Monday Options Brief: MO, NSC, STJ & JNS

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Includes: JNS, MO, NSC, STJ
by: Interactive Brokers

Altria Group, Inc. (NYSE:MO)Bullish activity in Altria Group call options this morning indicates shares in the cigarette maker, which today rallied 1.7% to a new three-year high of $29.63, may have more room to run in 2012. Investors dabbling in February 2012 contract calls on the Richmond, Virginia-based Company may be prepping for the stock to hit new highs following the company’s fourth-quarter earnings report on January 26. Options volume on Altria Group is heaviest at the Feb. 2012 $31 strike, where more than 3,000 calls changed hands against zero open positions. It looks like most of the call options were purchased for an average premium of $0.16 apiece. Call buyers stand prepared to profit should shares in the tobacco products provider climb 6.1% to top $31.16 at expiration day in February. Philip Morris International, Inc.’s shares too are in rally-mode today, though activity in February 2012 contract calls on the cigarette seller may not be the work of a bullish player. The purchase of 3,000 Feb. 2012 $80 strike calls on Philip Morris would have tended to suggest optimism on the tobacco Company; however, it appears the options were likely tied to the sale of stock in a position that may be profitable if shares in PM decline.

Norfolk Southern Corp. (NYSE:NSC)A large put credit spread on the rail transportation provider signals the stock is unlikely to crash in the near future. Shares in Norfolk Southern Corp. are bucking the broader market decline today, trading 0.40% higher on the session at $70.09 just before 1:00 PM on the East Coast. The strategist responsible for the sizable spread appears to have sold 13,750 puts at the Jan. 2012 $65 strike at a premium of $0.65 each, and purchased the same number of puts at the Jan. 2012 $55 strike for a premium of $0.15 apiece. The parameters of the transaction limit the investor’s maximum potential gains to $0.50 per contract, and cap maximum possible losses at $9.50 per contract. The trader walks away with the $0.50 net credit at expiration day next month as long as shares in NSC exceed $65.00. But, the investor starts to lose money on the spread in the event that shares in the transportation provider drop 8.0% to breach the effective breakeven price of $64.50 by expiration day. Shares in NSC would need to plunge 21.5% to settle below $55.00 at January expiration in order for the investor to absorb the maximum possible losses of $9.50 per contract on the trade. Norfolk Southern Corp. is scheduled to report fourth-quarter earnings after the final bell on January 24, which is several days after the puts will have expired.

St. Jude Medical, Inc. (NYSE:STJ) An options combination play on the medical devices maker suggests one strategist is positioning for shares in St. Jude Medical to rebound during the next 12-month period. The stock currently trades 0.85% lower on the session at a fresh 52-week low of $32.67. The trader responsible for nearly all of the volume in STJ options on Monday appears to have sold 3,000 puts at the Jan. 2013 $22.5 strike for a premium of $1.20 each in order to purchase 1,500 calls up at the Jan. 2013 $40 strike at a premium of $2.20 apiece. The sale of twice as many far out-of-the-money puts more than offsets the cost of buying the upside calls, resulting in a net credit of $0.20 per contract. The options player keeps the net credit as long as shares in St. Jude exceed $22.50 at expiration in January 2013. Additional profits are available to the trader in the event that STJ’s shares surge 22.4% over the current price of $32.67 to settle above $40.00 by expiration day. The sale of 3,000 put options at the $22.5 strike finances the bullish bet on STJ, but also means the investor could have 300,000 shares of the underlying put to him at $22.50 each should the stock drop more than 30.0% and the puts land in-the-money at expiration.

Janus Capital Group, Inc. (NYSE:JNS)Shares in Janus Capital Group started the week in rally-mode, opening Monday 1.5% higher than Friday’s closing price of $5.97. However, concerns out of Europe pushed the major averages down and sent shares in Janus Capital down 0.70% to $5.92 by 11:45 AM in New York. Call activity on the asset management firm this morning suggests some traders are throwing in the towel on any substantial rebound in JNS shares in the first month of the New Year. It looks like traders exchanged more than 3,600 calls at the Jan. 2012 $6.0 strike for an average premium of $0.22 apiece against previously existing open interest of 285 contracts. The majority of the call options appear to have been sold for an average premium of $0.22 a-pop. Call sellers walk away with the full $0.22 in premium per contract as long as shares in Janus Capital Group fail to rally above $6.00 at expiration in January. It does not look like the options were tied to any simultaneous transaction in the underlying stock. If investors are naked short the calls, they face uncapped losses to the upside in the event that shares settle above the effective breakeven price of $6.22 at expiration next month. The Jan. 2012 contract calls expire ahead of Janus Capital Group’s fourth-quarter earnings report on January 26.