Unusual Options Activity Briefing: A Week Of Bullish Ideas

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Includes: LXK, PVH, WMB
by: Brad Kenagy

Summary

This week there were no real big bearish options trades that stood out, therefore this week I focused on three bullish trades.

Even after a big run the last couple days, Lexmark International saw bullish options activity.

Williams companies saw bullish action as well.

Unusual Option Activity Briefing: A week of bullish trades

During the week I look for unusual options activity and at the end of the week, I highlight the most compelling options activity that occurred. The way I determine whether options activity is unusual is by looking for outsized trades in comparison to existing open interest for the strike purchased. I will be looking at potential catalysts that could drive the stocks I cover upward or downward towards the strike prices that the unusual options activity occurred.

Unusual Call Activity #1: Lexmark International (NYSE:LXK)

Description: Lexmark International provides printing & imaging products as well as software & services for consumers and businesses.

Option Activity: On Wednesday, there was a purchase of 4,700 $33 April call options for $1.00/contract. At closing that day, the stock was priced at $28.68, which means, if the stock reaches the strike price, the common stock has a potential upside of 15.06%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $34.00.

Action Since Trade: Since this trade was initiated, the share price has increased from $28.68 to $30.75 at the time of writing and with that increase, the potential common stock upside has decreased from 15.06% to 7.32% if the stock were to reach the $33 strike price by expiration. As I will detail below in the catalyst section this quick gain in the share price was because Lexmark is exploring the sale of part of its business.

Catalyst: The first catalyst for Lexmark is that they are reporting on February 23rd. Yes, the earnings themselves are important; however, the more important item will be information given by management about a potential sale of the whole company or parts of the company, which include either its hardware division or software division. Back in October Lexmark hired Goldman Sachs (NYSE:GS) to explore strategic alternatives and since then the stock has continued its downward trajectory until the last couple of days when reports came out that they had received bids for their software unit. The software unit is smaller than the legacy printing services business; however, it is growing and growing at a significant rate. The chart below from the Lexmark 3rd quarter earnings release shows this in visual form where you can clearly see that software grew 10% sequentially. This is the superior business, thus it should receive a premium price, which will be good for shareholders of Lexmark.

Click to enlarge

[Lexmark 3Q Earnings]

Unusual Call Activity #2: PVH Corp (NYSE:PVH)

Description: PVH Corp is an apparel company with well-known worldwide brands like Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD and Speedo.

Option Activity: On Thursday, there was a purchase of a March ratio call spread. The buyer purchased 3,000 March $80 call options for $2.00/contract and sold 8,000 March $85 calls for $0.60/ contract. At closing that day, the stock was priced at $76.38, which means, if the stock reaches the strike price purchased, the common stock has a potential upside of 4.74%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $80.80.

Catalyst: This was an odd trade given that PVH does not report earnings until March 23rd, which is after these options expire. I looked on the company's website to see if there were any upcoming events and the company has no scheduled events and just recently gave updated guidance for full year 2015. There are no real visible catalysts that I can find and it is still an interesting trade to highlight.

Unusual Call Activity #3: Williams Partners (NYSE:WMB)

Description: Williams Partners is a large energy infrastructure company that focuses on natural gas and natural gas liquids.

Option Activity: On Wednesday, there was a buy/write options trade in WMB, where someone bought the common stock and simultaneously sold 5,000 $18.00 March call options for $.80/contract. At closing that day, the stock was priced at $15.69, which means that if WMB reaches the $18 level, they would be obligated to sell the stock at that level, which is 14.72% above the stock price that day. This strategy shows that this call seller is comfortable with selling the stock they purchased at $18/share. If the option seller holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $14.89.

Action Since Trade: Since this trade was initiated, the share price has increased from $15.69 to $15.92 at the time of writing and with that increase, the potential common stock upside has decreased from 14.72% to 13.07% if the stock were to reach the $18 strike price by expiration.

Catalyst: The biggest catalyst for WMB is progress towards closing on its deal to be acquired by Energy Transfer Equity (NYSE:ETE), which the market has had concerns with because of low oil prices as well as fears about the potential impact of a Chesapeake Energy (NYSE:CHK) bankruptcy. As was noted in a recent news story, Williams has the most exposure to CHK, therefore this is a potential risk. With oil and shares of CHK having stabilized and ETE having bounced significantly off its lows in the last two weeks, the likelihood of a finalizing the ETE/WMB deal has increased, thus the $18 strike price is attainable and would represent a nice return if it were to reach that level by March Expiration.

Disclaimer: See here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.