Tuesday Options Brief: CAT, EBAY, IYT & RIG

Includes: CAT, EBAY, IYT, RIG
by: Interactive Brokers

Caterpillar, Inc. (NYSE:CAT)Caterpillar call options are in high demand this afternoon with shares of the machinery maker rising nearly 3.00% during the first half of the session to hit an intraday- and new all-time high of $96.35. Shares are currently up 2.5% to stand at $95.92 as of 12:45pm in New York. Investors are buying in- and out-of-the-money calls on CAT, purchased just fewer than 3,000 in-the-money contracts at the January $95 strike for an average premium of $1.27 each. Bulls hoping to see the stock breach $100.00 by February expiration picked up roughly 2,000 calls up at the February $100 strike for an average premium of $1.30 a-pop. Call buyers at this strike are prepared to profit should CAT’s shares rally 5.6% over the current price of $95.92 to surpass the average breakeven point on the upside at $101.30 before the contracts expire next month. Options expiring in February will have plenty of life left in them when Caterpillar reports fourth-quarter earnings before the market opens on January 27, 2011. Longer-term optimists looked to the May $110 strike to buy some 1,180 calls at an average premium of $1.26 apiece. Investors holding these contracts will break even on the trade if Caterpillar’s shares soar 16.0% higher to trade above the average breakeven price of $111.26 by expiration day in May. Options implied volatility on the manufacturer of excavators and backhoes is up 10.2% to arrive at 28.25% as of 12:55pm.

eBay, Inc. (NASDAQ:EBAY)Put options on the operator of online marketplaces continue to garner investor interest yet again this morning with eBay’s fourth-quarter earnings report close at hand. Shares in eBay, Inc. are currently up 0.65% to stand at $29.37 just before 12:15pm. One pessimistic player picked up 15,000 puts at the July $26 strike for a premium of $1.32 apiece today. Last week a total of 35,000 puts were purchased at the same strike for an average premium of $1.58 per contract. Put buyers attacking the July $26 strike appear to be initiating outright bearish bets on the stock, but it is also possible that they are picking up the contracts to hedge a long position in the underlying shares. The investor buying the chunk of 15,000 lots today is prepared to make money should shares in EBAY plunge 16.0% from the current price of $29.37 to breach the effective breakeven point on the downside at $24.68 ahead of July expiration. eBay’s shares last traded below $24.68 back on October 20, 2010. The online-commerce company reports fourth-quarter earnings after the market closes on Wednesday.

iShares Dow Jones Transportation Average Index ETF (NYSEARCA:IYT)Investors are piling into put options on the IYT, an exchange-traded fund designed to track the performance of the Dow Jones Transportation Average Index, with shares in the fund trading 0.50% lower on the session at $93.84 as of 1:00pm. Shares of the transportation ETF earlier increased 0.60% to touch an intraday high of $94.89, the highest traded price since September 2008. Approximately 10,500 puts have changed hands at the March $90 strike on open interest of just 228 contracts. It looks like the majority of the puts, more than 8,000 contracts, were purchased by investors paying an average premium of $2.28 per contract. Put buyers are poised to profit should the price of the underlying fund fall another 6.5% from the current price of $93.84 to breach the average breakeven point to the downside at $87.72 ahead of March expiration. Shares in the IYT last dipped below $87.72 back on November 30, 2010. The surge in demand for put options helped lift the overall reading of options implied volatility on the IYT 6.2% to 22.79% by 1:10pm in New York.

Transocean, Ltd. (NYSE:RIG)Options strategists dabbled in both calls and puts on the provider of offshore contract drilling services this morning with shares in the name trading 2.40% higher on the session at $80.87 by 11:50am in New York. It looks like one trader is taking profits on a previously established long call position, as well as rolling the contracts to a higher strike price in order to extend bullish sentiment on the stock through February expiration. The investor sold roughly 2,000 calls at the February $75 strike for an average premium of $6.43 a-pop, and purchased around the same number of calls up at the February $80 strike at an average premium of $1.45 each. Open interest patterns in the February $75 strike calls suggest the calls may have been originally purchased for an average premium of $2.04 each on January 5, 2011, when RIG’s shares were trading around $71.73. The subsequent surge in the price of the underlying shares lifted premium on the now deep in-the-money call options. Average net profits on the sale of the call options amount to $4.39 per contract when using the parameters in the scenario described above. The fresh chunk of calls purchased at the February $80 strike position the investor to make money should shares in Transocean rally above the average breakeven price of $81.45 ahead of expiration day next month. Meanwhile, activity in deep out-of-the-money put options caught our eye. It looks like the May $45/$55 put spread was purchased 4,000 times for a net premium of $0.39 per contract. Open interest at both strikes is sufficient to cover volume generated during the session thus far. Today’s transaction may be the work of an investor closing out a spread constructed during trading on November 10-17, 2010. Transocean will report earnings for the fourth quarter before the opening bell on February 16, 2011.