Monday Options Brief: HNR, ESI, XHB & FII

Includes: ESI, FII, HNR, XHB
by: Interactive Brokers

Harvest Natural Resources, Inc. (NYSE:HNR) News Harvest Natural Resources discovered oil off the coast of Gabon sent shares in the Houston, TX-based company up as much as 29.0% to an intraday high of $13.56. The sharp rally in the price of the underlying on the reports spurred bullish plays in Harvest’s options this morning. Shares are currently up a lesser 12.65% at $11.83 as of 12:25pm on the East Coast. Options players purchased roughly 1,600 calls at the June $12.5 strike for an average premium of $0.54 each. The call options were in-the-money earlier in the session, but are now trading out-of-the-money as the rally has cooled somewhat. Investors long the calls are poised to profit should shares in HNR increase 10.2% over the current price of $11.83 to surpass the average breakeven point to the upside at $13.04 by expiration on Friday. Like-minded bulls seeking a longer-term run-up in the price of the shares picked up roughly 1,000 calls at the September $12.5 strike for an average premium of $2.09 a-pop. Call buyers at this strike make money if shares in Harvest Natural Resources surge 23.3% to trade above the average breakeven price of $14.59 by September expiration. Options implied volatility on Harvest stands 9.8% higher on the session at 82.44% just after 12:30pm in New York.

ITT Educational Services, Inc. (NYSE:ESI)Shares in the for-profit provider of degree programs in the U.S. rallied nearly 2.0% this morning to touch an intraday high of $83.74 after analysts at Piper Jaffray raised their share price target on the stock to $84.00 from $75.00. Despite the rise in shares of ITT Educational Services today one options strategist is positioning for the price of the underlying to drop sharply ahead of June expiration. The near-term bearish player initiated a debit put spread, buying some 2,750 puts at the June $77.5 strike for a premium of $0.59 each, and selling the same number of puts at a premium of $0.09 apiece. Net premium paid to initiate the put spread amounts to $0.50 per contract. The investor profits if shares in ITT Educational Services fall 8.05% from an earlier high of $83.74 to breach the effective breakeven price of $77.00 at expiration. Maximum potential profits of $4.50 per contract are available to the put spreader should shares in ESI plunge 13.4% to trade below $72.50 at expiration at the end of the week. The rise in demand for put options on the stock helped lift the overall reading of options implied volatility on ESI 3.6% to 49.04% as of 11:30am in New York.

SPDR S&P Homebuilders ETF (NYSEARCA:XHB)A large transaction in July contract call options on the Homebuilders ETF suggests one strategist is preparing for a rebound in the price of the underlying fund through expiration next month. Shares in the XHB, an exchange-traded fund that replicates the performance of the S&P Homebuilders Select Industry Index, increased as much as 0.90% during the first half of the session to secure an intraday high of $17.23. The fund’s holdings include companies such as Bed Bath & Beyond, Inc., Tempur-Pedic International, Inc., and Toll Brothers, Inc. An investor positioning for shares in the XHB to continue to move higher purchased 10,000 in-the-money calls at the July $17 strike for a premium of $0.59 apiece. The trader makes money if shares in the fund rally another 2.1% over today’s high of $17.23 to exceed the effective breakeven price of $17.59 by expiration day in July. Shares in the fund tumbled 10.4% in the past couple of weeks, having traded up at $18.91 on May 31, down to a 6-month low of $16.95 this past Friday.

Federated Investors, Inc. (NYSE:FII) The provider of investment management and financial services popped up on our ‘hot by options volume’ market scanner this morning due to heavier than usual trading traffic in long-dated put options. Shares in Federated Investors are slightly lower in early-afternoon trade, standing 0.20% lower on the day at $24.10 as of 12:40pm in New York. It looks like some 4,200 puts changed hands at the January 2012 $20 strike against paltry previously existing open interest of just 16 contracts. The majority of the puts appear to have been purchased at a premium of $1.10 apiece. The investor or investors driving the volume are positioned to profit should shares in FII plunge 21.6% from the current price of $24.10 to breach the breakeven point on the downside at $18.90 by expiration day in January. Shares in Federated Investors, Inc. last traded beneath $18.90 back in March 2009. Second-quarter results from the company are scheduled for release after the final bell on July 21, 2011.