Five Options Ideas: Chesapeake Energy, CIT Group, Commercial Metals, GLD, Campbell Soup

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 |  Includes: CHK, CIT, CMC, CPB, GLD, KHC
by: Frederic Ruffy

The options expiration failed to trigger much volatility in the equity market last week. The S&P 500 Index (.SPX) finished at 1,298.20 and less than 2 points above a week ago. The lack of movement in the S&P 500 might explain why the CBOE Volatility Index (.VIX) finished Friday at 19.58 and its first close below 20 since June 5.

VIX tracks the expected volatility priced into S&P 500 Index options and tends to fall during periods of quiet trading. VIX also reflects investor sentiment, which seemed to lean on the bullish side.  Approximately 42.7 million call options and 36.1 million puts traded across the US options exchanges last week.  Among some of the more bullish trades: call spreads on Chesapeake Energy (NYSE:CHK), a substantial ratio spread on CIT Group (NYSE:CIT), bullish spreads on Commercial Metals (NYSE:CMC), butterflies on the SPDR Gold Trust (NYSEARCA:GLD), and call buying in Campbell Soup (NYSE:CPB).

Bullish Trading Hits Chesapeake Energy

Chesapeake Energy saw bullish trading throughout the week. The stock finished Friday trading for $45.53 and up 5.2 percent from a week ago despite three-month lows in crude oil. In the options market, bullish spread trading was seen on more than one occasion. For example, at 15:00 Eastern time Wednesday, 4,300 of the CHK October 50 calls traded on the offer for $2.75 a contract. The same number of October 60s traded bidside for .75. Open interest in the 50s increased by 4,756 and the 60s saw open interest increase by 4,359 contracts.

So, it appears that the volume represents opening of bullish spreads. If so, the strategist is looking for a big move in CHK. With the stock at $45.00, they are paying $2.00 for the spread, with the potential of making $8.00 if shares of Chesapeake move to $60 and or beyond by October options expiration.


Figure 1: CHK Bull Call Spreads

Sizing up CIT Group

CIT Group was the subject of a massive 1×2 ratio spread Friday. With CIT trading for $9.21 a share, 60,000 calls traded early in the session, compared to only 330 put options. The January 10 and January 15 calls saw most of the action. At 10:00 a.m. Eastern time on the PHLX, a strategist bought 20,000 of the January 10 calls for $2.10 and sold twice as many 15s for 70 cents. Sources on the exchange told WhatsTrading.com that a customer paid 70 cents for each of these 1x2 spreads and did it 20,000 times.

The trade is a substantial one in size and bullish in bias. It has a profit range between $10.70 and $19.30 a share. The max profits of $4.30 (per spread) happen if CIT settles at exactly $15 a share at January options expiration. The trade starts to turn ugly above $19.30, with substantial losses possible if the stock makes a really big move higher.

Bull Calls Commercial Metals

Commercial Metals saw bullish order flow Friday, as some players bet that the recent run lower in the stock has run its course. Shares of the Irving, Texas, steel and metals company finished the trading session down 55 cents to $25.77 and 35.25 percent below a June high of $39.80. In the options market, 25,000 CMC calls traded on the day, compared to just 402 puts. Most of the action was in the December 30 and 40 call options, where players appeared to be opening bullish spreads by purchasing the 30s for $1.85 and selling the 40s for 30 cents. At the end of the day, the spread had traded more than 11,000 times.

Flying for Gold

Despite the ongoing slide in gold prices, one player in the options market appears to be taking a contrary view on the recent trend and was actively trading a bullish butterfly spread on the SPDR Gold Trust Friday. GLD is an ETF that holds the precious metal. It fell $1.72 to $77.63 Friday and is down almost 30 percent from its March highs of more than $100 a share. The bullish strategist Friday was focused on the GLD September calls with the 80, 85, and 90 strikes.

For instance, shortly after 14:00 Eastern time, two orders for 2,075 GLD September 85 calls traded bidside for 71 and 72 cents a contract. Meanwhile, 2,075 of the 80s traded offerside for 94 cents and the same number of 90s traded offerside for 32 cents a contract. In this case, the strategist is selling two of the 85s for every 90 and 80 call. The two short 85s form the body of the butterfly. The 80s and 90s create the wings. The trade was repeated at least a half dozen times until volume in the 85s reached more than 16,000 contracts. 8,800 of the 80s and 7,600 of the 90s also traded on the day.

Click to enlarge
Figure 2: GLD Most Actives (8/15/08)

Is Heinz Hungry For Cambell Soup?

Options volume in Cambell Soup jumped to three times normal Wednesday, amid a noticeable uptick in call buying. The stock was trading down 22 cents to $37.59 about the time Bloomberg reported that Heinz (HNZ) CEO said at a shareholder meeting that CPB might be a "nice fit". The comment followed a question regarding whether Heinz would consider making an offer. The news didn't seem to move the shares of Campbell much, but as we can see from the chart, it triggered a flurry of activity in CPB call options.

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Figure 3: Campbell Soup Put Call Volume

Stock position: None.