Thursday Options Brief: EMC, MHS, AA & AEO

Includes: AA, AEO, DVMT, MHS
by: Interactive Brokers

EMC Corp. (EMC)Large blocks of in- and out-of-the-money call options exchanged on EMC Corp. during the first 25 minutes of the trading session appear to be the work of one investor taking profits off the table on the one hand, and ultimately extending bullish sentiment on the stock on the other. Shares in the provider of information infrastructure technologies and solutions are currently up a slightly 0.10% to stand at a fresh 52-week high of $27.11 just before 12:00pm. It looks like the options trader originally purchased 30,000 calls at the April $24 strike for $1.00 per contract back on January 3, 2011, when shares in the name were trading around $23.23. The subsequent rally in the price of the underlying lifted premium on the now deep in-the-money calls, allowing the investor to sell all 30,000 call options at that strike today for a premium of $2.86 apiece. Net profits on the transaction amount to $1.86 per contract. Next, the trader paid a premium of $0.83 per contract to buy a fresh batch of 30,000 calls up at the July $29 strike. The investor starts to make money on the new bullish stance in the event that EMC Corp.’s shares increase another 10.0% to exceed the effective breakeven share price of $29.83 by expiration day in July.

Medco Health Solutions Inc. (NYSE:MHS)The healthcare company and provider of pharmacy services popped up on our ‘hot by options volume’ market scanner this morning after one strategist initiated a delta neutral strategy using calls, puts and Medco stock. Shares in the name are currently up 0.50% to arrive at $62.29 in early afternoon trade. It looks like the investor purchased 295,800 shares in MHS at a price of $61.88 each, purchased 5,100 puts at the January 2012 $55 strike for a premium of $3.60 each, and sold the same number of call options up at the January 2012 $72.5 strike at a premium of $2.50 apiece, on a 0.58 delta. The profile of the transaction is such that the investor may make money if the price of the underlying declines ahead of expiration. The value of the long puts will grow, potentially offsetting and eventually trumping the loss of value on the long stock leg of the position, which would occur if MHS shares head lower.

Alcoa, Inc. (NYSE:AA) Heavy volume in near-term put options on the aluminum manufacturer caught our eye this morning. It looks like options traders may be speculating on a near-term pull back in the price of the underlying shares, although the stock is currently up 0.20% to stand at $17.19 just before 11:30am in New York. Alcoa’s shares have rallied substantially in 2011, extending gains realized during a strong 6-month uptrend. The aluminum maker’s shares, at their current price, are up around 73.3% since August 25, 2010, when the stock traded as low as $9.92. More than 32,000 puts changed hands at the February $16 strike on sizable, albeit smaller, open interest of 22,028 contracts. Nearly all of the put options appear to have been purchased for an average premium of $0.06 a-pop. Put buyers are perhaps positioning to turn a profit on the rise in premium that would likely accompany any sufficient decrease in the value of Alcoa’s shares ahead of February expiration. The value of the puts will climb substantially in the event of a significant pullback in the aluminum producer’s shares by next Friday, and investors securing the contracts for around $0.06 apiece today could benefit handsomely from such circumstances.

American Eagle Outfitters, Inc. (NYSE:AEO)Renewed speculation and chatter regarding private equity interest in American Eagle sent shares and options implied volatility on the stock higher, and spurred a flurry of call activity in the name this morning. Shares in AEO rallied as much as 11.2% in the first half of the trading session to secure an intraday high of $16.34. In- and out-of-the-money call options are a-buzz with buyers positioning for the price of the underlying stock to extend gains in the near term. More than 10,600 now in-the-money calls changed hands at the February $15.5 strike on sizable open interest of 19,780 contracts. Trading in these contracts is mixed, but it does appear there are more buyers than sellers this morning. Bullish call buying is the dominant theme up at the February $17 strike where more than 3,700 contracts were picked up for an average premium of $0.19 apiece. Investors long the calls are poised to profit should shares in AEO rally another 5.2% over today’s high of $16.34 to surpass the average breakeven point at $17.19 ahead of expiration next week. Similar buying patterns were observed in March $16 and $17 strike call options, as well. Rumors, speculation, and the rise in demand for call options in the name helped lift the stock’s overall reading of options implied volatility 31.1% to 56.35% by 12:05pm.