premium of $0.23 each. Higher-strike call buyers start to accrue profits should shares surge 10.4% to trade above $11.23 ahead of expiration day next month.