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Energy Select Sector SPDR ETF (XLE)Signs of bullish sentiment on the XLE, an exchange-traded fund that tracks the performance of the Energy Select Sector of the S&P 500 Index, appeared in the April contract this morning with shares in the fund rising 2.6% to $75.67 by 11:15am in New York. According to a report out from Bloomberg reporter Arie Shapira, analysts at Goldman recommended buying call options on certain energy stocks, many of which are holdings in the XLE. Like-minded traders looked to Energy SPDR options today to position for a sector rally. A couple of call spreads were purchased on the ETF earlier in the session. The use of this strategy reduces the premium required to get long the closer to-the-money strike calls as opposed to buying the contracts outright. It looks like traders picked up a total of 10,000 calls at the April $79 strike for an average premium of $0.76 each, and sold the same number of calls at the April $82 strike at an average premium of $0.205 apiece. The average net cost of initiating the bullish stance amounts to $0.555 per contract. Thus, call-spreaders stand prepared to profit should the price of the underlying fund surge 5.1% to surpass the average breakeven price of $79.555 by April expiration. Investors could walk away with maximum potential profits of $2.445 per contract if shares in the XLE jump 8.4% over the current price of $75.67 to trade above $82.00 by expiration day next month. Shares in the fund last traded above $82.00 back in July 2008.

Medco Health Solutions, Inc. (MHS) The pharmacy-benefits management company drew heavy options trading volume today with its shares declining as much as 6.3% today to touch an intraday low of $52.68. Shares in Medco Health Solutions dropped a total of 14.3% this week, heading lower today after the company said Wednesday that CalPERS, the California Public Employees’ Retirement System, will not renew a contract with Medco. Although shares are down, it looks like many options traders playing the field today are preparing for bullish movement in the price of the underlying. Near-term bulls looking for an immediate bounce in shares ahead of March expiration picked up around 4,000 calls at the March $55 strike for an average premium of $0.46 each. Like-minded optimists sold 2,100 puts at the same strike to pocket premium of $0.81 apiece. Put sellers keep the full premium if shares in MHS rally above $55.00 by expiration. Additionally, investors short the put options appear happy to have shares in Medco put to them at an effective price of $54.19 each in the event that the puts land in-the-money and are exercised at expiration. Put selling at the April $52.5 and $55 strikes is evident, as well. More than 19,500 calls have changed hands at the April $55 strike as of 1:00pm in New York. While the majority of the calls traded to the middle of the market, there were some clear buyers and sellers of the calls present. Investors looking for a sharp rebound in Medco’s shares purchased around 3,000 calls up at April $57.5 strike for an average premium of $0.95 per contract. Shares have recouped a large portion of earlier losses on the session, and currently stand just 2.3% lower on the day at $54.93 in early-afternoon trade. Interestingly, although shares in the name were sharply lower on Wednesday afternoon, we noticed a large bullish call butterfly spread was purchased on MHS in the July contract. The trader responsible for that transaction was positioning for Medco’s shares to shoot back up to $65.00 by expiration. Options implied volatility on the pharmacy-benefits manager is up 26.3% at 39.00% as of 1:10pm.

General Maritime Corp. (GMR)Shares in the provider of international seaborne crude oil transportation services dropped 30.0% at the start of the session to hit an intraday- and new all-time low of $1.75 after the company revealed it will delay the filing of financial results as it looks for additional capital. GMR said concerns regarding its ability to continue operating may be disclosed in its filing. Investors who bought put options on General Maritime back in February appear to be taking profits this morning. It looks like some 6,000 put options were purchased at the August $3.0 strike at a premium of $0.55 each back on February 3, 2011. The sharp decline in the price of the underlying shares since then has substantially lifted the premium on the put options. It looks like one trader sold 1,500 of the puts at that strike this morning for an average premium of $1.225 per contract. The change in put open interest over night will be helpful in determining whether the put seller this morning is taking profits, or whether the 1,500 contracts represent fresh positioning at that strike. It seems more likely that the trader is taking some portion of profits off the table given the significant move lower in GMR shares today. Options implied volatility on the stock is up 30.2% at 136.40% as the market waits to see if GMR will get the capital it needs to reduce uncertainty over its ability to stay in business going forward. One alternative to the interpretation of the trade described above is that the investor is outright selling deep in-the-money put options on the shipping company in the expectation that shares will spike higher if GMR gets itself back on course ahead of August expiration.

Deere & Co. (DE) The agricultural equipment manufacturer popped up on our scanners early in the trading day due to bullish activity in out-of-the-money call options in the April contract. Shares in Deere & Co. rallied as much as 3.85% during the session to secure an intraday high of $90.26. It looks like investors expecting shares to continue their run up in the near term bought the April $95/$100 call spread. Traders picked up around 5,000 calls at the April $95 strike for an average premium of $1.20 each, and sold roughly the same number of calls up at the April $100 strike at an average premium of $0.39 apiece. The average net cost of buying the call spread amounts to $0.81 per contract. Thus, traders employing this strategy stand prepared to profit in the event that Deere’s shares surge 6.1% over today’s high of $90.26 to surpass the average breakeven price of $95.81 by April expiration day. Maximum potential profits of $4.19 per contract are available on the spread should shares jump 10.8% to trade above $100.00 within the time remaining to expiration next month. We note that open interest at both strikes is sufficient to cover volume generated during the current session. This could mean that traders are unraveling bearish credit spreads on the stock, or in some way adjusting open positions, rather than buying debit call spreads.

Source: Thursday Options Brief: XLE, MHS, GMR & DE