Tuesday Options Brief: CAT, CLX, S & ELX

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 |  Includes: CAT, CLX, ELX, S
by: Interactive Brokers

Caterpillar, Inc. (NYSE:CAT)Signs of bullish sentiment on the machinery maker appeared in the options market this morning with the price of Caterpillar’s shares rising as much as 3.1% to an intraday high of $112.20. Strong earnings from a number of big industrials-names this week helped CAT’s shares higher in the face of the company’s own first-quarter earnings report ahead of the opening bell on Friday. In weekly options on the stock, the April ’29 $105 strike put options are most active. Two-way trading in the puts suggests mixed sentiment in the days leading up to CAT’s earnings. Buyers of the puts may be wary of an earnings miss, while sellers of the contracts seem to be saying they at least expect shares in the name to remain above $105.00 through expiration on Friday. Meanwhile, the May contract is a-buzz with activity as well. Call options are more heavily populated than puts in early-afternoon trade. Bullish players positioning for the price of the underlying stock to continue to climb ahead of expiration day next month bought calls and sold puts. Volume is heaviest in the May $115 strike calls, where around 6,300 contracts have changed hands, fewer contracts than the 11,355 lots of previously existing open interest at that strike. Buyers of the options are dominating, paying an average premium of $1.60 per contract for the right to buy the underlying stock at $115.00. Investors long the May $115 strike calls profit at expiration if shares in CAT rally another 3.9% over the current price of $112.20 to exceed the average breakeven point on the upside at $116.60. More than 1,100 call options were picked up at each of the May $120 and $125 strikes at average premiums of $0.52 and $0.17, respectively. Caterpillar’s shares recently hit an all-time high of $113.93 on April 4, 2011. Options players traded more than 55,000 contracts on the machinery manufacturer by 1:20pm in New York.

Clorox Co. (NYSE:CLX) Shares in Clorox Co. are on the rise today, trading roughly 0.9% higher on the session at $69.14 as of 11:30am, with one week to go before the consumer products maker reports third-quarter earnings. One options trader initiated what appears to be a protective play on the stock ahead of earnings. The three-legged spread provides downside protection in case an earnings miss sends the price of the underlying lower, while the parameters of the transaction suggest the trader does not see a collapse in Clorox’s shares as likely to occur ahead of May expiration. It looks like the investor sold 950 calls up at the May $72.5 strike for a premium of $0.15 apiece, in order to partially finance a ratio put spread. The trader purchased 950 puts at the May $67.5 strike at an average premium of $0.69 each, and sold 1,900 puts at the lower May $65 strike for an average premium of $0.20 a-pop. The sale of twice as many of the lower-strike puts, as well as the sale of the call options, reduces the net cost of the three-legged spread to roughly $0.14 per contract. Thus, the investor responsible for the transaction is protected beneath a breakeven price of $67.36, should he currently hold a long position in the underlying. Alternatively, the trader may be placing an outright bearish bet on Clorox. In this scenario, the investor may pocket maximum potential profits of $2.36 per contract if CLX shares drop to $65.00 by expiration day next month. The sale of the May $72.5 strike calls for an investor long the stock indicates a willingness to sell at that price in the event of a strong rally in Clorox shares post-earnings next week. If the investor is short the stock, the sale of the call options expose him to potentially devastating losses in the event that shares rally 4.9% over the current price of $69.14 to top $72.50 by expiration day in May.

Sprint Nextel Corp. (NYSE:S)Call buyers took to Sprint straight out of the gate this morning with first-quarter earnings from the third-largest U.S. wireless provider scheduled to be released before the market opens for trading on Thursday. Shares in Sprint Nextel Corp. are currently flat on the session at $4.80 as of 12:00pm in New York. Investors populating Sprint options at the start of the session appear to have purchased some 8,100 calls at the June $5.0 strike for an average premium of $0.23 apiece. More than 10,700 calls have changed hands at that strike on previously existing open interest of just 1,948 contracts. Buyers of the calls are poised to profit should the price of the underlying stock surge 9.0% to surpass the average breakeven price of $5.23 by expiration day in June. Sprint’s shares last traded above $5.23 back on March 18, 2011, before news of rival AT&T’s $39 billion proposal to buy T-Mobile USA sent shares in Sprint lower.

Emulex Corp. (NYSE:ELX) Shares in Emulex Corp. fell as much as 10.1% to an intraday low of $9.30 following the telecommunications equipment company’s third-quarter earnings report after the close on Monday. Emulex’s earnings forecast of $0.08 to $0.12 a share for the fourth-quarter came in below the $0.14 a share estimate analysts were expecting, on average. Shares in ELX pared earlier losses, but still currently stand 4.7% lower on the session at $9.86 as of 12:20pm in New York. Options traders expecting shares in Emulex to continue to recover in the near term picked up more than 2,100 calls at the May $10 strike for an average premium of $0.17 apiece. Nearly 3,000 calls changed hands at that strike on previously existing open interest of just 755 contracts. Call buyers make money in the event that ELX’s shares rally 3.1% over the current price of $9.86 to surpass the average breakeven price of $10.17 by expiration day next month. Options implied volatility is currently down 17.2% as of 12:25pm, to stand at 28.94% post-earnings.